The passage of the Inflation Reduction Act (IRA) is a major US domestic policy achievement. The first comprehensive climate law in US history puts the country’s climate targets within reach by supercharging the development and rollout of clean energy technology. While largely focused on reducing emissions at home, the new law will no doubt influence the international politics of climate change and have geopolitical implications.
What is the IRA?
The IRA is expected to cut US net greenhouse gas emissions down to 31–44% below 2005 levels by 2030, compared to 25–34% without it. It will do this mainly by providing US$369 billion worth of incentives and investments to support clean energy generation, household energy efficiency, and decarbonisation of the economy. There will be particular emphasis on disadvantaged communities and on supporting rural communities to be a greater part of climate solutions.
The law provides tax credits for buying clean vehicles and directs $9 billion to energy efficiency in homes. It includes $10 billion in investment tax credits to build clean technology manufacturing facilities and an estimated $30 billion in production tax credits to accelerate the building of clean energy technology, such as solar panels and wind turbines. These investments are needed to boost domestic demand for, and production of, American clean energy technology in order to build the industrial base needed to compete with Chinese companies.
To decarbonise the economy, the law includes tax credits for clean energy sources of electricity; grants and tax credits to reduce emissions from industrial manufacturing processes; $9 billion in Federal procurement authority of US-made clean technologies; and a $27 billion “clean energy technology accelerator” to support deployment of technology, especially in disadvantaged communities.
What are the implications for climate diplomacy?
Equally as important as the domestic incentives for climate action and clean energy, the IRA gives a much-needed boost to US international climate credibility. Climate change has been a foreign policy priority for the Biden administration, and the president personally. On day one, President Biden recommitted the US to the Paris Agreement and empowered former Secretary John Kerry to push higher international climate ambition by appointing him as special presidential envoy for climate change – a newly created cabinet-level position that serves on the National Security Council. Since then, Kerry and his staff have worked tirelessly to encourage countries to increase the ambition of their emission reduction targets.
It is hard, however, to push other governments to do more when the US was unable to deliver any policy that would lead to the emission cuts Biden had committed the US to. The IRA has changed this dynamic.
The US is not only talking the talk, but also now walking the walk. The improved international credibility will no doubt help US negotiators push for more ambitious climate targets and implementation plans ahead of and at the COP27 climate negotiations. For years, the lack of its own climate law had weakened any pronouncements the US made about climate change.
At COP26, President Biden called out President Xi for not attending the conference in person, claiming China was failing to lead on climate. Chinese diplomats responded by calling out the US for making announcements but not delivering on its promises. Wang Wenbin, foreign ministry spokesman, said: “What we need in order to deal with climate change is concrete action rather than empty words.” The IRA is concrete action that demonstrates the US is moving in the right direction.
While the IRA is a step in the right direction for repairing climate credibility the US lost during the Trump administration, there is still much work to do. One place to start would be the US living up to the promises it has made on delivering the $100 billion annually in climate finance that developed countries have promised developing countries, including a US-specific pledge of $11 billion.
The country could also help others adapt to climate impacts, including by delivering the doubling of adaptation finance by 2025.
Finally, US government and companies could offer to help global south countries develop clean energy supply chains, which would help those countries anchor their economic growth in the industries of the future.
What are the geopolitical implications?
The implications go beyond international climate politics. The IRA demonstrates that the US is unlikely to deploy carbon pricing like the EU model and to an extent China, and instead will continue to focus on policy that builds up US innovation and manufacturing in clean energy. This could have ripple effects internationally and ultimately reduce the costs of clean energy. Combined, the IRA, the CHIPS and Science Act, the Bipartisan Infrastructure Law, and President Biden’s invocation of the Defense Production Act, create a de facto, and robust, national industrial policy, designed to reshore and nurture clean energy industries to compete with China.
More broadly, this industrial policy will play an instrumental role in the US’ strategic rivalry with China. The investments in manufacturing and innovation of clean energy technology will help US companies develop an alternative offer to countries in the global south who are also on the front lines of climate change, for instance Pacific Island states. If the IRA lives up to its potential and the US reduces emissions at home, and helps others do the same, the pressure will be on China to step up its game and do more at home and abroad to reduce emissions.
The IRA is a historic policy achievement and the investments could get the US a long way towards meeting its targets of reaching net zero emissions by 2050, but it is also a significant foreign policy achievement. It gives the US the tools desperately needed to build an alternative offer and help developing countries to adapt and transition to cleaner energy by increasing market opportunities. The Biden administration can now say that America is back – and the ball is in Beijing’s court to match climate action in a race to the top.