On August 16, 2022, President Joe Biden signed the Inflation Reduction Act (IRA), a law that had been approved after long wrangling in both the House of Representatives and the Senate.
It was a much reduced version of the failed Build Back Better Act which wanted to invest US$3.5 trillion in infrastructure, healthcare, disadvantaged communities and the environment. Despite its noble aims such expenditure would have added fuel to an already rampant inflation, and even liberals were glad that it was buried by Republicans’ fierce resistance.
According to Fred Krupp, president of the Environmental Defence Fund think tank, the IRA was “the biggest thing Congress has ever done to address climate change”. The fiercely scrupulous NGO Earth Justice – despite the usual caveats – was in celebratory mood, and media pundits talked about “the largest investment into addressing climate change in US history”.
To get the law passed against staunch Republican resistance it had to compromise with “coal baron” Senator Joe Munchin (West Virginia) and “tax is evil” Senator Kyrsten Sinema (Arizona), both nominally Democrats but with a keen eye on their conservative electorate.
As a result, the law had to be fully funded, as opposed to raising new debt, thus reducing its inflationary impact ‒ hence the slightly misleading title. The law, vilified and celebrated in equal measure as I will now outline, is 755 pages long and was never read in full by anyone in the media profession, which sadly includes me. It’s perhaps too uneconomical to be a commentator and a freelance lawyer at the same time, I guess.
Even ChatGPT, the AI platform which promises to soon make written exams and commentators from all walks of life obsolete, has no insights to offer: “I am sorry, I am not aware of any legislation called the ‘Inflation Reduction Act’”. The admittedly impressive analytical skills of the fully automated chatbot, which came into operation in November, is only based on data available until 2021.
The lack of prime source knowledge is perhaps one of the reasons why the amounts circulated in news outlets never quite add up. Is the law now raising US$738 billion, or US$758 billion as some publications claim? Is the investment earmarked for climate change policies now US$391 billion, as most sources state, or US$369 billion, or US$500 billion (Adam Tooze in the Financial Times)? Some of the provisions are contained in separate laws and can therefore be accounted for in different ways.
Policies designed over a 10-year time horizon are in some instances ending earlier; in others they may never fully materialise. Budgeting is vague and hard to pin down. A large chunk of the funding, US$281 billion, will come from rebates and price reductions of drug makers, which will fiercely resist the loss of income, one can assume. The tax take of a one per cent excise duty on share buybacks is estimated to be US$74 billion, which may never fully materialise, as share buybacks will be scaled down.
Why did we Europeans not try to outdo the US provisions?- Andreas Weitzer
A lot of money will be spent for important causes, like home energy upgrades, energy supply improvements, forest protection, coastal habitat preservation and such. But overall, as welcome as this legislative initiative should be for everyone who cares about our climate future, the sums involved are small. Yet apparently they will be very effective: most papers published foresee by 2030 a reduction of US greenhouse gas emissions of about 40 per cent below 2005 levels.
Even habitual climate change deniers like ExxonMobil praised the legislation as a “step in the right direction” (CEO Darren Wood), and Texas farmers, not notorious for their green convictions, have started to embrace the money that can be made by building wind farms.
On the other side of the Atlantic, a storm of protest broke out about the US$13 billion electric vehicle purchase incentive and public subsidies for advanced manufacturing, such as batteries and rare earth processing (US$37 billion) which both are exclusively granted to US businesses.
An EV imported from abroad will not be eligible for the newly introduced sales subsidies. The 27 EU finance ministers aired in a formal letter to the US its “serious concerns”, and Dutch trade minister Liesje Schreinemacher is “very worried”. They voiced their concerns about the blatant violation of WTO trade rules, as if they were still universally upheld.
Their loud protestations, perhaps formally justified, are nevertheless absurd in other respects. Why did it take the EU more than three months to protest Biden’s ‘America First’ provisions? Why was nobody concerned about the WTO already having become a toothless body, bereft of its appellation court for many years because of the US refusal to nominate judges?
Who still cares about free trade when currency and trade embargoes and sanctions have hollowed out our credo of free trade? Why does Europe wish to pick a trade tussle with the US over ridiculously small total amounts when the war in Ukraine demands unity? And, most important, why did we Europeans not celebrate that the United States, for many years the main laggard in climate initiatives, takes action, and try to outdo the US provisions?
The UK Confederation of British Industry too bemoans the “arms race” on green subsidies. I wish. In 2019 the World Bank estimated that worldwide an investment of US$90 trillion was needed to bring down emissions by 2030. Since the 2015 Climate Summit in Paris, the industrialised world is promising an annual financial support of US$100 billion to developing countries to help them mitigate the impact of climate change and cutting future greenhouse gas emissions.
We are not only falling short in respect of the amounts promised. The US$83 billion so far coming forward are not grants, but loans, increasing the default risk of countries already suffering from global monetary tightening and a stronger US dollar. How much better for global climate action it would be to more forcefully help developing nations’ transition to renewable energy generation than promoting dubious carbon “offsets” and wood burning.
The US, at the core of its trade policies, wishes to harm China, which it considers a serious challenger to its commercial and military supremacy. Nowhere is this more apparent than in green technology. Most electrical cars are sold in China these days, which is a world leader in battery production too.
China mines approximately 60 per cent of all rare earth metals needed for the energy transition, and has a monopoly on rare earth processing (90 per cent) and a leading role in silicon production. Considering that China is by far the biggest emitter of greenhouse gases, we should embrace cooperation rather than confrontation.
Yes, China is our adversary when it comes to societal values and geopolitical interests. Yet we share the same climate and the Chinese Communist Party is fully aware of this. As it stands, “decoupling” and “friend-shoring” is now the political flavour of the day. Free trade has become a maligned concept. Yet cooperation is our last chance. Let us all engage in an arms race of green investment to give our climate reprieve.
Andreas Weitzer is an independent journalist based in Malta.
The purpose of this column is to broaden readers’ general financial knowledge and it should not be interpreted as presenting investment advice, or advice on the buying and selling of financial products.