Climate Action

The Inflation Reduction Act invigorated US clean energy plans – can it stir a stronger climate response globally?

The Inflation Reduction Act spurred plans for hundreds of new clean energy manufacturing facilities in its first year of existence.

The Inflation Reduction Act spurred plans for hundreds of new clean energy manufacturing facilities in its first year of existence. Image: REUTERS/Kevin Lamarque

John Letzing
Digital Editor, World Economic Forum
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  • The Inflation Reduction Act has spurred sweeping plans for producing clean-energy technology in the US following its passage last year.
  • It’s projected to help the country make marked progress on its climate goals.
  • To truly fulfil its promise, it will also spark bolder climate action in other places.

Some notable things have happened recently in Pataskala, Ohio. The local Rotary Club selected a 9-year-old as “Junior Grand Marshal” of an annual parade. The mayor got a raise for the first time in a decade. And plans moved ahead to build the biggest solar-panel factory in US history.

The project is part of a vast reindustrialization effort, powered in large part by clean energy and a deceptively named law passed slightly more than a year ago.

The Inflation Reduction Act spurred plans for more than 100 new or expanded clean-energy manufacturing facilities in the US during its first 12 months of existence, representing about $80 billion in fresh investment. Goldman Sachs estimates that in less than a decade, it’s possible the country could be pouring $290 billion annually into the “re-invention” of its energy system thanks to the law.

Of course, those numbers are just projections. For now.

The IRA’s first major hurdle will be moving from encouraging headlines to actual domestic projects. The second will be inspiring more competitive climate plans in other countries, in ways that hasten a timely global energy transition.

For some places, this means coming to terms with legislation that initially stirred anxiety. Much of the funding the IRA makes available must go into products at least partly made in the US, giving it a protectionist slant. And the government-centered approach to building industries may seem out of sync for a country that rode free-market orthodoxy to Cold War victory, then drove decades of relentless globalization.

But in wartime, governments of all stripes tend to apply a heavier hand to economies. And the fight to preserve existence as we know it in the face of climate change might be a conflict worthy of full mobilization.

The Inflation Reduction Act galvanized US plans for domestic clean energy production.
The Inflation Reduction Act galvanized US plans for domestic clean energy production. Image: World Economic Forum

That logic appears to have eventually resonated abroad. Or at least, stirred a desire to keep pace.

About five months after the IRA was passed in the US, the European Union’s Green Deal Industrial Plan emerged. By the year 2030, it’s supposed to have at least 40% of the annual need in the EU for net-zero technologies like solar panels being met domestically.

“We can’t just sit there and watch this evolve,” Germany’s economy minister said of the IRA, while pointing to efforts in his country to ramp up battery cell production and build fuel cell components. In France, a tax credit for investing in the production of things like electric heat pumps and wind turbines was introduced in May. And in Canada, tax credits now slated for clean-energy production function in ways similar to what was enshrined in the US law.

Every effort matters. In order to stop global warming short of the meaningful guardrail of 1.5°C, the rate of new wind- and solar-energy installations needs to become about five times faster in the next seven years, according to a study published in June.

Making supply-side economics ‘modern’

As the one-year anniversary of the IRA approached last month, US Treasury Secretary Janet Yellen described it as an example of “modern supply side economics" – designed not just to spur growth, but to do so in a way that builds a more sustainable foundation for the future.

The law may be domestically focused, but its impact wouldn’t be possible without interest from abroad. That planned solar factory in Pataskala, Ohio, for example, is a joint venture with a Chinese manufacturer. It’s expected to deliver power to a million homes.

South Korean companies account for more than a third of all manufacturing investment planned under the IRA; their projects include a $5 billion electric battery plant and a $2.5 billion solar panel factory, both in the state of Georgia.

All told, the IRA is being credited with booking nearly 70,000 new jobs, geographically spread more than evenly across the political spectrum – including in districts represented by lawmakers who voted against it.

Ultimately, the law’s designed to nudge the country towards a significant reindustrialization following decades of disappearing manufacturing jobs. In the state of Ohio, more than one in five workers were employed in manufacturing in 1990; that slipped to 12.5% by 2019.

Electric cars, batteries, and solar have been the primary focus areas for IRA-linked projects.
Electric cars, batteries, and solar have been the primary focus areas for IRA-linked projects. Image: World Economic Forum

Between 1990 and 2007, an estimated 1.5 million US manufacturing jobs were lost specifically due to trade with China.

That country has steadily built a comfortable lead in areas of clean-energy technology like solar and wind. By 2021, China accounted for 63% of global solar employment. Its 2.7 million jobs in the sector far surpassed the combined 523,000 in the US and Europe.

As the US ramps up its own related efforts, and other countries respond in kind, the widely shared hope is that each region finds a way towards healthy competition – which would be more beneficial to everyone than decoupling in order to try to gain a strategic advantage.

Soon after the IRA’s passage, officials from the US and China were frankly tweeting at each other over its implications. If that kind of energy is channeled into constructive rivalry, prospects for our collective clean energy future brighten.

But we’re not there yet.

The IRA could still run into political obstacles at home, for one thing.

And even if it succeeds, it may leave ample room for further action. According to a study published earlier this year, the law could help the US slash its emissions by as much as 48% by 2035 (from 2005 levels).

That’s still shy of the 50% cut by 2030 that the country has committed to.

More reading on the IRA and climate action

For more context, here are links to further reading from the World Economic Forum's Strategic Intelligence platform:

  • More than just energy – according to this analysis, the IRA spurred the announcement of a “barrage” of new carbon capture projects, including a Swiss firm’s plans to operate in three different US states. (GreenBiz)
  • “The IRA helped me break up with fossil fuels.” This piece describes one person’s efforts to cut ties with their California gas company (no more gas stove, no more fireplace) by taking advantage of new incentives provided by the law. (The Atlantic)
  • This is a behind-the-scenes view of the IRA’s passage via an academic who joined the staff of a member of the “Never Give up Caucus” in the US Congress, and is now back home in the state of Minnesota helping implement the law. (Inside Climate News)
  • This study details concerns about US-centric aspects of the IRA and their spill-over effects, and reaches this conclusion from a purely economic point of view: “the first best response to climate change remains international cooperation.” (VoxEU)
  • “Part of a looming international subsidy war driven by politicians’ attempts to shore up voter support.” This is a less-than-glowing take on the effects of the IRA. (LSE)
  • “Instead of fighting the IRA, Europe should embrace its pro-worker bent.” This was a relatively early vote in favor of Europe shifting from questioning the IRA to developing a “better” version of its own. (Project Syndicate)
  • Transforming the global economy to run on clean energy is one thing, changing the way we work is another. According to experts cited in this piece, there’s a worldwide shortage of the skills required to build a green economy. (Eco-Business)

On the Strategic Intelligence platform, you can find feeds of expert analysis related to Climate Change, the Energy Transition and hundreds of additional topics. You’ll need to register to view.

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