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Blog Aug 15, 2022

3 big ways the U.S. Inflation Reduction Act may impact the energy transition in emerging and frontier markets

The U.S. Inflation Reduction Act, now headed to President Biden’s desk for signature, is predominantly a domestic bill…

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The U.S. Inflation Reduction Act, now headed to President Biden’s desk for signature, is predominantly a domestic bill – with huge ramifications for U.S. energy, decarbonization, industrial policy, and health care. But its ripple effects will be global, with some big potential impacts on emerging and frontier economies. Here’s what we’re watching:

  1. Next-generation decarbonization tech should come faster to lower-income markets.

    By driving innovation, investment and early deployment in emerging technologies, the IRA will ultimately expand the menu of solutions available (and economically viable) in lower-income markets. The IRA includes grants, tax credits, and loan programs to turbocharge relatively nascent technologies the world will need in coming decades (including clean hydrogen, carbon capture, zero-carbon liquid fuels, and advanced nuclear and geothermal). These solutions need to be much cheaper and available at scale before poor countries can take advantage of them – and the IRA will (eventually) help make that happen.

  2. The boost to US clean energy manufacturing should ultimately be positive, but short-term mercantilism could hinder investment in the near term.

    The IRA has a strong emphasis on US production and manufacturing. (For example: it ties tax incentives for clean electricity and EV purchases to domestic content sourcing standards; provides $2 billion in grants and $30 billion in loans to retool American auto manufacturing for EV production; and provides $37 billion in new tax credits to spur American production and assembly of wind and solar PV components, batteries, clean vehicles, and processing of critical minerals). In the long-term, this should help expand and diversify clean energy supply chains, which is good for everyone because it creates more competition and reduces the geopolitical and social welfare risks inherent in over reliance on Chinese-dominated supply chains.

    But – especially in the short-term – the US focus on domestic manufacturing, not just non-Chinese sources, may make it harder to finance energy projects overseas. With the U.S. intent on strengthening its own industries, development agencies and initiatives will likely be more constrained in their ability to invest in projects that don’t include strong ties to U.S. commercial interests, narrowing the available investment pipeline in Africa and Asia.

  3. US action should improve the tenor of climate negotiations and international policy discussions.

    First, the IRA suggests that carrots are better than sticks. The IRA incentivizes energy companies, airlines, industrial firms, and households to decarbonize, rather than penalizing them for failing to do so. This is an approach we should bring to our foreign policy as well: let’s focus on making it as attractive as possible (with renewables subsidies, grants, and other support) for other countries to develop clean energy – rather than getting bogged down in unproductive conversations about restrictions and what we won’t do.

    Second, it reminds us that compromise helps get big things done. The IRA contains concessions that not all climate hawks are happy with: it supports carbon capture, which does little to address the localized pollution from fossil fuels, and requires the federal government to auction some federal land for oil and gas drilling. These concerns are valid but – newsflash – the energy transition is hard, and trade-offs will get made along the way. Our international climate and energy policy needs to recognize that other countries face political constraints just as complex and as real as ours – and focus on helping navigate those complexities.

    Third, it (finally) gives the US some credibility on emissions reductions. Princeton University’s REPEAT project estimates the IRA will get us two-thirds of the way to closing the emissions gap between our current pathway and our goal of reducing emissions 50% below 2005 levels by 2030. There’s still a long way to go. But the fact that we’re taking significant action to meet our own climate pledge gives us some much-needed (and long lacking) credibility in international contexts, and will hopefully help lessen the perception of hypocrisy that has so hampered productive conversations to date.