The Inflation Reduction Act: a game-changer for US and global climate action

In April, Imperial College Business School explored the potential effects of the US Inflation Reduction Act, including a talk by Charlie Donovan, Senior Economic Advisor at Impax Asset Management. In this article, we capture some of the key points

In October 2022, US Congress passed the Inflation Reduction Act – one of the biggest pieces of climate and energy legislation in the country’s history. The act sets out around $340 billion in investment and tax breaks, with the potential to boost the US’s position in the race to lead clean energy production and capacity. 

This is important from a geopolitical standpoint, as China has far outstripped both the US and Europe in clean energy manufacturing over the past decade. At the same time, the conversation around climate change has shifted, moving it from an environmental matter to a much bigger global macroeconomic issue. Clean energy technology will underpin the industries of the future, and the race is on to see which countries will be the leaders in those industries. 

In this context, the Inflation Reduction Act marks a significant step forward for the US. In turn, it has also accelerated progress towards net zero in Europe; partly due to the fear of losing out competitively to the US, the EU announced its Green Deal Industrial Plan in February 2023. This will create a more attractive regulatory and investment environment for clean energy and related industries. 

Practical barriers 

This signals that there is real political will in the US, under the Biden Administration, to move towards a safer, cleaner, more resilient energy system. On a practical level, this has been facilitated by three key drivers: decarbonisation targets at federal and state level; the impact of Russia’s invasion of Ukraine on global thinking around energy security; and – perhaps most importantly of all – cost shifts which have put wind, solar and battery technologies in a serious position to disrupt energy markets. 

With these fundamentals falling into place, it might be tempting to see the Inflation Reduction Act as a positive end goal achieved. However, there remain some key domestic barriers for the US to overcome to make the most of what is undoubtedly a favourable situation. 

A proxy battle is playing out in the form of anti-ESG and “anti-woke” sentiment

The first of these barriers is around transmission capacity. To move away from a world in which hydrocarbons are the main source of energy, we need new networks and systems – upgraded transmission and distribution grids – in place to harness clean energy. The US Department of Energy estimates electricity transmission systems will need to be expanded 60 per cent by 2030, and tripled by 2050, in order to cope with the expansion of energy from renewable sources. 

This also raises another key barrier: permitting. For clean energy to power the same area that one large coal-fired station could cover, a number of smaller facilities would be needed, which requires the right practical framework on a local and national level. The current timeframes for approving and building this infrastructure are unlikely to be sufficient to meet the US Government’s decarbonisation targets, making reforms to the permitting process a vital step in maximising the Inflation Reduction Act’s potential. 

Cultural questions 

Perhaps the toughest obstacle to the US making real progress in the clean energy race is the impact the impending change is having on established industries, and the resulting wider cultural fallout. As it becomes apparent there will be a value shift between companies that have dominated for decades and emerging green competitors, a proxy battle is playing out in the form of anti-ESG and “anti-woke” sentiment. 

As it spills out into wider society, this has the potential to hold back progress in clean energy through a lack of public support. To be clear, most Americans believe in climate change and the need to act to mitigate it, but there remains a much more prominent minority vocally opposed to climate action than in most of Europe and Asia. This is partly due to the US’s position as a major oil and gas producer, but there is also a lingering question around how a shift to lower emissions – and the restrictions this inherently involves – fits with individual freedoms. 

China has far outstripped both the US and Europe in clean energy manufacturing over the past decade

There’s no single solution to this issue, but unleashing US potential in clean energy requires a greater societal consensus around climate change and its costs. Ultimately, this will require people to see decarbonisation as a sound investment despite the upfront financial and cultural costs, not through the lens of whether or not to pay those costs, but rather in terms of who pays them and how much they pay.  

In that context, the argument needs to be that it's better to bear the costs now than to leave them to our children and future generations, with the additional burden of a degraded biosphere. Making this case successfully will be key to making the most of favourable political and economic circumstances for decarbonisation and clean energy in the US, through the Inflation Reduction Act and beyond. 

The event "Prospects for a Global Energy Transition: A View from the US" took place at Imperial College Business School on 13 April 2023, chaired by Professor Ralf Toumi, Co-Director of the Grantham Institute for Climate Change & the Environment.  

Dr Charlie Donovan is former Executive Director of the Centre for Climate Finance & Investment at Imperial College Business School. He is currently Senior Economic Advisor at Impax Asset Management and Visiting Professor of Sustainable Finance at the University of Washington in Seattle.