Policy Perspective: The Resounding Impact of the Inflation Reduction Act on Deployment of Climate Technology and the Global Response to Its Economic Influence

As concerns surrounding climate change increase and widespread embracement of technology as a solution to the issue grows, greenhouse gas emissions-intensive industry is facing significant pressure to commit to ambitious sustainability targets and decarbonize their operations. Industries that fall under the umbrellas of sectors such as energy, chemicals, and resources must navigate the balance between sustainably responsible operations and profitable business. The nascency of some of the technologies that make up the suite of options for emissions reductions ensure that many of these pathways will come at a substantial cost.

It isn’t difficult to see that favorable government policy and regulatory frameworks are driving climate technology investment in certain geographic regions. Control strategies, often referred to as “stick” approaches, are legal obligations require certain emitters to comply by paying a tax on their emissions or covering their emissions with allowances allocated from the government or procured from emitters with a surplus. Incentive strategies, which have been dubbed “carrot” approaches, provide financial motivation for voluntarily adopting decarbonization technologies through grants, advantageous financing, or tax benefits.

In August of 2022, The United States Government passed the Inflation Reduction Act (IRA) and immediately changed the climate technology investment landscape. Embedded within this landmark legislation is a portfolio of technology-neutral climate action programs fueled by fiscal appropriations of nearly $400 billion. Though multiple funding instruments are utilized by the IRA, the focus of this paper will be the government’s doubling down on the tax credit mechanism and other “carrot” approaches, and how they have positioned the United States to benefit from the economic activity surrounding climate investment.

Tax credits function by reducing the amount a taxpayer owes at the end of a taxable year, and this is not a novel strategy used by the US government to motivate climate action. However, the IRA significantly bolstered existing tax credit programs and introduced several new programs for technologies that weren’t already prioritized. Appropriations for grant and loan programs to be administered by the Department of Energy (DOE) are competitive application processes that provide criteria for technology, geography, and other topic areas.

Coupled with the anticipated reduction in country-wide greenhouse gas emissions is an already-realized economic boom that has other jurisdictions taking notice. According to the White House on the one-year anniversary of the enactment of the law, over $110 billion has been announced in clean energy manufacturing investment, greater than 110,000 clean energy manufacturing jobs have been created, and it is estimated that the IRA could create more than 1.5 million additional jobs.

Garnering a keen interest from industry in the US and globally is the tendency for the requirements in the lucrative IRA programs to mobilize a clean energy and clean manufacturing workforce by paying prevailing wages, providing apprenticeship opportunities, and ensuring domestic content assurances are satisfied. There are also stipulations for communities that have been historically marginalized by energy and manufacturing activities. These aspects of the funding programs have been mimicked in major policies of other countries, such as Canada, the European Union, and the United Kingdom. The domestic provisions have also received criticism on the global stage, with the international community claiming them to be protectionist and in violation of the country’s obligations to the World Trade Organization.

Other nations with major climate ambitions are, however, responding to the IRA with major policy announcements that seek to draw climate technology and clean energy manufacturing investment back to their respective communities. In addition to the countries previously mentioned, Australia has strengthened its flagship emissions reduction program and individual member states of the European Union are mobilizing funding to encourage deployment within their borders.

This paper will describe the major policy instruments that are currently in use across the globe and identify instances of where they are, and are not, working efficiently and effectively. The various tax credits programs and major funding allocations of the IRA will be highlighted to demonstrate the importance of the bill, as well as the preceding Bipartisan Infrastructure Law, in catalyzing climate technology and manufacturing deployment in the US. Finally, the global response to the IRA will be reviewed and a discussion of the need for cross-border collaboration will be provided to determine how the net zero targets and other sustainability commitments will be achieved most efficiently achieved on time.