Finding greener pastures: The global impact of the IRA, one year on

One year ago today, President Biden signed into law the Inflation Reduction Act (IRA), immediately hailed as the most ambitious climate act in history.[1] The legislation’s $369 billion in subsidies have already begun to turbocharge clean energy and climate technology deployments and are forecast to generate roughly $1.7 trillion of new investment in the United States over the next decade.[2]

However, the impact of the IRA extends beyond the borders of the United States. The legislation’s ambition and scale has forced governments around the world into a rapid reappraisal of how to retain and attract the capital needed to enable their own energy transitions. Indeed, an unintended consequence of the law has seen policymakers across the European Union and the United Kingdom raise escalating concerns that the IRA could reduce global competitiveness and divert investments away from the region.[3]

And investors are playing close attention. According to a survey conducted by FTI Consulting, 83% of global institutional investors said subsidies and other policy mechanisms now influence their investment decisions, and 78% said climate change was a significant factor in choosing where and how to invest.[4] That sentiment has already begun to materialise with approximately $271 billion of clean energy investments committed to the US over the past year.[5]

How has the world responded?

In response, governments across Europe have scrambled to develop their own policies to streamline permitting and incentivise new investment in renewables and technologies, like electric vehicles, hydrogen and capture projects.[6] However, their efforts have been undermined by the war in Ukraine, as well as inflation, high energy costs and supply chain disruptions.

After months of debate, the European Commission introduced the Strategic Technologies for Europe Platform (Step) in June, intended to steer an additional €10 billion in funding towards the digital and green transition and complement policies like the Net Zero Act and Critical Raw Materials Act that aim to simplify the regulatory environment.[7]

The Commission hopes the Step programme will remove regulatory red tape and serve as a precursor to a future European Sovereignty Fund, which would relax state aid and help finance multi-country projects within the bloc. For all its importance, the Fund is a controversial issue in the EU and its creation is by no means a foregone conclusion. 

The UK government’s response has been similarly contentious. While it has pledged to unveil its legislation, early indications suggest it will seek to avoid a ”distortive global subsidy race” through a comparable clean energy subsidy package.[8] Although Westminster is considering new policies like an energy security bill, businesses are still contending with labyrinthine permitting systems and a hefty windfall tax on low-carbon electricity generators, including wind, solar and nuclear.

With both the EU and UK facing elections in the next year, governments will have limited time to push through new legislation and are expected to avoid any controversial market interventions. But a failure to act decisively could have lasting impacts across the region.

Among surveyed investors, two-thirds (67%) believe the EU and UK have not done enough to remain competitive in energy transition technologies. 42% of respondents said they would be more willing to move capital to the United States from other regions in the wake of the IRA.

This is not the first time the UK has been slow to provide support for a nascent industry at a critical juncture. In response to the oil price shocks of the 1970s, the UK developed a world leading position in wind energy in the 1980s – advancing some of the most advanced technologies of its time.

However, when North Sea oil was discovered, the government shifted attention to promoting the UK as an oil-producing powerhouse, and the burgeoning wind industry’s momentum was lost. While political interest in wind was renewed in the UK decades later, the opportunity for dominance had already passed and the industry had moved elsewhere.[9] Spain underwent a similar experience in the early 2000’s when its nascent solar photovoltaic industry was hampered by the introduction of a subsidy cap.[10]

What next?

There is no silver bullet to catalysing the technologies needed to enable the energy transition. When asked about the most effective policy mechanisms, nearly half of investors (46%) identified creating a more attractive tax regime, 39% said state spending through subsidies and tax cuts, and 32% said reducing regulatory burdens. However, a strong majority of investors (75%) agree that government policy support will be essential to fighting climate change and that the private sector cannot deliver the transition alone.

Though governments must contend with how to support investment and remain domestically competitive, the unavoidable truth is that climate change transcends national borders. Meeting that challenge will require truly global collaboration between governments, industries, and consumers around the world, and simultaneously avoiding parochial self-interests. While current discussions centre on how governments can create greener domestic pastures, building a more sustainable and equitable future means we must also look past our own backyards.

References

[1] “Inflation Reduction Act Guidebook,” U.S. White House (16 August 2022), https://www.whitehouse.gov/cleanenergy/inflation-reduction-act-guidebook>.

[2] “Treeprint: U.S. Inflation Reduction Act – A tipping point in climate action,” Credit Suisse (November 2022), <https://www.credit-suisse.com/treeprintusinflationreductionact>.

[3] Graham Lanktree, “Brexit Britain trapped in the middle as US and EU go to war on trade,” Politico (29 November 2022), https://www.politico.eu/article/uk-calls-out-biden-over-electric-vehicle-subsidies>.

[4] In April 2023, FTI Consulting surveyed approximately 200 institutional investors around the globe with an average $80 billion in assets under management (AUM).

[5] “Clean Energy Investing in America,” American Clean Power Association (August 2023), <https://cleanpower.org/wp-content/uploads/2023/08/CleanEnergyInvestingReport_digital.pdf>.

[6] “Accelerating permitting for renewable energy,” European Commission (May 2023), <https://reform-support.ec.europa.eu/accelerating-permitting-renewable-energy_en>.

[7] “EU budget: Commission proposes Strategic Technologies for Europe Platform (STEP) to support European leadership on critical technologies,” European Commission. (20 June 2023), <https://ec.europa.eu/commission/presscorner/detail/en/ip_23_3364>.

[8] Matt Honeycombe-Foster, “UK chancellor swipes at Biden’s ‘massively distortive’ Inflation Reduction Act,” Politico (30 March 2023), <https://www.politico.eu/article/jeremy-hunt-joe-biden-uk-chancellor-swipes-at-bidens-massively-distortive-inflation-reduction-act/>.

[9] Fiona Harvey, “Has the wind revolution stalled in the UK?” The Guardian (27 February 2012), <https://www.theguardian.com/environment/2012/feb/27/has-wind-revolution-stalled-in-uk>.

[10] “Solar energy gets jitters as Spain plan retreats,” Reuters (9 July 2008), <https://www.reuters.com/article/us-solar-spain-idUSL0932027820080709>.