The Inflation Reduction Act (IRA) is the US’s answer to the global call for strong policy action on the climate crisis. It’s lit a fire under the global energy industry, causing scrutiny of policy across Europe and the UK.
The state of play: US vs UK and Europe
The IRA was introduced by the US in 2022 and will direct around $370 billion in federal funding to clean energy. This is one of the largest commitments to date and a clear signal from the US that it’s stepping up to the plate on climate policy.
The US has previously tried and failed to introduce climate policies, with carbon pricing and emissions reduction bills that received little to no support from the Senate. This has left the US with only one clear pathway to an ambitious climate policy – one focused on subsidies, with a US-First approach that sits well with Senators.
The funds will be delivered through a mix of tax incentives, grants, and loan guarantees that cover all the technologies needed to reach net zero: from carbon capture utilisation and storage, to geothermal energy, hydrogen, ammonia and more.
This has already had significant impact on clean tech industries in the US, with sectors like wind power, already seeing a significant boost. More broadly, the investment enabled by the Act is leading to the rapid growth of the entire clean tech sector. Recent research by the FT shows that US companies have committed $204bn in large-scale projects to boost semiconductor & clean-tech production, potentially creating 82,000 jobs – this is almost double the commitments made in 2021.
This level of support has led to more firms wanting to invest in green projects in the US, helping to accelerate their transition to net zero and their green economy. The US’ ambition to become a clean tech superpower is clear – and governments across the world have been paying attention.
The EU is one such bloc that has been racing to respond to the IRA and the global impact it’s created. For many, there are concerns that the IRA could pull investment from the EU as the Act competes with Europe’s Green Deal.
Whilst subsidies across the EU can currently be accessed by non-EU producers, the IRA takes a more home-grown approach. It has strongly incentivised the formation of localised supply chains as they look to bring the manufacturing of renewable materials and components to US soil.
The Commission has already called on member states to fast-track net zero projects and ramp up the production of critical raw materials for the low-carbon economy, whilst the bloc plots its next move. There are plans for further commitments, including that at least 40% of the EU’s low-carbon technologies, from solar panels to heat pumps, must be made within its borders by 2030.
Indeed, Europe hasn’t escaped claims of protectionism either. In the past month, the EU backed a radical new Carbon Border Adjustment Mechanism which aims to incentivise non-EU countries to increase their climate ambition and to ensure that EU and global climate efforts are not undermined by production being relocated from the EU, to countries with less ambitious policies.
In the UK, the Government has recently announced its own measures to accelerate the UK’s green industries, framed as the UK’s ‘Energy Security Day’.
This includes some promising signs of progress – on carbon capture and storage, nuclear energy and proposals to accelerate reform, and covers details on how the government will support delivery in these areas.
However, there are concerns the UK has become complacent following early leads in the race on clean tech, and industry voices are clear that what has been announced is not enough. The package does not include any new funding, with many previously announced updates being rehashed and wrapped into it.
While the UK has had previous successes around Contracts for Difference and Feedin Tariff schemes, these have been significantly dialled back, as have EV subsidies alongside a number of other U-turns in the last Budget.
Too little too late for the UK and Europe?
Globally, policymakers are re-evaluating their decarbonisation initiatives to see if they can level the playing field, and coordinate efforts across the globe to lower emissions. The IRA has been a great catalyst for these market shifts, but it also has its pitfalls.
The Act has been dubbed protectionist by many, as it focuses on US-centric policies, and actively encourages green supply chains to remain on US soil. Whilst inward-looking, this may provide the EU and the UK with opportunities to become the target export market of choice for the US. This could mean a re-focus on downstream job creation and equipment deployment instead of manufacturing for the European countries.
Looking to green investment, while the US has historically lagged in this space, this may soon be a thing of the past. Without similarly bold statements of sweeping measures and new funding, the EU and the UK risk falling behind. Without stronger signals, clean tech firms and investment will be lost to countries with better incentives.
In Europe, Tesla’s battery maker has already shifted plans for new manufacturing activity from Germany to the US, won over by the new tax incentives. In the UK, AMTE Power, Britain's only home-grown battery producer, is also considering a move across the pond for the same reason.
However, subsidies and tax breaks might not be the answer for all. Looking to the UK, we need to acknowledge that our economy is far smaller than that of the EU or the US, which makes competing on subsidies alone more of a challenge.
Taking a swipe at the IRA recently, Chancellor Jeremy Hunt has been clear that his long-term solution for the UK is “not subsidy, but security”. He argues that the best way forward for the UK is to be highly strategic, and home in on the areas where the country has a clear competitive advantage.
Essentially, funding in both the UK and Europe should prioritise green technologies where economies of scale are smaller, or where energy security demands it.
Turning to the UK specifically, businesses need reassurance that their investments and operations are secure for the long term. Many of the IRA’s incentives have timelines of five to ten years, which give businesses unprecedented security and stability and are a huge market signal to firms looking to invest.
This is starkly contrasted with the ever-changing governments and scrapping of policies in the UK, which means that building confidence in the UK’s ability to deliver on promises will be even more crucial in retaining clean tech investment this side of the pond.
Against the backdrop of the lacklustre Energy Security Day announcements, the time has come for a truly ambitious industrial strategy, focused on fostering large-scale innovation, job creation, and investment in clean tech. In the meantime, the jury is out as we await the UK’s full response to the IRA, come Autumn.
This can’t afford to be half-hearted. Our environment and economy will depend on it.