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President Joe Biden on 16 August signed into law the ‘Inflation Reduction Act’, declaring that “the future of America is bright and the promise of America is real”.
The USD740 billion omnibus legislative package, which includes a record USD375 billion of climate and energy spending, promises genuine action to limit emissions and should stand Biden in better stead with Democrat voters in the November midterms, as well as at COP-27 in Egypt that same month.
However, the simultaneous move by China to cancel climate talks with the US over Nancy Pelosi’s trip to Taiwan threatens the clean tech supply chains needed to deliver that action, cautions our Climate and Resilience Team Lead, Will Nichols.
First to the legislation itself. Passing an Act rather than relying on executive action – as Biden has largely had to do so far – cements climate change as a key pillar of the administration’s agenda and also makes it more difficult for a future Republican administration to reverse course, Nichols notes. As such, this offers business and investors a much more stable policy context, alongside moves such as financial regulator the SEC pushing to incorporate greater consideration of climate risks into company reporting.
With polls consistently showing that climate change is among the major priorities of US voters, the Act is well-timed ahead of this year’s midterms, where the Democrats face the very real possibility of losing control of the House and the Senate, effectively tanking any route forward for significant climate action. A late addition of USD4 billion to combat the ‘megadrought’ affecting the west of the country could also go some way to securing votes in a contested area.
Independent analysis suggests that the planned investment in clean energy technologies, including wind, solar, hydrogen and electric vehicles would, fully realised, deliver emission cuts of around 40% on 2005 levels by 2030, albeit with spending a little under the USD500 billion in the Build Back Better bill. The Inflation Reduction Act will generate more than USD300 billion of investment into renewables between now and 2035, according to our sister company Wood Mackenzie, and nearly USD1.2 trillion through 2035, while accelerating a low carbon shift that will see two-thirds of power generation coming from carbon-free sources by 2035.
That is including the fossil fuel trade-offs needed to pass the bill: more drilling on federal lands, tax credits for carbon capture and storage, and smoothing the path for fossil fuel pipelines, although there will also be a new fee on excess methane emissions from oil and gas drilling.
The Act should shore up the US as a climate leader internationally and allow it some space to chivvy other countries into upping their emissions reduction ambition ahead of COP-27 later this year, Nichols continues.
However, as Nichols warns, Biden needs to be wary of the geopolitics of clean energy. Provisions in the bill tying eligibility for EV credits to battery production in North America or countries with which the US has signed free-trade deals is a clear attempt to build up domestic value chains, but the US simply hasn’t got time to catch up.
Instead, Biden’s plans will hinge on clean tech supply chains in which are already facing disruption from the US looking to tighten regulations on goods produced in Xinjiang over forced labour concerns.
There is no suggestion yet that China will restrict clean tech supply chains in response to latest tensions with the US, but what is certain is that Biden’s plans cannot succeed without Chinese inputs – and investors and environmentalists will be wary of any threat to that value chain.
Moreover, although China has not said it will pare back its own carbon cutting efforts, its full involvement of the world’s largest emitter is vital if the COP process is to have any legitimacy and particularly crucial right now given countries have a host of problems in the shape of covid, cost of living, and shortages of food and energy that have jumped ahead of climate action. As shown in our chart of the week, China is still showing steady emissions growth compared to declines in the US and EU.
Looking ahead, Nichols notes that US voters will have a significant say on the direction of global climate action on 4 November. The mood music at COP-27 will be rather subdued should Republicans make inroads into Congress.
Equally, how the US mollifies China ahead of COP-27 will have a huge bearing on the success of the Sharm El-Sheikh conference, which already has issues around the involvement of Russia.
The US-China agreement at COP-26 to urgently work on reducing emissions is not only a key cog in their own efforts, but also serves as an encouragement to other countries to move on climate.
However, if US-China talks are curtailed and Biden is looking to move supply chains away from China, Nichols warns that we could see climate cooperation between the two falter – with potentially huge implications for the Paris Agreement.
That said, Nichols concludes, leaders in both countries recognise the need for action and low-level bilateral talks may still continue, especially against a backdrop of this year’s record-breaking heat extremes across the world.