The impact of the US Inflation Reduction Act on trade, politics and the global transition to a low-emissions economy.
Sir Winston Churchill once famously said, “You can always count on Americans to do the right thing – after they’ve tried everything else”. The US Inflation Reduction Act (IRA) has nothing to do with inflation and everything to do with climate change, US jobs and votes. It is arguably the most important climate change legislation ever enacted. The bill was signed by President Biden on August 16, 2022, and in the year since, it has completely changed the landscape for investment in clean technology.
What is the Inflation Reduction Act?
Unlike Australia’s Safeguard Mechanism, the IRA adopts a carrot rather than stick approach to emission reductions. It has earmarked a total of US$369 billion to programs to support energy production and reduce greenhouse gas emissions. The major provisions include1:
Provisions to lower energy costs through consumer rebates, tax credits and grants.
Financial assistance in the form of loans, tax credits and grants to promote domestic energy production and advanced manufacturing.
Investments to reduce emissions from a host of high-emitting sectors, with a particular focus on electricity production, transportation, industrial manufacturing, buildings, and agriculture.
Promoting equity and environmental justice by targeting emissions-reducing investments in historically disadvantaged communities.
Investments in rural communities to promote climate-smart agricultural practices, wildfire resilient forests, and sustainable biofuels.
Controversially, the IRA did contain some limited support for oil and gas, however it has been estimated that for every ton of new emissions generated by the IRA’s oil and gas provisions, at least 24 tons of emissions will be avoided2.
To understand just how impactful the IRA is, it is probably worth thinking about the example of a hypothetical farmer in the US considering generating a new income stream by installing a 1MW (megawatt) solar farm, which would cost around US$1 million. Panels can be located on frames around 10 feet (3 meters) above the ground which allows cattle or sheep to graze under them. A 1 MW solar farm requires around 6-8 acres (2.5 – 3.2 hectares) of land3.