## AMERICA’S LANDMARK CLIMATE LAW

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**Canonical URL:** [AMERICA’S LANDMARK CLIMATE LAW](https://www.imf.org/-/media/files/publications/fandd/article/2022/december/bordoff.pdf)

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### Overview
- The Inflation Reduction Act will deploy nearly $400 billion over the coming decade to slash carbon emissions.
- The law subsidizes clean energy technologies rather than taxing or restricting carbon pollution.
- The law explicitly favors clean energy manufactured in the United States and includes domestic manufacturing requirements as part of a broader shift toward “industrial policy.”
- Political outcome: the law secured 51 votes with a broader political base of labor joining environmental groups.

### Trade risks and protectionism
- Domestic-preference elements:
  - Electric vehicles must be assembled in North America to qualify for subsidies.
  - Batteries must be made from components mined or processed in the US or its free-trade partners to qualify.
  - Larger renewable energy subsidies are available if projects use materials, such as steel and iron, sourced from domestic manufacturers.
  - Generous subsidies for green hydrogen and ammonia could lower delivered export costs below competitors in the Middle East and Asia.
- Potential consequences:
  - The EU and South Korea have indicated they may challenge the electric-vehicle restrictions.
  - Countries whose firms may be undercut by US subsidies may enact their own protectionist policies in response.
  - Some companies have expressed interest in relocating green-hydrogen projects to the US to capture subsidies; existing projects in other countries might be scrapped and relocated.
  - US taxpayers may face limits on subsidizing the delivered cost of energy for foreign consumers and businesses, creating diplomatic and trade tensions.
- Examples of retaliatory or protectionist moves:
  - Indonesia’s president has articulated a goal of banning exports of nickel to build domestic manufacturing further up the value chain.

### Fragmentation and geopolitical context
- Drivers of fragmentation:
  - COVID-19 supply-chain disruptions prompted reevaluation of supply security.
  - Russia’s invasion of Ukraine intensified geopolitical drivers reshaping alliances into new regional blocs.
  - Growing trade tensions between the US and China have already darkened the outlook for US solar projects.
- Implication for decarbonization:
  - Trade in clean energy components, critical minerals, and fuels such as hydrogen must expand rapidly to achieve net-zero emissions by 2050.
  - According to the International Energy Agency, achieving net-zero emissions by 2050 requires tripling the value of global trade in critical minerals and boosting global trade in hydrogen to 1,500 times its negligible level today.
- Risk: tit-for-tat retaliation could limit access to lowest-cost clean energy materials and products and thus undermine the energy transition.

### Climate cooperation and policy recommendations
- Strategic goals:
  - Ensure the Inflation Reduction Act sparks virtuous competition and cooperation rather than vicious protectionism.
  - Strengthen commitment to a rules-based trading system and cooperation with free-trade partners to diversify clean energy supply chains.
  - Recognize that countries cannot produce everything domestically; diversifying supply sources improves energy security and counters concentrated influence (e.g., China’s dominance in certain industries).
- Suggested actions for US officials:
  - Leverage strong domestic climate action to bolster climate cooperation with other countries worried about competitiveness impacts.
  - Engage in or mirror initiatives such as the Group of Seven agreement to form alliances of nations that benefit from preferential trade terms if they achieve certain environmental standards.
  - Potentially join or mirror the EU’s plan to impose a carbon fee on imports of high-emitting goods.
  - Implement agreements with partners (e.g., the EU deal referenced) to restrict imports of steel and aluminum from Asia and elsewhere if they do not meet emission standards.
  - Strengthen the World Trade Organization and build new mechanisms for economic cooperation to support a rules-based trading system.
- Balance recommended:
  - Do not unilaterally disarm: the US should pursue industrial policy measures while managing diplomatic and trade relations to avoid exacerbating global fragmentation.

### Key statistics and facts
- "nearly $400 billion" deployed over the coming decade.
- The law secured "51 votes."
- To achieve net-zero emissions by 2050, the International Energy Agency calls for:
  - "tripling the value of global trade in critical minerals"
  - boosting global trade in hydrogen to "1,500 times its negligible level today."
- Target year for net-zero emissions referenced: "2050."

*Jason Bordoff, December 2022, Finance & Development.*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2022/december/bordoff.pdf_