Inflation Reduction Act is a turning point in US climate policy

$370 billion of climate spending offers to transform the economy and reduce emissions, despite concessions to fossil fuels
<p>Democratic Senator Ed Markey, a veteran advocate for clean energy and environmental action in the US, takes a selfie with climate activists after the senate passed the Inflation Reduction Act on 7 August (Image: Bill Clark / Alamy)</p>

Democratic Senator Ed Markey, a veteran advocate for clean energy and environmental action in the US, takes a selfie with climate activists after the senate passed the Inflation Reduction Act on 7 August (Image: Bill Clark / Alamy)

When Build Back Better was killed by Joe Manchin, a single holdout senator from coal country, US progress on climate change seemed stalled, and Joe Biden’s presidency had faltered.

Then, something genuinely surprising happened. On a quiet Wednesday afternoon, Senate Majority Leader Chuck Schumer and Joe Manchin announced they had a budget deal, eluding the thousands of journalists and Washington insiders who make their money giving you the inside scoop.

The so-called Inflation Reduction Act (IRA), which includes US$370 billion of climate spending in the form of subsidies and tax credits over the course of a decade, passed the Senate and the House. President Biden is expected to sign it into law on Tuesday 16 August.

Biden was jubilant. The IRA “addresses the climate crisis and strengthens our energy security, creating jobs manufacturing solar panels, wind turbines, and electric vehicles in America with American workers. It lowers families’ energy costs by hundreds of dollars each year,” he said.

These investments could get the US a long way towards meeting its targets of reaching net zero emissions by 2050. Combined with existing central government and state-level action, it could reduce emissions by 41-44% below 2005 levels by 2030, compared to 25-34% without it. However, this is still less than the 50-52% Biden has targeted. As the US is the world’s largest cumulative greenhouse gas emitter, it’s also likely to be short of what the country should deliver as a fair share.

Hope for the green economy

Analysis conducted by Energy Innovation, a think tank, states that the IRA will create at least 1.5 million new jobs in 2030, mainly in manufacturing, construction and related services.

More will need to be done by localities, businesses and at the state level for the US to reach its climate targets. Yet analysts are optimistic about the bill’s potential to catalyse action. For example, $27 billion provided to a new Greenhouse Gas Reduction Fund – essentially a green bank – can be leveraged to lend more and spur greater private sector investment.

The bill contains $60 billion to advance environmental justice in disadvantaged communities

The bill also contains $60 billion to advance environmental justice in disadvantaged communities facing pollution. It has the potential to power a low-carbon transition and development within communities that have long been neglected and where there is considerable potential for economic growth.

In the past, technologies developed in the US have been commercialised in China and Europe. This bill seeks to change that by onshoring green industrial manufacturing and spurring new consumption. For example, by subsidising electric vehicles with batteries made of minerals mined, processed or recycled in the US or in countries with which it has free trade agreements. That said, the US still relies heavily on Chinese manufactured goods for clean energy.

Fossil fuel concessions

But a deal with Manchin, who benefits personally from a family coal company and is a major recipient of political donations from the energy industry, was never going to come without costs.

Democrats agreed to new spending and support for fossil fuels, including leasing federal land for drilling in the Arctic and offshore in the Gulf of Mexico, something President Biden promised not to do during last year’s election campaign. Democrats also promised legal changes to speed up the development of specific fossil fuel projects, including the Mountain Valley Pipeline, which transports gas through Manchin’s home state of West Virginia.

These concessions were forcefully opposed by groups representing the areas and communities affected by new drilling and facilities. Bineshi Albert, co-director of the Climate Justice Alliance, said: “Hard-fought measures for environmental justice that support our communities are now being positioned alongside things that harm us, essentially holding us hostage to the needs of the fossil fuel industry.” ​​Brett Hartl, government affairs director at the Center for Biological Diversity called the bill’s support for fossil fuels “a climate suicide pact”.

But many of the changes to permitting provisions that would be most useful to fossil fuel companies need to pass through congress separately in the coming months. Democrats will be under pressure to oppose them. And Republicans, usually in favour of concessions to industry, are also threatening to block them out of spite, having suffered a rare legislative setback.

Biden may also have a role to play. Advocates are still asking him to declare a “climate emergency”, unlocking additional presidential powers that could, for example, be used to prevent the export of gas overseas.

On the global stage, the US has regained some credibility for asking other nations to deepen emissions cuts. Although for developing countries, many of which are facing post-Covid debt crises, there is a stark difference between the domestic spending the US is planning through the IRA and the climate finance it will provide them; Biden has pledged to gradually ramp up such finance to a relatively paltry $11.4 billion a year by 2024.

Climate politics in the US have entered a new phase. Battles to stop the development of oil wells, rigs, pipelines and export terminals will continue and intensify. Meanwhile, Democrats and the clean energy industry will attempt to profit – politically and financially – from the renewed US effort to build a clean energy economy.

Jamal Raad, executive director of Evergreen Action, a think tank, called the passing of the Inflation Reduction Act “a historic moment for climate action, and a turning point in American climate policy.”

How the money is spent, who benefits and what action might follow will determine whether it is truly transformative.