Good morning from New Economy Brief.
The Inflation Reduction Act in the US has put pressure on governments across the world to ramp up their efforts to develop their own green economy.
The ‘Washington Consensus’ of free trade is dying. State-aid rules, a cornerstone of the EU’s single market, are being relaxed as Western governments move towards state-directed reindustrialisation and decarbonisation.
But where does this leave the UK government and how could they catch up in the 'green arms race'?
The green arms race. The Inflation Reduction Act (IRA) in the US has catalysed a ‘green arms race’ across the Western world, with many governments pledging billions in public investment to compete for private capital and grow their domestic low-carbon economies. Governments are moving away from the ‘Washington Consensus’ of free trade in favour of state-directed reindustrialisation, with the IRA offering tax breaks for businesses that invest in low-carbon manufacturing and for consumers who buy electric vehicles which have materials sourced in the supply chain from North America. The EU has responded with its own Green Deal Industrial Plan (GDIP) and loosened state-aid restrictions to allow for more state intervention by member states to develop low-carbon economies and diversify critical supply chains within the EU.
- ‘Made in America’: Reshoring US manufacturing jobs. The Biden Administration has pledged $369bn in tax breaks for companies investing in low carbon manufacturing if they have ‘local content requirements’, where goods are assembled or sourced domestically. The aim is that many businesses utilise the subsidies and reshore to the US so that around 90% of domestic demand could come from domestic manufacturing supply chains by 2030 and bring millions of good quality jobs with them. Households can also receive up to $28,500 in up-front incentives to switch to lower carbon appliances, electric vehicles and install energy efficient upgrades. More than 100 climate, energy and environmental investments in the IRA have been estimated to create more than 9 million jobs in the US over the next decade. In the seven months since the IRA passed, clean energy companies have announced over 100,000 new jobs across 31 US states with investments totalling $89.5 billion - nearly 10 times more jobs have been created there in the last 7 months than have been created in the UK’s low carbon and renewable economy over the last 7 years.
- Job quality was important for political support. The scale of investment is novel in US climate policy, but the legislation also unites climate and trade union agendas through requirements for green jobs to pay ‘prevailing wages’, apprenticeships, access to affordable childcare and other benefits to receive certain tax credits. International Climate Policy Expert Mary Hellmich explains the political context for this: “American support for climate action depends on these policies leading to well-paying, union jobs, in addition to the achievement of climate targets. Thus, the inclusion of domestic content and labor provisions in the IRA were critical to the legislation’s passage; without them, there would be no climate bill in the US.”
Green protectionism and the end of the ‘Washington Consensus’. This new ‘interventionist moment’ should be seen as part of an international competition to develop low-carbon technologies by the world’s major economies. China currently holds at least 60% of the world's manufacturing capacity for technologies such as solar, wind and batteries and holds “a near-monopoly on the production of many minerals critical for low-carbon technologies”. The Western world now wants these jobs and industries back, and governments are prepared to go against the norms established in the era of globalisation and use state-directed green industrial development on a huge scale to shelter their own nascent sectors and secure domestic supply chains. (Angela Nagle provides a great overview of the economic history of protectionism and situates the green industrial strategy race in a geopolitical context.)
- The EU’s response. The EU has noted ‘at least nine points’ in the IRA which could be regarded as a breach of international trade rules; in particular, the stipulation for local content requirements are incompatible with World Trade Organisation rules which are supposed to be agnostic about where products are made. Because the IRA is likely to attract private investment and industry away from the European economies and towards the US, the European Commission has responded with its Green Deal Industrial Plan (GDIP) to get at least 40% of the EU’s low-carbon technologies - such as solar panels and heat pumps - produced within its borders by 2030. The EU 's goal is to avoid dependency on any single nation outside of the EU for more than 65% of any one critical raw material by 2030 - which has already reportedly “sent renewables shares plummeting” in the Chinese low-carbon industry.
- Developing the European green economy. The GDIP will be accompanied by Net-Zero Industry Act to “identify goals for net-zero industrial capacity and provide a regulatory framework suited for its quick deployment”, a Critical Raw Materials Act to reduce dependency on imported materials and diversify domestic and sustainable supply of materials such as lithium and rare earth metals needed for electric vehicles and wind turbines, and a loosening of state-aid rules to allow EU member nations to channel more public funds into critical minerals extraction. This latter change has been described by experts as “nothing short of a paradigm shift in EU State Aid law…The EU now leaves the achievement of its climate targets to the willingness and ability of the Member States to subsidise companies in support of accelerating the rollout of renewable energy, the decarbonisation of industrial production processes and accelerated investments in sectors strategic for the transition towards a net-zero economy.”
“The British way.” Whilst the UK’s formal response to the IRA is scheduled to be announced in the Autumn, Chancellor Jeremy Hunt has written in the Times warning against a protectionist “distortive” global subsidy race and says “Britain will not go “toe-to-toe” with the United States and the European Union by offering billions in green subsidies and tax breaks.” Hunt said the UK response will instead focus on private investment and a “pro-growth regulatory regime…this is ‘the British way’”.
- Green day. The government released 44 climate and energy related documents on ‘Green Day’ last week, including a new net-zero strategy after a High Court ruling that its climate strategy was unlawful under the Climate Change Act and a carbon budget delivery plan, which showed the UK is not on track to deliver its legally-binding carbon budgets. Former President for COP26 Sir Alok Sharma MP has warned that a key test of “Green Day” last week would be whether the government’s announcements “materially accelerate significant private sector money into green technologies and green jobs in the UK”, and called for faster action to respond to US and EU incentives that are ”attracting billions and billions of private sector investment in their green energy sectors right now”. (It’s not just the US and EU though… the Canadian government also pledged an $80bn investment package in clean technology in response to the IRA.) Responding to the Government’s energy announcements on ‘Green Day’ the Executive Director of Policy for Renewable UK (the UK trade body for renewables) said: “These announcements do not go far enough to attract the investment we need in the renewable energy sector…Global competition for investment in renewable energy projects is fiercer than ever, and the UK risks falling behind and surrendering our global lead…we need much more than a “business as usual” approach to kickstart investment…Without that, we won’t land the UK-wide economic benefits of building up new clean energy supply chains, as they will go elsewhere where the investment environment is more conducive and attractive”.
- Missed opportunities. Whilst the UK government has criticised the ‘dangerous’ measures in the IRA, they have simultaneously argued that we are unable to compete with the scale of subsidies needed to attract private investment on offer in the US and EU, whilst also being “ahead of the game” on renewable energy, pointing out that the UK has the four largest offshore wind farms in the world. Critics note that much of this infrastructure is owned by foreign state-owned entities and that the wind farms are an “illustration of political failure because they should have been built by a home-based manufacturing sector”, in the words of GMB Scotland’s Peter Welsh: “The result is a situation where we have haemorrhaged the vast majority of the jobs in the manufacture of offshore wind projects to the rest of the world because we have not invested in our infrastructure and supply chains – and the public are footing this industrial failure through their bills.” (Readers might also remember the collapse of ‘flagship’ electric battery manufacturer, BritishVolt, which went into administration in January after the government refused to bring forward public funding and it failed to find a private investor to save it.)
Catching up in the 'green arms race'. The UK’s drive for Net Zero is now taking place in a new context, where other nations are offering generous subsidies to develop their own green industries. What does this mean for UK policy? And can the UK really compete with the IRA? Luckily there are various lessons that the government can learn from this paradigm shift in global trade and green industrial strategy.
- “This is not protectionism, is it patriotism”. Labour are now positioning their Green Prosperity Plan as a direct response to the IRA. Shadow Chancellor Rachel Reeves often justifies their £28bn a year green investment pledge as a way to compete with other nations which are “taking a punt on these jobs and industries of the future”. Labour’s plans for an initial £8bn National Wealth Fund to invest in the green economy also echoes the US’s ambition to redevelop domestic industries (“made in Britain”), and similarly aim to generate returns for taxpayers. Shadow Secretary for Climate Change and Net Zero Ed Miliband outlined Labour’s approach in a speech to Green Alliance last week: “those who say we can’t be winners in that global race are wrong. We should match the ambition of President Biden’s Inflation Reduction Act and stop moaning about it…this is the British version of the Inflation Reduction Act: 2030 zero carbon power. Action to break down the barriers in planning, grid, skills and supply chains. A new national wealth fund to invest in partnership with the private sector. And GB Energy, our new publicly-owned energy company.”
- Reindustrialisation and decarbonisation: lessons for the UK. IPPR’s Luke Murphy explains how the UK can use a wider policy toolkit than the US due to unique constraints within their political system, such as regulatory measures and public procurement, “but to reap the economic benefits of such measures the UK must learn from the US approach combining regulation with greater public investment and green industrial policy.” Some of the eight lessons include learning from the unprecedented certainty and policy stability that the IRA provides through its 10 year framework for tax credits (resembling the ‘critical decade’ for climate action), focusing climate action on creating good quality jobs, using conditionality to shape and bend corporate behaviour to socialise risks and rewards (e.g. through encouragements to sign collective bargaining deals with unions, offering affordable childcare for workers and ruling out share buybacks and sharing excess profits with the government), and that the UK should play a role in greening the global trade regime. (We will cover more on the international trade angle in a future Digest.)