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.

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’”. 

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.)
Weekly Updates

Energy and poverty

Ending energy debt. Debt Justice has announced a three step plan to “end energy debt” as figures show that UK households are in a “record £2.5 billion of energy debt and arrears” with around £1 billion of that debt held by households on pre-pay energy accounts. Debt Justice proposes pausing enforcement and collection, writing off unpayable debt and providing affordable energy for all. 


Profit-price spiral. Fabio Panetta, Executive Board member of the European Central Bank has argued that profits, not wages, are driving up inflation and that governments may need to intervene. “Policymakers, long preoccupied with higher pay’s tendency to prompt companies to raise their prices, generating a wage-price spiral, should also be alert to the risks of a so-called profit-price spiral”, said Panetta. 


Fair banking for all. The Finance Innovation Lab is calling for a ‘Fair Banking Act’, arguing that “the UK has some of the worst levels of financial exclusion in relation to comparable economies” and that financial exclusion is a “serious, but hidden part of the cost of living crisis”. Such an Act would require mainstream banking institutions to disclose their performance on financial exclusion, in a transparent, publicly available, data disclosure framework and create a system for clear ratings, that show which banks are doing well and which need to improve. Banks would be able to improve their ratings by expanding the provision of affordable and ethical lending and providing fair services to those who are underserved and excluded. 

Public services

Public attitudes on the role of government. Britons want a “bigger role for the state in delivering a social contract” according to a new report by the Fairness Foundation. The research found that “belief in a small state… is a minority sport among all sections of society” and that the areas with the biggest support for government funding were social care, early years and public transport. 

Climate change

The lost decade in the climate fight. No sectors in the UK are prepared for the impacts of climate change with the last 10 years being described as a “lost decade” for action, according to the UK’s Climate Change Committee (CCC). The CCC has identified 45 outcomes that are needed to adapt to the effects of climate change, however the government is yet to deliver on any of them. Carbon Brief has summarised the key findings of the CCC’s latest report here