The Inflation Reduction Act (IRA) is a landmark piece of legislation, signed in August 2022, enabling the Democrats to implement their aims in creating social and climate policies. The IRA was initially produced to be a slimmed-down version of the Build Back Better bill which lacked enough support from the Senate to be fully adopted. Although there have been queries over the short-term effect the Bill will have on inflation, it is believed that the IRA will help to reduce inflation in the long term. This is mostly due to the IRA’s climate agenda, helping the USA to shift from oil to renewables. It is also the largest investment in US history for tackling climate change, bringing the climate targets of the Paris Accord into America’s reach.
As the transport sector is the greatest source of greenhouse gas emissions in the USA, the IRA has a particular focus on electric vehicles (EV) to encourage clean transport. E-mobility companies have flurried investment into North America because tax credits up to $7500 have branched into electric vehicle production. However, the EVs must fulfil certain requirements to meet the tax credits, such as domestic sourcing. As foreign markets currently dominate the EV supply chain, with most models developed outside of the USA, these incentives will address the supply chain issues and encourage the expansion of local EV production.
There are two requirements for EV manufacturers to be eligible for receiving the tax credit: materials and components. Accordingly, EV batteries must adhere to a certain percentage of domestically sourced minerals and manufacturers, with this percentage getting stricter after each year of implementation. Whilst potentially proving disruptive to the global supply chain, these domestic requirements provide U.S. EV manufacturers with increased competitiveness, leading to more employability and opportunity in the local sector.
Reactions to the IRA have varied across the globe. Canada and Mexico were relieved as the EV battery requirements include free trade partners as locations for mining minerals. Although the IRA has been welcomed by climate activists who celebrate the shift towards a green future through clean energy, governing bodies across the globe have expressed concerns due to the protectionist requirements previously mentioned for companies to receive the tax breaks. Officials from countries such as South Korea and France have travelled to Congress to discuss these concerns.
South Korean officials have stated that the IRA will damage trade rules between South Korea and the US, against objectives to improve economic relationships between the two nations. The Trade Minister of South Korea has suggested that Korea and the EU work together when dealing with the protectionist nature of the IRA, albeit recognising what form such a collaboration would take.
Moreover, the Japanese government fears that the tax credits will disadvantage Japanese car makers in the North American market. Due to this, the Japanese government warns that Japanese EV firms are therefore likely to reduce investment and employment in the USA.
The EU have criticised the IRA, calling the protectionist clauses discriminatory and claiming that the IRA is likely to cause great tariff wars. The subsidies offered by the IRA and the increases in energy prices in Europe are causing companies such as Volkswagen to reconsider building EV battery factories in Europe as the prospects in the US are more economically advantageous. Therefore, European officials aim to secure exemptions, similar to Canada and Mexico, to reduce the loss of EV business in Europe which the IRA may cause.
Furthermore, the ‘Clean Tech Europe’ initiative, which was signed by the Single Market Commissioner Thierry Breton, has been described as Europe’s answer to competing against similar policies found in the USA and China. The initiative aims to decarbonise solar, wind, heat pumps, electrolysers, and electricity grids technology. One reason why the initiative is compared to the IRA is the fact that participating countries need to investigate challenges and opportunities for the green production of the above, including local-content requirements.
The passing of the IRA is a positive move by the USA, making their climate stance clear to the world. Whilst no one can be certain that the Act will reduce inflation, it will encourage investment into the American clean transport sector due to the tax break incentive. However, the Act has already disrupted international relations, with global leaders outraged by the protectionist requirements. Therefore, it is likely that global leaders will need to devise strategies to ensure that their country is not negatively impacted by the IRA.