U.S. President Joe Biden signed a sweeping set of climate change initiatives into law this week, and with it, reclaimed momentum for American climate action on a global stage. While the legislation is named the Inflation Reduction Act, it allocates about $370 billion specifically to address climate change, the largest investment in climate action in U.S. history. This massive influx of funding could position the United States to substantially reduce its greenhouse gas emissions, solidifying its return to a leadership role in the global struggle on climate change—a role that the Trump administration had relinquished through its withdrawal from the Paris agreement and rollbacks on climate regulations.
Until the surprise announcement in late July by Senate Democrats that an agreement had been reached on the bill, the prospects for the United States’ meeting its international climate obligations seemed dim. Chief among those obligations is a commitment to cut U.S. net greenhouse gas emissions to roughly half the 2005 level by 2030, a target announced in May by the Biden administration as the country’s new nationally determined contribution (NDC) under the Paris climate accord. A halving of emissions by the end of this decade is the speed of decarbonization necessary to put the United States on a path to achieve net-zero emissions by 2050, in line with the Paris agreement’s aim of holding increases in global average temperature to well below two degrees Celsius to avoid the worst effects of climate change. Until last week, the United States seemed likely to fall significantly short of this target, with estimates suggesting overall emissions reductions of less than 30 percent by 2030.
U.S. emissions are currently about 17 percent below 2005 levels, having recently increased due to the resumption of economic activity after the shutdowns precipitated by the COVID-19 pandemic. Setbacks over the past several months—from a U.S. Supreme Court decision limiting the government’s ability to regulate power plant emissions to the growing energy crisis stemming from the Ukraine war—only reinforced the sentiment that the United States would not be able to fulfill its international obligations. Robert Stavins, an environmental economist at Harvard University, reflected the prevailing mood when he told a reporter in early July, “It is clear the NDC is not going to be achieved—the question is how far off is the administration going to be from what it committed to.”
That picture is now changing. Thanks to the Inflation Reduction Act, the United States will be able to both substantially reduce its emissions and credibly demonstrate essential international leadership on climate. But the new law doesn’t just affect the United States’ climate outlook. It also puts extensive measures in place to support domestic U.S. industry, including the production of clean energy equipment such as wind, solar, batteries, and the critical minerals required for their manufacture with an eye toward leveling the playing field for trade with China and ensuring access to essential raw materials. The United States is thus embarking on not one but two distinct shifts in its international posture: renewed climate leadership, and an industrial policy designed to take on Chinese competition and enhance U.S. energy security. Although the economic and political calculus for including provisions that support local economic development is clear, the decision could have foreign policy reverberations, disrupting aspects of cooperation on the international stage, from climate negotiations to international trade.
TRANSFORMING THE EMISSIONS OUTLOOK
The Inflation Reduction Act introduces a combination of major new clean energy investments, tax incentives, loan programs, rebates, grants, and other policy mechanisms to drive down carbon emissions. The legislation speeds up the deployment of clean electricity and vehicles by paying households and businesses to choose clean energy options rather than those that emit heat-trapping pollution. It encourages carbon capture, the process used to collect emissions of carbon dioxide from power plants and other industrial sources and pump them underground instead of into the atmosphere. It also funds efforts to reduce emissions in the agricultural and industrial sectors, especially those produced by chemical, steel, and cement plants. And it establishes tax credits and direct incentives for consumers ranging from rebates on electric vehicles to new funding for energy efficiency, electrification retrofits, and installing solar panels in homes.
These and other provisions in the legislation are poised to transform the emissions outlook in the United States. Modeling analysis by leading research groups suggests that by 2030, the Inflation Reduction Act could bring about emissions reductions of approximately 40 percent relative to 2005 levels. This represents a dramatic drop that would be driven principally by emissions reductions in the electricity sector of about 70 to 75 percent below 2005 levels. In short, the legislation moves the United States much closer to meeting its international commitment—a stark turnaround from the situation of just a few weeks ago.
The Inflation Reduction Act is a domestic policy win for the administration, but it is also a boon for U.S. diplomats working to restore the United States’ international reputation. The inaction of the previous administration on climate change exasperated international allies and raised the prospect of lasting climate damage. Now, the passage of a sweeping climate program in the United States might have the opposite effect, encouraging similar actions in other nations and boosting the array of technologies available at reasonable cost to those looking to cut emissions.
POKING THE DRAGON?
There is no doubt that this new law is good news for the environment, but its full impact in the international arena will take time to play out completely. In particular, the legislation’s sweeping measures to support U.S. industry may present new and possibly unanticipated complications. Consider, for instance, that electric vehicles eligible for the bill’s full $7,500 tax credit must be assembled in North America and rely heavily on critical minerals sourced from North America or from countries with which the United States has fair-trade agreements. And eligible vehicles are explicitly prohibited from using Chinese- or Russian-sourced components and critical minerals after 2024.
Moreover, these are not one-off provisions. The $52 billion CHIPS and Science Act, signed into law by Biden last week, boosts the U.S. semiconductor industry through investments in design, manufacturing, and research while strengthening related supply chains. The CHIPS Act also requires that companies benefiting from the program do not expand production in China and other “countries of concern.” In short, renewed American climate ambition is coinciding with an evolving U.S. industrial policy that is more supportive of domestic manufacturing and community development and more aggressive toward international competition, especially from China. It remains to be seen how China will respond, although Chinese officials moved swiftly to cancel a planned U.S.-China climate working group after House Speaker Nancy Pelosi’s recent visit to Taiwan.
While the state of play as outlined above might suggest that climate ambition is at odds with international trade interests, it does not have to be. Explicitly and strategically linking it with aspects of trade policy could rather reinforce the ability of countries to pursue ambitious and effective climate policies in a manner consistent with international trade competition. While the Inflation Reduction Act does not include explicit trade provisions such as carbon border adjustment mechanisms—charges on imports to account for their emissions—or sector-based international climate agreements, it reflects many of the same interests that are at play.
Witness the recent emergence of “climate club” discussions in the G-7, wherein countries that agree to a certain level of environmental performance would form an alliance through which members benefit from trade. Countries outside the alliance would be subject to trade tariffs or other restrictions. This type of strategy reflects the increased consideration of climate in the context of evolving trade arrangements for steel, aluminum, and potentially other carbon-intensive products among the United States, the EU, and others, reflecting a “joint commitment to use trade policy to confront the threats of climate change.” These efforts are in early days, yet they illustrate a rise in collaborative exchanges that deliberately link climate and trade.
AN IMPORTANT STEP, A TOUGH JOURNEY
Even with the Inflation Reduction Act in full force, the international community will be carefully watching Washington’s efforts to meet the U.S. commitment to reduce greenhouse gases, from the strategies needed to close the gap on the remaining 10 percent of reductions needed to achieve its NDC target to whether the Inflation Reduction Act delivers the predicted results. To keep this goal in sight, the administration is considering a range of options, from regulation of the power sector, vehicles, and methane emissions under the Clean Air Act to investments in forestry and agriculture that both reduce emissions and act as a carbon sink. State-level policy is also on the table. Recall that if they were countries, California would be the fifth largest economy globally and New York the tenth largest. These and other states have invested heavily in climate action even when the federal government has faltered in the past, and they are receiving more financial support to do so under the new law.
While much work remains, the enactment of the Inflation Reduction Act into U.S. law should be very welcome news for other countries committed to climate action. Not only is the world’s second largest emitter—and largest historical emitter—committing long-term resources to its clean energy transition, the United States is also the world’s largest economy, its leader in innovation, and its leader in finance. Developing, demonstrating, and deploying low-carbon technologies at scale and learning from the process will reap climate dividends beyond U.S. borders through improved performance, cost reductions, and the creation of new options. Although the coupling of climate action with trade may cause complications, progress requires taking bold action where possible, as the Inflation Reduction Act does, while also constantly working to advance linked and sometimes competing interests.
