The costs of the green transition must not be underestimated
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Sometimes politicians get smart. More often, though, they get smart by accident—or by luck. And this week, as America marks the second anniversary of the Inflation Reduction Act, that second point seems relevant again.
The reason for this is that when US President Joe Biden surprisingly introduced the bill on August 16, 2022, it was particularly popular with Democrats: The bill aims to drastically reduce carbon emissions by providing about $400 billion in subsidies for renewable energy technologies such as solar power and electric vehicles.
No, it doesn’t have much to do with inflation (except if it drives down the price of renewable energy); in fact, an advertising regulator would probably find the name IRA extremely misleading.
Still, the bill represents the most dramatic political move the West has seen to accelerate a green transition. And, not surprisingly, it is therefore a welcome political whipping boy for the team around Republican presidential candidate Donald Trump, who has repeatedly vowed to repeal it.
That’s why it pays to be randomly smart. This week, White House adviser John Podesta revealed that one irony of the IRA is that nearly 60 percent of the jobs it created were in districts where Republican lawmakers voted against its passage by Congress. And analysis by the FT suggests that about 80 percent of the investment from the IRA and the separate Chips Act (to boost chip production) was in red states, not blue states.
Why? Heather Boushey, a White House economic adviser, tells me that this reflects smart economic planning: The law is designed to encourage activity in disadvantaged areas such as the Republican-leaning rust belt. Other observers attribute it to a happy coincidence: Because building, planning and labor laws are much looser in Republican states, it is much easier to attract new investment there.
Either way, this imbalance means that residents of Republican constituencies in states like South Carolina, Oklahoma and Texas now have a vested interest in protecting Biden’s political baby. After all, IRA-related investments in manufacturing have already created 300,000 jobs, according to Podesta – and added 0.35 percentage points to gross domestic product, according to Boushey. This is by far the largest investment boom since 1981.
And many Wall Street financiers also have an incentive to support the government – even if they vote Republican – because private capital groups have investment funds that benefit from these subsidies.
So is this a guarantee that the IRA will reach its third birthday even if Trump wins? And can it really decarbonize America? The answers are “probably yes” and “probably no.”
Politicians close to Trump tell me that if they win, they will actually repeal the law under the pretext of reducing the budget deficit. And that is already scaring investors: an FT investigation shows that 40 percent of the announced IRA and CHIPS Act projects have been postponed, partly because of political uncertainty.
Personally, however, I doubt Trump will be able to thwart these Republican vested interests. In fact, 18 Republicans in the House have already written a letter to Speaker Mike Johnson opposing repeal because it would create “a worst-case scenario in which we have spent billions of taxpayer dollars and received next to nothing in return.”
In addition, Pew Research reports that 78 percent and 72 percent of voters want more solar and wind energy, respectively (though down from 90 and 83 percent in 2020, respectively)—and nearly two-thirds want America to be carbon neutral by 2050. Separately, a Morning Consult/Allstate poll shows that 73 percent of Americans want more proactive government action to promote climate resilience, and 53 percent would pay more taxes to fund it. Given the rising costs of weather disasters, that share is likely to rise.
However, investors must also recognize that even if these forces keep the IRA in place, it will not be enough to truly decarbonize America. One reason for this is that oil and gas production continues to rise: One little-noticed detail of Biden’s presidency, as Columbia University professor Adam Tooze notes, is that the White House issued 758 drilling licenses last year, twice as many as under Trump. This is another bitter irony.
And even when you include the IRA, the world has installed only about a tenth of the low-emissions infrastructure needed to reach carbon neutrality by 2050, according to a new McKinsey study. That’s partly due to a lack of overarching, holistic planning. It’s also because green technologies have now become the focal point of geostrategic rivalry between the US and China, rather than a catalyst for cooperation, as many people (like me) once hoped.
Then there’s a third, more subtle cultural problem: As innovations like ChatGPT spread at breakneck speed, voters and politicians generally fail to recognize the extent to which a green transition requires a long and messy investment in physical infrastructure. The key point about the IRA is that it’s a first step on a path — not a magic wand.
And that’s why, of course, we must pray that it stays in place, whatever happens in November. As laws go, the IRA is certainly not perfect. But not having it would be even worse. So all eyes should now be on those 18 Republicans who wrote to Johnson last week. They could yet be seen as accidental – self-serving – heroes.
