The Inflation Reduction Act (IRA) remains the Biden administration’s most significant refutation of unfettered globalization.
Administration leaders hold overzealous liberalization culpable for accelerating climate change, creating U.S. vulnerability to China-dominated supply chains, moving American middle-class jobs abroad, and generating attendant inequality and political divisiveness. Its solution is an embrace of industrial policy, led by the IRA, CHIPS Act and Bipartisan Infrastructure Law, which seeks to address these problems together.
One year on, the success of the IRA — particularly for energy and climate goals — hinges on two categorical factors. The first is governance.
IRS Notice 2023-38, from May, clarifies IRA domestic content provisions to incentivize firms to use products and components produced in the U.S. or in countries with which we have free-trade agreements, circumventing China in the process. But this requires defining applicable projects, applicable project components, manufactured components and more — no easy feat.
Manufacturing processes relating to steel and iron must take place in the U.S., except for metallurgical processes to refine steel additives. Do raw iron ore and scrap steel need to be domestic? That’s currently a grey area. Components are subject to domestic manufacturing requirements where subcomponents are not — an important distinction for clean energy technologies with thousands of components and subcomponents that remains somewhat ambiguous.
Manufacturing processes are covered by the IRA, but assembly processes are not, creating the potential for more blurriness. Then things really get complicated with the Adjusted Percentage Rule, which determines project qualification by calculating and then dividing the domestic manufactured products and components cost by the total manufactured products cost for a percentage that will either qualify or disqualify a project.
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Complying with these provisions requires complex coordination across supply chains, just as other benefits from the IRA — such as credits for projects in energy communities and requirements on workforce diversity — only come with complicated measurement, reporting and verification. This complexity will raise transaction costs for firms and challenge regulators charged with making fair and expedient reviews.
The salve for these problems is high-performing, coordinated domestic governance that keeps IRA goals central. The Treasury Department (and the IRS in particular), Department of Energy, Department of the Interior, and Environmental Protection Agency, among others, are responsible for steering personnel and policies toward the interpretation of the IRA, as well as distributing funding and liaising with the public.
Implementation governance must also head off barriers and bottlenecks that can undermine IRA progress. Permitting looms large here, with long time horizons and high transactional costs for acquiring permits, slowing and at times undermining project development prospects.
Permitting measures in the 2023 bipartisan debt ceiling agreement include seeking to better coordinate federal review processes; creating deadlines and length limits for environmental assessments and impact statements; and expanding access to expedited permitting. Questions remain about how these assessment measures will work in practice, and litigation risks and lengthy judicial processes that plague permitting processes remain. Thorny subnational permitting challenges continue to impede energy transition progress, particularly on transmission. New legislation is needed — specifically, a bipartisan deal this fall on a permitting compromise that can better unlock the IRA’s potential at the federal level and incentivize states to follow suit.
The IRA’s second inflection point concerns how to order its myriad goals. U.S. leadership needs to make choices about what to prioritize now, what to pursue concurrently, and what to soft-pedal until the time is right.
Meeting the material and production needs of the U.S. energy transition requires looking beyond domestic and allied-country capacities. The responding reality is that the U.S. will struggle to rapidly decarbonize its economy while also rapidly implementing IRA provisions on onshoring and friend-shoring materials and labor. If the alternative is true, and IRA implementation strategies place near-term primacy on overhauling supply chains, improving the U.S. position relative to China and creating new domestic industries, the energy transition will continue but be slower and more expensive as a result.
These are not either-or scenarios, but it is vital to form clear-eyed assessments of trade-offs and temporal strategy development, and to make deliberate and fluid policy prioritization choices.
There are positive tailwinds.
Biden’s administration estimates that more than $500 billion in private-sector manufacturing investments have been announced since he took office — a substantial proportion on the heels of the IRA. Battery plant, chip production and solar project growth in the U.S. is not hypothetical, it is happening. Jobs are growing and predicted to continue, with independent middle-of-the-road projections seeing millions of new jobs created as a result of the IRA by 2035 — most of them durable and lasting.
The IRA was born from the Biden administration working with a divided Congress that coalesced around industrial policy for different reasons. Successful implementation requires constantly balancing these reasons, prioritizing them in ways that recognize trade-offs and limitations and improving governance. These are no easy tasks, but possibilities abound.
Jackson Ewing, Ph.D., is director of energy and climate policy at the Duke University Nicholas Institute for Energy, Environment & Sustainability.