Little time remains before countries gather in early December in Dubai for COP28, the world’s largest climate conference. The negotiations frequently feature rifts between rich and poor countries, but this time it could be worse, because Washington’s biggest domestic action on climate may compound the world’s existing climate woes, from a lack of finance to bureaucratic battles over a promised loss and damage fund. The Inflation Reduction Act (IRA) received a lukewarm response last year at COP27 in Egypt several months after it was enacted, even provoking squabbling among the United States’ closest partners and allies. Last year, French President Emmanuel Macron told West Virginia Sen. Joe Manchin, one of the IRA’s architects, “You’re hurting my country,” intimating that the IRA will likely redirect billions in clean energy investment away from Europe and toward the United States as multinationals chase the legislation’s generous benefits.
Little time remains before countries gather in early December in Dubai for COP28, the world’s largest climate conference. The negotiations frequently feature rifts between rich and poor countries, but this time it could be worse, because Washington’s biggest domestic action on climate may compound the world’s existing climate woes, from a lack of finance to bureaucratic battles over a promised loss and damage fund. The Inflation Reduction Act (IRA) received a lukewarm response last year at COP27 in Egypt several months after it was enacted, even provoking squabbling among the United States’ closest partners and allies. Last year, French President Emmanuel Macron told West Virginia Sen. Joe Manchin, one of the IRA’s architects, “You’re hurting my country,” intimating that the IRA will likely redirect billions in clean energy investment away from Europe and toward the United States as multinationals chase the legislation’s generous benefits.
Tensions with Europe have abated, but that trans-Atlantic spat may pale in comparison to what is to come on a global scale. Whether the IRA helps or hinders global climate progress will depend on whether the Biden administration can craft a policy toolkit to take the IRA abroad.
On one hand, the IRA will provide immense global benefit by reducing the cost of clean energy technologies internationally. According to modeling from the Rhodium Group, for every ton of carbon dioxide that the IRA reduces within the United States, an additional 2.4-2.9 tons of reductions could occur elsewhere, thanks to IRA-driven cost reductions. Put another way, 70 percent of the IRA’s emissions impact could be outside the United States and is generally not accounted for in analyses.
To that end, the global impact is good news. However, these potential global emissions reductions are only uncertain and unrealized projections into the future. If the traditional model of international trade and global geopolitics persists, that prediction could prove true.
But on the other hand, the IRA itself upends that very model of globalized, frictionless trade and investment. Its domestic content requirements and massive investment signal have concerned a wide swath of countries beyond Europe, which might have every incentive to erect their own trade barriers and support domestic industries with export bans or tariffs that would inhibit the flow of clean energy finance and technology. Such an outcome seems likely, given the fact that it would play into the tendencies of developing countries: India’s production-linked incentives predate the IRA, and Indonesia’s move to ban critical mineral exports has proved effective at higher value-chain investment.
Poorer developing countries and emerging markets are unable to match the scale of the green subsidies offered by the United States and its wealthy allies, despite needing an additional $1.3 trillion to $1.7 trillion per year until 2030 to transform their respective energy sectors. That dynamic, run amok, would slow climate progress. To be sure, the IRA’s protectionist elements were necessary to pass the bill, but they create their own challenges to global climate action amid a stagnant international trade landscape in need of reform.
To the extent there is a path for the world to meet its midcentury climate targets it will depend on expanding IRA’s global impact. That hinges on the United States working with other countries to manage the law’s effects. Unfortunately, Washington’s approach has been muddled at best. It has been negotiating ad hoc deals with wealthy partners such as the European Union and Japan to manage domestic content provisions for electric vehicles after facing loud, public consternation from these countries. This leaves smaller or poorer countries that lack this lobbying power to manage the impacts of the law on their own, making retaliatory trade moves all the more enticing.
The absence of a coherent strategy to take the IRA abroad diminishes confidence that its technology cost reductions will spread to the rest of the world frictionlessly. Further, it undermines global climate talks, which have been underpinned by the notion that one country’s progress would motivate others to act more ambitious. Now a new paradigm has emerged, in which one country’s action on climate might discourage that of another.
The United States needs a new playbook to take the IRA abroad. First, the Biden administration should align its international climate strategy with its domestic climate investments. Such a strategy would entail bolstering commercial diplomacy to facilitate joint ventures, engaging in bilateral research and development partnerships, and reaching trade and investment agreements with target countries for the specific clean technology that the IRA will commercialize and make cheap.
The U.S. Development Finance Corporation, Export-Import Bank, and Trade and Development Agency could prioritize overseas projects underpinned by the same technologies that benefit from IRA tax credits. In their bilateral engagements, agencies such as the U.S. Departments of Energy, Commerce, and State, as well as the U.S. Agency for International Development, can promote private sector investment, which offers an optimistic avenue to deliver the IRA abroad and reduce the brewing tension on green subsidies between developed and developing countries.
Joint ventures and foreign direct investment in the United States that take advantage of the law’s incentives offer a mutually palatable pathway to transfer clean technology to developing countries. For example, Indian companies are already investing in solar and green hydrogen in the United States.
Moreover, the White House can push to incorporate the law in its initiative to increase U.S. investment in low- and middle-income countries, the Partnership for Global Infrastructure and Investment, which seeks to rival China’s Belt and Road Initiative. Rhetorically, the Biden administration has touted this law as sufficient climate action on the United States’ part, but through a variety of agencies and instruments, there is ample room to further articulate how the positive impacts of the United States’ own climate investments align with the interests of other countries.
Second, the United States should seek to create a climate club that would negotiate comprehensive rules of the road around climate, trade, and development policies. Club members would collectively outline a green box of allowable trade tools to promote domestic clean energy manufacturing, deployment, and innovation and a red box of discouraged “trade remedies” that could potentially devolve into a vicious cycle of protectionist measures that raise the collective cost of decarbonization and diffusion of clean technologies.
Covered policies could include subsidies, tariffs, and supply chain coordination. For example, the United States and other developed countries could agree to limit further domestic sourcing provisions for green subsidies to emerging clean technologies that require public support to commercialize. Further, developed countries could pledge to increase finance and technology assistance to developing countries in the same sectors that they domestically support with green subsidies. In turn, developing countries might pledge not to limit or place tariffs on imports of clean energy technologies from developed countries and agree to abide by a green peace clause, under which all countries refrain from pursuing cases at the World Trade Organization against one another.
Third, the United States should partner with the International Energy Agency (IEA) to expand upon IEA technology road maps to produce in-depth, segment-by-segment supply chain road maps for sectors such as steel and cement by detailing areas of cooperation between developed and developing countries. Further, the IEA can facilitate workings on various climate and trade topics beyond the ambition of the U.S.-led club. For example, a subset of IEA member countries could opt in to work through tensions over the EU Carbon Border Adjustment Mechanism, which will require Europe to impose tariffs on the United States, India, and China, among many other countries.
The unfortunate reality is that no single government can mobilize the level of finance necessary to limit warming in line with global climate goals. Existing tools of the trade, including development assistance and concessional finance, can only bridge so much of the gap. The IRA, which will likely mobilize trillions in public and private capital toward the energy transition, can do more for the world—but only with the right playbook.
