Updating Trade for Job Creation and Climate Protection - Center on ... - Columbia | SIPA Center on Global Energy Policy
Updating Trade for Job Creation and Climate Protection - Center on Global Energy Policy at Columbia University | SIPA %
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On March 31, the US Treasury Department issued guidance on tax incentives for vehicle batteries and minerals under the Inflation Reduction Act (IRA). Among other features, the new guidance—which is subject to revision after a period of public comment—proposes a relatively permissive interpretation of the IRA’s provisions for tax subsidies on domestically sourced critical minerals and battery components assembled or manufactured in North America.
The guidance signals the high-stakes balancing act the Biden administration aims to pull off: delivering accelerated progress on climate protection and growing high-quality clean energy jobs while avoiding bitter trade tensions with partners and allies such as the European Union (EU) and Japan. Sustaining such a balance in the coming months, as the administration releases other rounds of implementation guidance, will be challenging, but this appears to be the Biden team’s goal. This post discusses how updated international trade can serve both as a conveyor belt to move raw materials, intellectual property, investment, new hardware, and other services around the globe—and as an enabler of global climate progress. Whether the politics permit the simultaneous pursuit of new domestic clean energy manufacturing and an updated version of trade remains to be seen.
A trio of new laws resulting from Joe Biden’s first two years as president—the Infrastructure Investment and Jobs Act, the CHIPS and Science Act, and the IRA—represent long-awaited American action on climate. The laws aim to speed the build-out of American clean energy industries, and already there has been a resulting flurry of investments announced in states such as Georgia, Arizona, Texas, West Virginia, Ohio, Indiana, and Michigan.
But the new laws lay bare a fault line within current views on the role of trade in promoting clean energy in the United States. Some policy makers and advocates assert that the purpose of the IRA is simply to create American jobs and secure supply chains.
The EU has now also put in place several measures, designed in part to respond to the IRA, that may pose serious complications for the future of trade. One example is the EU’s new border tariff, the Carbon Border Adjustment Mechanism (CBAM), which will be phased in starting in October 2023. The CBAM will impose a price at the EU’s border on products from jurisdictions that do not price carbon emissions as Europe does. Implementation of the CBAM could spur new trade tensions, including with the United States, given the reluctance of the US Congress to impose an explicit price for CO2 emissions.
In the face of these headwinds to longstanding trade policies, a key question is whether leaders in Washington and other capitals can find a palatable mix of efforts to promote domestic industry and sustain trade through friendshoring (encouragement of investment in, and trade with, aligned countries) and progressively greater supply chain security.
The projected growth in clean-energy-related demand for minerals highlights the importance of a functioning, updated trading system. The International Energy Agency estimates that, under its Net Zero Emissions by 2050 scenario, the global economy will require a sixfold increase in mineral production over 2020 levels.
Europe’s experience with Russian gas further underscores the importance of addressing the strategic vulnerability arising from China’s domination of minerals markets. In fact, many in Washington hope to rebuild US mining and minerals processing (including through the IRA’s tax provisions). But that’s difficult because only time and significant investment will nurture alternative mineral supply chains. Improvements in procedures are needed if domestic mining and mineral processing are to avoid protracted roadblocks. In the meantime, expanded efforts to develop friendshoring structures—such as the Minerals Security Partnership—can progressively reduce today’s supply insecurity.
Trade moves technologies to markets beyond where new products are developed, driving economies of scale, speeding up progress along the experience curve, and enabling cost reductions for new products. This is vital for scaling climate solutions, especially those that require large-scale investment and long lead times.
Historically, new technologies have moved from first commercialization to tiny niche roles to material shares of the global energy economy over the course of several decades.
Achieving ambitious climate targets requires global action, but concurrently also strong support for domestic clean energy. The trio of recent US climate laws can give communities across the country a positive stake in the clean energy future. With a deft balancing of policies, the United States can not only create clean energy employment, improve supply chain security, and bring down clean energy costs, but also foster clean energy export opportunities and help generate global climate solutions. Whether American leaders can fashion the needed compromises, with each other and with foreign partners, is a topic the authors will return to in future posts.
https://www.utilitydive.com/news/ev-sector-welcomes-treasury-tax-credit….
https://www.wsj.com/articles/bidens-green-subsidies-are-attracting-bill…; https://nationalinterest.org/feature/north-american-battery-belt-here-2….
https://www.manchin.senate.gov/newsroom/press-releases/manchin-statemen….
https://www.uschamber.com/international/made-china-2025-global-ambition…; https://ustr.gov/sites/default/files/2022%20National%20Trade%20Estimate….
https://www.csis.org/analysis/analyzing-european-unions-carbon-border-a…; https://cdn.sanity.io/files/0wfzc71x/production/1c3e358c87d71d861e57932….
https://www.atlanticcouncil.org/event/a-conversation-with-margrethe-ves…; https://www.politico.eu/article/vestager-us-inflation-reduction-act-sub….
https://www.energypolicy.columbia.edu/industrial-policy-nationalism-how….
https://www.iea.org/reports/the-role-of-critical-minerals-in-clean-ener….
https://www.reuters.com/markets/us/us-wants-end-dependence-china-rare-e…; https://foreignpolicy.com/2019/05/21/china-raises-threat-of-rare-earth-….
https://www.reuters.com/business/sustainable-business/western-countries…; https://www.state.gov/minerals-security-partnership/.
https://www.bp.com/content/dam/bp/business-sites/en/global/corporate/pd…; https://www.shell.com/energy-and-innovation/the-energy-future/scenarios….
Related Knowledge Center: Climate economics
Climate change is now a driver of the world’s economy. The impact is profound:
- Catastrophic weather events — hurricanes, floods, droughts, high temperatures — are more frequent and more extreme. The cost can be measured in both the initial damage caused and the longer-term impact on the economy.
- Vulnerable communities are increasing climate-related investments, hardening infrastructure and taking other protective measures.
- Investment in carbon capture and storage technologies is increasingly rapidly.
- Governments are making investments and crafting regulations to reduce emissions of carbon dioxide and other greenhouse gases.
On top of all of this is the cost of uncertainty. As the Fourth National Climate Assessment, released in 2018 by the U.S. Global Change Research Program, says, “The assumption that current and future climate conditions will resemble the recent past is no longer valid.”