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31 August 2022

Towards a unified theory of Biden’s climate deal

Big Tech and asset management have defined the Inflation Reduction Act.

By Kate Aronoff

Passed into law on 16 August, the Inflation Reduction Act is the largest piece of climate spending in American history, totalling nearly $370 billion in investments for carbon emissions reductions, energy security, innovation and environmental justice. It is also a helpful summary of the balance of forces in American politics. To the credit of organisers for a Green New Deal, the fixation with carbon pricing, which attempts to apply a cost to emissions, that prevailed in the White House and in elite Democratic circles a decade ago has weakened. Investment is the watchword that now defines Washington’s approach to both climate and economic policy. Even the International Monetary Fund is talking about industrial policy, or “the policy that shall not be named”, as two of its senior economists quipped in 2019.

But even its boosters agree that the Inflation Reduction Act (IRA) is not enough. It’s still hard to see the alternatives to a Green New Deal – which has captured the political imagination in the US but none of the hegemony – as sufficient in the long-run. Decarbonisation will require an active and generous state willing to engage with the dirty work of distribution and direct investment, and to champion its accomplishments to democratic majorities that will, in response, demand that a green state go even farther in building a fairer, cleaner economy. That vision will be won or lost in a place where the Inflation Reduction Act is now the law of the land.

Most successful US legislation is a largely improvised hodgepodge crafted by a handful of harried Capitol Hill staffers to appease congressional egos and interest groups. The IRA is no different. But to the extent that there is some theory behind it – that helps explain why it became law when so many similar legislative efforts failed – it’s worth trying to understand what that theory is.

First of all, it doesn’t regard fossil fuels as a problem. Pro-oil and gas measures included in the bill – and (more significantly) the broader deal struck to get it – have largely been framed as the price of securing Senator Joe Manchin’s vote on climate and energy provisions. There’s little reason to think that his fellow Democrats mounted much resistance to these provisions. In keeping with Obama’s “All of the Above” approach to energy policy, the Biden White House has never believed in a contradiction between growing domestic fossil fuel production and renewables as part of the energy transition. Restricting fossil fuel supply has long been a third rail in US politics; even the relatively audacious congressional Green New Deal resolution has no direct language about phasing out coal, oil and gas.

[See also: Joe Biden’s Inflation Reduction Act is the biggest climate victory since the Paris Agreement]

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Russia’s invasion of Ukraine has supercharged pride in US domestic drilling and allowed the administration to approve new polluting infrastructure. The White House has deployed an ambitious suite of executive authorities, including the Strategic Petroleum Reserve, to guarantee oil and gas companies a stable investment climate. There has also been the perennial bipartisan goal of keeping domestic gas prices as low as possible to avoid a political backlash. This spring congressional Democrats grilled oil executives – not for fuelling the climate crisis, or for misleading the public about it, but for not drilling more.

The case for how more drilling squares with decarbonisation is presented like this: the key to greening the US is to introduce as much clean energy as possible. That means making it cheaper and more attractive to private capital. The role of the state is to turn its chosen suite of green energy and technologies into moneymakers. Over time all that state-backed – and ideally US-made – green tech will get cheaper and outcompete not only fossil-fuel incumbents but foreign competitors. This wouldn’t entail cutting domestic fossil fuel production or courting the backlash of oil and gas executives. Whatever isn’t burned domestically can be sold abroad.

The cost of acting on this theory is deepening what might be the 21st century’s most cruel and gaping inequality. Letting domestic drillers continue with business as usual allows American CEOs to devour still more of the dwindling revenues from what fossil fuels can still be extracted if we hope to maintain a liveable planet. The US government does not depend on such revenues to function. Other countries do. Carbon Tracker, a think tank, has found that 19 oil and gas producing governments could see their budgets cut nearly in half if the world stays on track to meet the goals of the 2015 Paris Agreement on limiting climate change. Oil and gas account for 45 per cent of government revenues in Nigeria and 92 per cent in Iraq, a country the US has spent most of my life destroying. About 400 million people call these and other heavily oil-dependent countries home. Many of them already face climate disaster, displacement and death, and receive precious little support from historical emitters like the US that routinely fail to live up to their own modest climate finance pledges. So far, Washington has been unwilling to take even basic steps, such as redistributing its unused, IMF-issued special drawing rights, or backing debt-for-climate swaps, to offer countries more fiscal space to mitigate, adapt to and recover from the climate crisis in the midst of a dire debt crisis. If they remain unwilling to countenance an equitable, orderly phase-out of global fossil fuel production, the US and other rich countries will either consign climate-vulnerable, oil-rich places to misery or resign to a world warmed by well above 2°C, but probably both.

Pursuing “All of the Above” climate politics is a similarly provincial version of the case that climate-economy modellers have made for decades: that over time the returns of fossil-fuelled growth can build the foundations for its own replacement. Over the next decade, the Inflation Reduction Act promises progress towards that goal. It stands to deliver considerable emissions reductions by offering $369 billion worth of subsidies to a wide range of consumers and producers to invest in clean energy projects. That includes everything from a new $7,000 tax credit on electric vehicles available at the point of purchase to a $10 billion tax credit for green manufacturing. Rural electric cooperatives, which power some of the poorest and most remote parts of the country, can take advantage of a $10 billion fund to exit long-term contracts with coal producers. Long-standing solar and wind tax credits are now available to public providers, too. In addition there is a $5 billion programme through which the Department of Energy can administer $250 billion in loan guarantees, similar to the one that helped to jumpstart Tesla as part of the American Recovery and Reinvestment Act of 2009.

In that sense the IRA is less a climate bill than a green-ish form of industrial policy, better thought of as complimenting the recently-passed $52 billion CHIPS Act that was intended to construct a domestic semiconductor industry. As Brian Deese, head of the National Economic Council, has explained, competing with China, which currently supplies two-thirds of the world’s solar panels and lithium ion batteries, is key to the administration’s philosophy on industrial policy. To execute it they’ll resort to “non-market” methods, too. The state should play a “catalytic role”, he has said, to overcome “market failures or barriers that are not just solvable by a price in unlocking the private sector”. John Kerry, the US climate envoy, has summed up the decarbonisation challenge similarly as one of using the state to cultivate “bankable” investments. In February he argued: “We need research, development, demonstration and deployment grants from governments, as well as blended finance packages that de-risk these investments. We need angel investment from philanthropists. We need venture debt and equity from venture capital firms. That’s the only way this money will move.”

In this optimistic view of the market’s potential, every element of a decarbonised economy is on an inexorable path toward profitability. New green technologies (hydrogen, carbon capture and storage, and so on) are so obviously valuable to the world that they will attract adequate investment at some point. The state can help innovators with funding for research and development and loan guarantees to get their products ready for widespread commercial release. It might even sponsor demonstration projects, underwrite new factories or become a guaranteed buyer, creating markets for products that wouldn’t exist otherwise. Solar and wind power, and electric vehicles, can be deployed more readily but still require help to convince buyers that they are stable enough investments to justify the up-front cost of switching. The role of the state is to lower the barriers to entry and wherever possible transform clean energy into profitable assets that can raise funds from investors seeking steady yields. At some point – perhaps also that far-off moment at which fossil fuels have been replaced – the constituent parts of a decarbonised world will be self-sufficient return generators.

[See also: Joe Biden’s “money illusion” and how it could beat back Trumpism]

The fingerprints are clear. If climate activists convinced the White House to switch their focus from pricing to investment, it was two of the last decade’s most influential industries – tech and asset management – that have defined what that investment will look like. Bill Gates, the founder of Microsoft, was reported by Bloomberg to have been instrumental in convincing politicians to conclude a deal, urging them to view climate change primarily as a matter of unleashing private sector innovation. Like other senior officials in the White House, Deese, a key force shaping the president’s climate agenda, is an alumni of Blackrock, the titanic asset manager where he served as global head of sustainable investment. Its rise over the last decade has been remarkable, ballooning from $1 trillion in assets under management in 2009 to $10 trillion last year. Clean energy projects could be a steady source of returns, Blackrock and its competitors reason, and the state should make it worth their while to do the right thing.

As the economist Daniela Gabor has detailed, this “de-risking state” is a boon to asset managers that outsources key planning and distribution functions to a handful of for-profit actors, usually the larger and more established firms best positioned to take advantage of complicated subsidy regimes. It also proposes a massive gamble on the private sector’s interest in saving the planet. As Gates’s own meddling in the pandemic makes clear – having lobbied for biotech companies to safeguard their intellectual property – some things that can be turned into commercial products probably shouldn’t be.

Several parts of the energy transition, like electric vehicles, might be suited to relying on “unlocked” private investment. What about those that aren’t? Even as renewables get cheaper, large parts of the wind and solar business remain stubbornly unprofitable compared to fossil fuels. Nuclear plants haemorrhage cash, which is partly why France is bringing its main power provider under full public ownership. Vital new technologies such as carbon capture and storage, as Kim Stanley Robinson has suggested, are better suited to operating like public utilities than new investment frontiers. “There’s promise in developing liquid fuels made with captured CO₂ or turning the primary greenhouse gas into feedstock for various carbon fibers,” Robinson writes. “But the amount of carbon we need to draw down far exceeds these industrial uses, and capital seeking the highest rate of return won’t get invested.”

An economy that runs on clean energy may simply be worse at generating returns than one that runs on fossil fuels. As anxious as Democrats are to revitalise American manufacturing – to return the US to its supposed postwar glory atop the world order – that project may not pack quite the populist punch they’re hoping for, especially given the relatively modest sums being devoted to it. If the rough mechanism for improving the lives of working people in the 20th century was to shake down the gains of booming growth through class struggle – demanding a bigger piece of an expanding pie – then what does it mean if the pie is getting smaller? That’s not because the global elite are committed degrowthers: the global economy has stagnated with low levels of investment and growth since the 1970s. Climate change itself, of course, is already wreaking havoc on the global economy. It could cost the US $2 trillion a year by the end of this century, according to the White House’s own estimates. The sum total of the government’s new interventionism is trying to jumpstart domestic growth in general as the core engine of decarbonisation, greener than its predecessors but aimed nonetheless at beefing up major export industries. It may well fail on its own terms and the planet’s.

[See also: Pakistan floods: Climate catastrophes in other countries impact all of us]

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