The United States and climate protectionism in the energy transition

A Inflation Reduction Act (IRA) is a public policy of the United States, proposed in 2021 by the Joe Biden administration and signed into law in August 2023. It was created with the objective of mitigating the rise in inflation in the country, with the provision of green investments to expand domestic supply, fostering energy production, increasing industrial capacity, acquiring critical supplies and carrying out research and development of technologies. The planned investments total approximately US$ 500 billion, including subsidies, tax reductions and grants. The policy also provides for a series of actions to reduce the public deficit and increase revenues estimated at US$ 738 billion, which predict a net positive balance of US$ 238 billion, without added interest, between 2022 and 2031 in the program. 

Of the total investment, US$391 billion will be earmarked exclusively for reducing energy costs by accelerating investments in clean energy solutions. Due to the large volume involved, the IRA can be considered the largest historical action by the United States in favor of climate change and the energy transition, since its investment commitment will result in a 40% reduction in the country's emissions by 2030, taking 2005 as the base year.

Table 1. Summary of investments comprising the IRA (US$ billions)

Source: Inflation Reduction Act, Congressional Budget Office (2022).

In terms of sectors, incentives for clean energy policies total US$391 billion, with energy, manufacturing and the environment accounting for the largest share of the resources allocated. Approximately US$342 billion, or 88% of this total, will be allocated to investments in electricity and transmission. Among the types of incentive policies, tax credits account for the largest share of investment. Corporations are the largest beneficiaries, with approximately 55% of the budget, or US$214 billion. The IRA design provides for tax incentives to be paid directly, meaning that an entity can request the full amount even if its tax liability is less than the credit. This has led to a real business euphoria regarding the incentives provided.

However, in addition to decarbonizing the economy, the investments are mainly aimed at reducing the dependence of production chains on the external market. This movement aims, on the one hand, to minimize the influence of global market turbulence on domestic prices in the United States. On the other hand, it also has a highly protectionist character.

In the case of manufacturing industries, eligibility for incentives from the IRA is complete if requirements are met that involve, among other aspects, the production and acquisition of raw materials locally or from commercial partners. For example, to unlock credit for the consumption of electric vehicles (EVs), a percentage of the critical minerals in the battery must be extracted or recycled in the US, and/or in a country with which it has a trade agreement.

This also applies to incentives for biofuel production. The biofuel program includes significant tax credits, which are allocated based on reductions in greenhouse gas (GHG) emissions. These credits are valid for the establishment and development of biofuels in transportation, such as Sustainable Aviation Fuels (SAF), green hydrogen, green diesel (HVO) and existing biofuel blends. For SAF alone, there is US$250 million in financing available for projects and an additional US$500 million for infrastructure and its adaptations.

Brazil, as a major producer of biofuels, could benefit from the forecast of greater demand and stimulus for the sector in the US. However, the program's rules requiring that they have local content or come from countries that have trade agreements with the US may limit this potential.

Within the energy and climate policy, in addition to corporate investments, subsidies total approximately US$84 billion, while consumer incentives reach US$42,7 billion. The credits are intended to reduce greenhouse gas emissions through changes in the consumption structure of vehicles, installations in homes and buildings, and new applications for energy generation, such as geothermal, solar and domestic batteries.

The IRA is part of a sequence of policies that, since 2021, have been boosting the competitiveness, innovation and productivity of US industry. Together with the Bipartisan Infrastructure Law (BIL)[1] and the CHIPS & Science Act[2], which partially complement each other and overlap in priorities, the IRA will inject US$2 trillion in federal spending into the economy over the next decade. Specifically in the context of energy transition, China, the United States and the European Union are experiencing a “race” of investments in electrification, innovation and industrial centrality. In this “dispute”, China is ahead of the United States, as reflected in the graph below.

This scenario did not occur by accident, but rather by the Chinese government’s ongoing efforts to expand its industries and implement decarbonization programs—facilitated by its centralized objectives and long-term strategy. With the IRA, the Americans are now seeking to generate a green reindustrialization movement under the codename “inflation reduction law.” This is a plan whose incentives and benefits are linked to protectionist positions that create essentially national supply chains. This initiative could generate significant movements in the reconcentration of capital and trade flows in the world, affecting Brazil and other developing countries that could potentially benefit from global investments in the area of ​​biomass and bioenergy.

[1] The Bipartisan Infrastructure Act (BIL) was enacted in 2022 and authorizes a $2022 billion program of investments and jobs in the public transportation sector between 2026 and 108. The goal is to modernize the bus and train fleet, improve safety, replace current vehicles (trains and buses) with “green” or clean energy-based vehicles, and improve accessibility to stations.   
[2] The CHIPS (“Creating Useful Incentives to Produce Semiconductors”) & Science Act is a United States federal law signed into law on August 9, 2022, that provides approximately $280 billion in new funding to boost domestic semiconductor research and manufacturing in the United States. The law includes $39 billion in subsidies for chip manufacturing on U.S. soil, 25% tax credits for investments in equipment manufacturing costs, $13 billion for semiconductor research and workforce training.

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