The US Inflation Reduction Act explained

The US Inflation Reduction Act is a significant piece of legislation that’s making the US more attractive to infrastructure investors and businesses.

Containing approximately USD $750 billion in new spending and tax incentives, its main goal is to advance clean energy, reduce healthcare costs, and increase tax revenue.

It aims to reduce carbon emissions by roughly 40% by 2030 by:

• Investing in domestic energy production and manufacturing capacity.
• Jump-starting research and development and commercialisation of technologies such as carbon capture and storage and clean hydrogen.
• Reforming the US planning system to unlock domestic energy and transmission projects.

What does this mean for infrastructure?

The White House claims President Biden’s economic policies have driven US $500bn of investment in the private sector.

Clean energy, conservation, and green infrastructure programmes are seeing significant investment.

The clear priorities and certainty of funding will buoy the US construction sector and boost jobs. The US is already attracting skills from countries where infrastructure programmes are stalling.

This focus on outcomes delivered through larger, more complex portfolios will also require a shift towards enterprise models and collaborative delivery.

It will be important to establish the right culture and strategy at the outset of a project.

Whether collaborative models transcend US borders remains to be seen.

The Inflation Reduction Act promotes ‘Buy America’, and some have accused it of protectionism.

How the Inflation Reduction Act compares with policy elsewhere

The EU

The EU has responded to the Inflation Reduction Act with the Green Deal Industrial Plan and Net Zero Industry Act.

The Brussels-based economic think tank, Breugel, estimates that manufacturing subsidies for clean technologies are about the same absolute size in the US and the EU.

A key difference is that the US subsidy is a tax reduction rather than a grant. Tax reductions are much faster and, from an investor perspective, more certain.

On the other hand, grants can be concentrated where necessary.

The EU approach allows member states to proactively target certain geographic or economic clusters or cutting-edge technologies with higher risk-return profiles (carbon sequestration and storage, for instance).

One feature of EU funding is that a substantial contribution will come from national governments.

This will favour northern European nations with the fiscal room to manoeuvre, while federal tax rebates in the US apply equally across the country.

Japan

Published earlier this year, Japan’s Green Transformation Act aims to accelerate decarbonisation: cutting 46% from Japan’s carbon emissions by the turn of the decade and making Japan carbon neutral by 2050.

An initial US $150 billion in Japanese government bonds will fund investments.

This figure could rise to over US $1 trillion over the next decade.

Australia

Australia has launched an AU $15 billion National Reconstruction Fund to support renewables and low-emission technologies.

Transport is one of the seven priority areas covered by the fund.

The UK

The UK has delayed its response to the Inflation Reduction Act until the autumn.

Chancellor Jeremy Hunt has suggested the UK's approach, "will be different – and better."

We eagerly await the next budget statement.

How could the UK respond to the Inflation Reduction Act to support infrastructure delivery?

The UK will need a huge amount of capital in the next 15 years to decarbonise its economy and society.

If supporting infrastructure delivery is the only objective, there’s no need to ‘respond’ to the Inflation Reduction Act.

The UK should be subsidising its energy infrastructure anyway – regardless of what’s happening in the US.

Doing so will attract much-needed private finance for projects vital to achieving internationally agreed net-zero ambitions.

What about competitiveness?

One likely consequence of subsidised renewable energy in the US is lower energy bills for US-based goods and service providers, making them more internationally competitive.

A lot of early coverage of the Inflation Reduction Act in the UK focused on the absolute size of the US monetary aid.

Fears were that the UK could never hope to rival this, and UK companies would be driven from the market.

Things are a little more complicated, however:

• The US is subsidising a continental economy and population much larger than the UK’s. The relative level of US aid as a percentage of US GDP is small (about 0.13%). Labour’s suggested £28 billion per year for green projects is about 1% of UK GDP.
• US (and EU) subsidies may reduce the cost of components used in UK products, indirectly making UK products cheaper and more competitive.
• The UK might also indirectly benefit from US and EU companies bearing the cost of trial and error in scaling up new renewable technologies – allowing ‘second mover’ UK companies to operate at a lower cost.

There could be benefits for the UK in reopening negotiations for a free trade deal with the US.

The Inflation Reduction Act’s domestic content requirement – ‘Buy America’ – includes countries with a free trade agreement in place.

The UK will ultimately need to make a judgement call as to which markets to contest.

In those where other countries are already ahead, the UK may be better off subsidising higher education – exporting cutting-edge skills, rather than products.

Whatever it does, though, the UK should move decisively, and with the future firmly in mind.

In case you missed it

How can the UK remain competitive in the race to net zero?

*The ICE welcomes guests to share their views about infrastructure policy issues on the Infrastructure Blog. These views are the views of the individual.

If you're interested in writing for the Infrastructure Blog, please email [email protected]. The ICE reserves the right not to publish articles that have been submitted.