The “green arms race” appears to be going global. The “green arms race” is the idea that in order to encourage energy transition countries have to out-incentivize other countries in order to draw investment towards their country and away from others. For years Europe was the only player in the game, but that changed when the United States Congress passed the Inflation Reduction Act (IRA) into law in August 2022. While U.S. allies cheered the stimulus, they also immediately voiced concerns over the potential of IRA’s tax incentives to suck private investment away from them and toward the U.S. In addition to policy enhancements being pursued in the European Union, we more recently observed policy announcements and enhancements from Canada and the United Kingdom.
To back up a bit, the IRA was more than just a $430 billion decarbonization package. According to analysts at Goldman Sachs, the IRA is a massive boost to what they term the Third American Energy Revolution, putting the U.S. in position to dominate energy production for decades. Coming on the heels of the Shale Revolution, (Revolution #2), it adds competitive strength in carbon capture, wind and solar production, and green hydrogen production to the already strong U.S. position in traditional energy.
The IRA directs new federal spending designed to catalyze investments in domestic manufacturing capacity, encourage procurement of critical supplies domestically or from free trade partners, and jump start R&D in leading edge technologies. Some estimates suggest the $430 billion of government spending will leverage into $1-3 trillion per year in clean energy investment.
Not to be outdone, Canada announced during its budget process last week their own package of incentives aimed at lowering the cost of investment in clean tech to remain competitive with the U.S. The package includes a 15% credit for non-emitting electricity generation, a goal of the electricity grid reaching net zero by 2035, and a 30% tax credit for manufacturing equipment to produce renewable and nuclear energy projects.
The U.S., long thought of as a decarbonization laggard, has raised a ruckus with the IRA. We love good old-fashioned competition. Let the games begin/continue!
(1) European Commission press release, Feb 1, 2023.