The Climate Law Might Turn America Into the World’s Factory
On Tuesday, President Joe Biden signed the Inflation Reduction Act into law. It is no exaggeration to say that his signature immediately severed the history of climate change in America into two eras. Before the IRA, climate campaigners spent decades trying and failing to get a climate bill through the Senate. After it, the federal government will spend $374 billion on clean energy and climate resilience over the next 10 years. The bill is estimated to reduce the country’s greenhouse-gas emissions by about 40 percent below their all-time high, getting the country two-thirds of the way to meeting its 2030 goal under the Paris Agreement.
Since the law emerged from a surprise compromise between Senator Joe Manchin and Senate Majority Leader Chuck Schumer last month, most attention has been paid to the fact of the bill itself: that it is a climate bill, that America’s sorry environmental record has begun to reverse. Far less attention has been paid to the ideas that animate the IRA. That is a shame. Every law embodies a particular hypothesis about how the world works, a hope that if you pull on levers A and B, then outcomes C and D will result. Yet even by the standards of landmark legislation, the IRA makes a particularly interesting and all-encompassing wager—a bet relevant to anyone who plans to buy or sell something in the U.S. in the next decade, or who plans to trade with an American company, or who relies on American military power. And although not a single Republican voted for the IRA, its wager is not especially partisan or even ideological.
The idea is this: The era of passive, hands-off government is over. The laws embrace an approach to governing the economy that scholars call “industrial policy,” a catch-all name for a wide array of tools and tactics that all assume the government can help new domestic industries get started, grow, and reach massive scale. If “this country used to make things,” as the saying goes, and if it wants to make things again, then the government needs to help it. And if the country believes that certain industries bestow a strategic advantage, then it needs to protect them against foreign interference.
The approach is at the core of how the IRA seeks to resolve climate change. Democrats hope to create an economy where the government doesn’t just help Americans buy green technologies; it also helps nurture the industries that produce that technology.
This reflects a homecoming of sorts for the United States. From its founding to the 1970s, the country had an economic doctrine that was defined by its pragmatism and the willingness of its government to find new areas of growth. “Yes, there was an ‘invisible hand,’” Stephen Cohen and Brad DeLong write in their history of the topic, Concrete Economics. “But the invisible hand was repeatedly lifted at the elbow by the government, and placed in a new position from where it could go on to perform its magic.” That pragmatism faded in the 1980s, when industrial policy became scorned as one more instance of Big Government coming in to pick so-called winners and losers.
The IRA is not the only bill intent on bringing back industrial policy. The two other large bills passed by this Congress—the $1 trillion bipartisan infrastructure law and the CHIPS and Science Act—make down payments on the future as well; both laws, notably, were passed by bipartisan majorities. They alone would be notable commitments to a different vision of the next decade. But it is in the IRA that these general commitments become specific, and therefore transformative.
Fifty-eight feet above the floor of the Capitol Rotunda is a painting, meant to look like a marble inscription, that tells the story of the country’s history as it seemed in the late 1870s, when it was first painted. But Congress couldn’t decide how that story ended, and the last few scenes sat unfinished for decades. Finally, in 1951, lawmakers set upon a final image that seemed to cap the country’s history: the Wright brothers assembling the first airplane.
Aviation is a good way to think about how industries are born, grow, and become major forces in the economy. Long before they got off the ground, the Wright brothers had spent several years researching key concepts in flight at their bike shop in Dayton, Ohio. Finally, in late 1903, they built a plane at a base camp in North Carolina, and on December 17, Orville Wright rode it into the air, completing the first heavier-than-air flight in human history.
And that’s where the grade-school account of aviation stops. In one miraculous moment, a human being leapt into the air; today, we have Top Gun, FedEx, and Spirit Airlines. Yet the one flight near Kitty Hawk is not actually the end of the story. Although the Wright flier proved that heavier-than-air flight was possible, it was only one piece of machinery. To manufacture multiple aircraft, the brothers opened the Wright Company Factory, the world’s first airplane factory, in Dayton in 1909. In Kitty Hawk, flight became a scientific fact, but six years later, in Dayton, it became an industry.
And that is something closer to how technology actually develops. First, you have research and development, where important ideas are tested and proved on a small scale. Second, you have a prototype, such as that first Wright flier, that translates the ideas into a real technology. Third, you have early commercialization: Engineers and assembly-line workers must learn how to produce multiple copies of that technology, must ensure that the first version wasn’t a fluke, and, perhaps most important, must find people and companies who will serve as their first customers. This is the core work that the Wrights did in their Dayton factory. Only after completing all three steps do you begin to approach something like the enormous Boeing factory outside Seattle today, where 747s are made.
For too long, this story about technological development has focused almost exclusively on steps one and two. We have heard about the brilliant founders in a garage who changed the world with their ideas, but not about the factories where those ideas turned into silicon and plastic. Federal policy has reflected that: Since the 1980s, when Congress has wanted to spur technological progress, it has usually thrown money exclusively at R&D. We have had a science policy, not an industrial policy.
Until this year, that is, when Congress started passing industrial policy right and left. Why the change? Part of it, surely, is that in a post-Trump world, no party really champions globalized free markets anymore. But inextricable from that turn is Washington’s consuming anxiety over China’s rise—and China has embraced industrial policy.
It’s worth clarifying here that industrial policy really isn’t a single “policy” at all, at least not in the same way that, say, a carbon tax is. It’s more like a toolbox of different approaches that act in concert to help push technologies to grow and reach commercial scale. The IRA and the two other new laws prefer four tools in particular.
The first tool is the demonstration project. A demonstration project helps a technology that has previously existed only in the lab get out in the real world for the first time. Although prototypes are used in every type of invention—the Wright flier was a demonstration project—they rise to the level of needing policy when a given technology is so experimental, expensive, or far from market that banks or venture capitalists would decline to fund it.
The second set of tools is supply-push policies. As the name suggests, these tools “push” on the supply side of an industry by underwriting new factories or assuring that those factories have access to cheap inputs to make things. In 2010, Tesla benefited from a supply-push policy when it won a low-interest government loan to build one of its first factories. Supply-push policies tend to get paired with the third category, demand-pull policies, which create a market for whatever is coming out of those new factories. The government can “pull” on demand by buying those products itself or by subsidizing them for consumers.
Finally, there are protective policies, meant to insulate industries—especially new ones that are still growing—from foreign interference. Infant-industry protection goes all the way back to Alexander Hamilton, who called for tariffs to protect American manufacturers until they achieved sufficient scale. (In countries with no industry, “the importations of manufactured supplies seem invariably to drain the merely Agricultural people of their wealth,” he wrote.)
These four tools make up every piece of industrial policy in the three new laws. Although both parties have moved to embrace industrial policy, Democrats are clearly ahead of their Republican colleagues. You can see it in their policy: While the bipartisan infrastructure law sets up lots of demonstration projects, and the CHIPS Act adopts some supply-push and protectionist theory, only the IRA uses all four tools. But that makes sense, because Democrats’ climate priorities mean that they have a clearer idea of what they want the future economy to look like. In order to stop climate change, experts believe, the United States must do three things: clean up its power grid, replacing coal and gas power plants with zero-carbon sources; electrify everything it can, swapping fossil-fueled vehicles and boilers with electric vehicles and heat pumps; and mop up the rest, mitigating carbon pollution from impossible-to-electrify industrial activities. The IRA aims to nurture every industry needed to realize that vision.
Take hydrogen and carbon removal, two industries that are essential to creating a greener America but that remain in their early stages. A pure stream of hydrogen is an almost ideal industrial fuel: It burns hotter than coal, has the highest energy-to-weight ratio of any combustible substance, and can supply the raw molecular inputs for chemical- and steelmaking. Hydrogen doesn’t release any carbon when burned (because it has no carbon in it to burn!), but today, the cheapest way to make it is an industrial process that is extremely carbon-intensive. Meanwhile, carbon removal—sucking CO2 out of the atmosphere—has not been proven on any mass scale. The Intergovernmental Panel on Climate Change says that by 2050, the world must remove at least a billion tons of carbon dioxide, and likely much more, from the atmosphere every year in order to avoid the worst of climate change; right now, it removes only several thousand at most.
Hydrogen and carbon removal are going to benefit from nearly every tool the government has. The bipartisan infrastructure law will spend more than $11 billion on hydrogen and carbon-removal “hubs,” huge demonstration projects where companies and federal agencies will work together to make hydrogen or remove carbon at factory scale. These hubs will also foster geographic concentration, the economic idea that when you put lots of people working on the same problem near one another, they solve it faster. You can see such clustering at work in San Francisco’s tech industry, and also in China, which now creates hubs for virtually every activity that it wants to dominate globally—even soccer.
Then the IRA will take over and deploy some good ol’ supply push and demand pull. It includes new programs to underwrite new hydrogen factories; on the demand side, a powerful new tax credit will pay companies for every kilogram of low-carbon hydrogen that they produce. Another tax credit will boost the demand of carbon removal by paying firms a $180 bounty for trapping a ton of carbon dioxide and pumping it underground. (More controversial, the IRA also rewards firms for capturing carbon from coal-plant smokestacks, and it pays a bounty—albeit a smaller one—if they use captured carbon to drill for more oil.)
The same suite of tools is about to remake America’s lithium-ion battery industry. Lithium-ion batteries are a bedrock technology of the modern world: They are in hedge trimmers, Juuls, and the Mars Curiosity rover. But in terms of the climate, their most important use is in EVs, which are little more than batteries with four wheels and a motor. Today, not only does China make most batteries worldwide; it alone makes the tools that make the batteries, Nathan Iyer, an analyst at RMI, a nonpartisan energy think tank, told me. This extreme geographic concentration—which afflicts not only the battery industry but also the solar-panel industry—could slow down the energy transition and make it more expensive, the International Energy Agency has warned.
So the IRA uses a whirlwind of supply-push policy to try re-creating the battery industry in the U.S., subsidizing new mines, new metal refineries, and new battery factories. But by far the most ambitious battery-centric policy in the IRA is the new slate of tax credits for EVs, which have completely replaced an older Obama-era policy. For the first time, Americans can get a $4,000 tax credit for used EVs, and they will be able to take the $7,500 tax credit for new EVs as a discount at the dealership instead of waiting for tax season in April. On its own, these amount to a nice bit of demand pull to help jump-start EV purchases. But the new tax credit is also supply-minded, arguably even protectionist. Under the new scheme, very few electric cars and trucks will immediately qualify for that full $7,500 subsidy; it will go only toward vehicles whose batteries are primarily made in North America and where a certain percentage of minerals are mined and processed in the U.S. or one of its allies. Will these policies accelerate the shift to EVs? Well, no, not immediately. But the idea is that by boosting domestic production of EVs, batteries will become cheaper and more abundant—and the U.S. will avoid subsidizing one of China’s growth industries.
And then there’s solar policy. Right now, next to no solar panels are made in the U.S., even though the technology was invented here. The IRA endeavors to change that by—you guessed it—a mix of supply-push, demand-pull, and protectionist policies. Under the law, the government will underwrite new factories to make every subcomponent of the solar supply chain; then it will pay those factories for every item that they produce. Meanwhile, a powerful set of clean-electricity tax credits will cause demand for new solar panels to boom. “It’s realistic that within four to five years, [U.S. solar manufacturers] could completely meet domestic demand for solar,” Scott Moskowitz, the head of public affairs for the solar manufacturer Q CELLS, told me.
In each of these industries, you’ll notice that the government isn’t only subsidizing factories; it is actually paying them to operate. That choice, which is central to the IRA’s approach, is “really defending against the mistakes of the 2009 bill,” Iyer told me. In its stimulus bill passed during the Great Recession, the Obama administration tried to do green industrial policy, underwriting new solar-panel factories across the country. But then Chinese firms began exporting cheap solar panels by the millions, saturating domestic demand and leaving those sparkly new factories idle, Iyer said. Policy makers learned that demonstration projects and supply-side policy alone won’t cut it; you need demand pull too.
So many other industries will also be touched by these laws. There’s a new program to nurture a low-carbon aviation-fuel industry in the U.S. (Long-distance jet travel is one of those climate problems that nobody knows how to solve yet.) There are a slew of policies meant to grow and decarbonize the U.S. industrial sector; every tax credit pays out a bonus if you use U.S.-made steel, cement, or concrete. “You would need thousands and thousands of words to capture the industries that will be transformed by this,” Josh Freed, the climate and energy leader at Third Way, a center-left think tank, told me. Surveying all the programs in the bill, he recalled a moment in 1995 when a friend’s father brought him into a university lab to look at something on the screen called the internet. “This is going to change everything,” he said.
Industrial policy is hard. The IRA bets on a certain vision of the world, and plenty could keep that world from becoming a reality. Even some of Biden’s governing priorities could get in the way: The IRA imagines new mines opening up across the country, for instance, but most of the country’s untapped lithium, cobalt, and nickel reserves sit within 35 miles of a Native American reservation. How will Democrats weigh a mining expansion against their environmental-justice concerns?
And even if the policies do succeed, America’s green industries are not guaranteed to outcompete China’s or speed up the green transition in the process. Just look at China itself: For all of its efforts to build a competitive semiconductor industry, its chips still trail behind Taiwan’s. Five EVs were sold in China last year for every one EV sold in the United States; that larger domestic market will provide a significant economy of scale when Chinese EV makers begin exporting their cars abroad. For that reason and others, many people in China are “deeply skeptical” that the U.S. can catch up with its lead, according to Li Shuo, a Greenpeace campaigner in Beijing.
But consider the world if even a few of the IRA’s policies do succeed. Electricity will be cheap and plentiful, much of it coming from farms of U.S.-made solar panels or offshore wind turbines. Across the Great Lakes, new steel refineries will be producing zero-carbon steel for export to Europe; a new fleet of factories, stretching across the West, will use nuclear energy to capture carbon from the air and store it in rocks below the subsurface. Air pollution will have fallen substantially, meaning that fewer Americans will die of heart attacks or lung disease every year, and fewer children will have asthma attacks. The Fortune 500 might still include Apple or Exxon, but it will also encompass EV makers, green-hydrogen producers, and carbon-removal specialists. “We are about to have a huge new set of vested interests who want the economy to be clean and benefit from that. We’ve literally never had that before,” Freed told me.
For decades, when environmentalists imagined an America that had begun to solve climate change, they pictured many of the trappings of post-industrial urban liberalism: bike trails, micro-grids, and organic farms. No doubt that stuff will exist in a decarbonizing world—and in fact one of the next fights for the climate movement will be to loosen the chokehold that cars have on American cities. But the revelation of the IRA is that decarbonizing the United States may require re-industrializing it. A net-zero America may have more refineries, more factories, and more goods production than a fossil-fueled America—while also having cheaper cars, healthier air, and fewer natural disasters. And once the U.S. gets there, then it can keep going: It can set an example for the world that a populous, affluent country can reduce its emissions while enjoying all the trappings of modernity, and it can export its cheap zero-carbon technologies abroad, helping reduce the approximately 88 percent of annual carbon pollution that it does not cause.
And that is the IRA’s biggest idea, its biggest hypothesis: that America can improve its standard of living and preserve its global preeminence while ruthlessly eliminating carbon pollution; that climate change, actually, doesn’t change everything, and that in fact it can be addressed by changing as little as possible. This hypothesis has already proved itself out in one important way, which is that the IRA passed, and the previous 30 years of climate proposals did not. Now comes the real test.