How the Inflation Reduction Act is transforming America — and the world

America’s flagship climate law — now two years old — has helped revive the country’s manufacturing sector while also giving the world a better shot at avoiding catastrophic climate tipping points.

Signed into law in mid-August 2022, the Inflation Reduction Act (IRA) introduced subsidies aimed at ramping up US investments in clean energy supply chains, renewable electricity generation, and low-carbon transportation, among other things. It is, in a sense, America’s first real attempt to catch up with clean energy powerhouse China.

While the IRA’s passage initially raised alarm bells across the Atlantic — French president Emmanuel Macron said it was “super aggressive” toward European companies, who would struggle to compete — major economies have since responded with their own clean energy programmes.

The European Union introduced a ‘Green Deal Industrial Plan’ and the REPowerEU initiative to bolster domestic supply chains and speed the shift from fossil fuels, and Australian parliamentarians have introduced the ‘Future Made in Australia Bill’.

“I think it is changing the world — it sparked a race to the top,” Christina DeConcini, director of government affairs at the World Resources Institute (WRI), tells The Progress Playbook. China led the charge on green energy, “but now the US is in the game” and others are following suit.

Besides reducing their own climate-altering emissions, this will give the US and its allies more legitimacy in their climate and energy diplomacy efforts.

An investment boom

In the two years since the IRA was enacted, actual business and consumer investment in clean technologies and infrastructure in the US totalled $493 billion — a 71% increase from the prior two-year period, according to an analysis by Rhodium Group and MIT’s Center for Energy and Environmental Policy Research.

Investments in clean energy and electric vehicle (EV) manufacturing facilities accounted for $89 billion of the total, while $161 billion went towards clean energy production and industrial decarbonisation.

American businesses and households invested the remaining $242 billion, buying electric cars, heat pumps, and solar systems, among other things. That’s a 58% increase relative to the previous two-year period.

US Treasury Department stats show 752,000 households have claimed credits for rooftop solar systems, while close to 700,000 have got money back for insulating their homes.

And since January 2024, the White House says, some 250,000 Americans have bought electric vehicles using IRA tax credits, which effectively shave $7,500 off the price of qualifying new electric cars and up to $4,000 off used EVs.

These incentives have helped the US overtake China as the world’s biggest market for climate-tech financing, according to a new analysis from BloombergNEF, which says the tax breaks on offer have helped investors gain confidence in green hydrogen and other nascent industries.

An estimated 335,000 clean energy jobs have been created since the IRA’s passage, and data from the Department of Energy shows that in 2023, clean energy job numbers grew at more than double the pace of the US economy overall.

This comes as investments in new manufacturing facilities in the US have reached fresh record highs (the Bipartisan Infrastructure Law and the CHIPS and Science Act, which aims to stimulate domestic semiconductor manufacturing, have helped here too).

With this in mind, Goldman Sachs Research says it’s seeing signs of “a renaissance in American manufacturing.”

Of note, US solar module manufacturing capacity has surged from 7GW per year before the IRA to 27GW today, according to the Solar Energy Industries Association (SEIA) and Wood Mackenzie. Once this capacity fully ramps up, American factories will be able to supply 70% of US demand for solar panels.

And panel demand is rocketing. Around 1,080GW (1.1 terawatts) of planned solar projects are now seeking grid connections in the US, according to Lawrence Berkeley National Laboratory. That’s nearly equal to the country’s total installed generating capacity — across all technologies.

Meanwhile, 366GW worth of wind projects are actively seeking grid connections, while the battery storage capacity in the queues has grown more than 50% over the past year to 1,030GW.

“The IRA supercharged the already-vigorous market for clean energy and storage development,” says Berkeley Lab’s Nick Manderlink.

Bending the emissions curve

Thanks in part to the IRA, US greenhouse gas emissions in 2030 will likely be between 32% and 34% lower than they were in 2005, according to the REPEAT Project, which is led by Princeton University’s ZERO Lab. By 2035, the reduction will have reached 40%-43%.

For context, US emissions in 2023 were 18% lower than they were in 2005, according to Rhodium Group’s calculations.

However, the anticipated fall in emissions over the coming decade is less steep than previous studies suggested.

This is partly because the IRA’s implementation has been slowed by labour shortages, critical mineral supply challenges, the post-pandemic surge in interest rates, political uncertainty ahead of the US election, grid constraints, permitting hold-ups, and a lack of clarity around who qualifies for some of the incentives.

Further, energy demand is growing quickly amid a data centre boom that’s complicating decarbonisation efforts.

As a result, the US’ emissions outlook is still not aligned with what’s needed to avoid the worst impacts of climate change, even if the picture has improved significantly since the IRA took effect.

Achieving the targeted 50% cut in emissions by 2030 would require additional interventions, such as programmes that address emissions from agriculture and heavy industrial processes, the REPEAT Project says in its analysis.

The country would also need to move faster on electrification and phasing out coal- and gas-fired generators.

The US government wants to reach 80% clean electricity by 2030 and a 100% carbon-free power system by 2035. As things stand, the share of renewables in the mix will reach 34% in 2028, from 22% in 2023, according to the International Energy Agency.

Largely Trump-proof

While presidential candidate Donald Trump has promised to unravel the IRA and instead double down on oil and gas, analysts expect the legislation will remain largely intact even if he wins in November.

That’s because the vast majority of clean energy manufacturing projects are in rural, Republican districts — where land is more abundant and operating costs are lower. Recently, 18 House Republicans asked speaker Mike Johnson to spare the clean energy tax credits.

“We think that the IRA and Bipartisan Infrastructure Law have the potential to survive a potential second-term Trump administration — and even a Republican Congress on top of that — because of the significant economic benefits they can bring,” ING analysts said in a recent note.

Further, clean energy installations are surging in Republican states like Texas simply because renewables and battery storage now comfortably outcompete fossil fuels economically.

“You can’t change the momentum created by this [the IRA], but there may be setbacks” if Trump wins, the WRI’s DeConcini says.

The Republican says he’ll roll back environmental regulations that are seen as key complements to the IRA. New laws, such as the Environmental Protection Agency’s carbon pollution regulations for power plants and cars, could be binned, and Trump has said several times he wants to can the IRA’s subsidies for EV purchases.

As such, implementing the IRA could become more difficult should Trump win, “especially if fiscal deficits become more of a problem” and prompt budget cuts, ING says.

A long way to go

Nevertheless, the US and Europe have already started to chip away at China’s enormous lead in clean energy supply chains, research group RMI noted in a recent report.

The two regions are expected to see a 16-fold jump in cleantech supply chain investments between 2022 and 2025.

“But it is arguably more important to run smarter: to design leading regulatory structures, to unblock the grid, and to make smart, concentrated bets in the many areas of competition that are open now but won’t be for long,” RMI says.

According to the Brookings Institution, the US could move much faster if it augmented the IRA by imposing a “modest” fee on carbon emissions — as Europe has done.

This would reduce US emissions, relative to 2005 levels, by 45%-47% percent by 2030 and 57%-62% percent by 2035, the nonprofit said in a recent report.

DeConcini agrees that a price on carbon may be needed, as the IRA on its own “is great but not enough.”