Does the UK need its own Inflation Reduction Act?

Amidst global economic shifts spurred by the IRA, the UK stands a year post-implementation without a response. While the EU and India have advanced with IRA-driven domestic industry expansions, the UK has rolled back on its net-zero commitments.

Earlier this year, Prime Minister Rishi Sunak announced a scaled-back approach toward net-zero policy proposals, emphasising a ‘pragmatic, proportionate, realistic’ strategy. However, this retreat faced considerable scrutiny and discontent from the green economy.

The green groups argued that such a step would send a misguided signal globally, particularly at a time when world leaders, such as the US with its IRA, perceive the transition to net-zero as a substantial economic opportunity.

Moreover, there are growing concerns about the UK’s capacity to uphold its leadership position in the global race toward achieving net-zero, with other nations resolutely investing in shaping a green industrial strategy, actively capitalising on the economic prospects emerging from industrial decarbonisation.

Environmental advocates contend that the proactive measures accompanying the launch of the IRA have the potential to surpass the UK’s leadership in the realm of achieving net-zero.

“The overarching reflection of the IRA is that opportunities don’t remain opportunities forever. The US and other countries are moving quickly, and the UK has to keep pace,” says Ben Westerman, the head of policy at the Aldersgate Group, speaking at an event earlier in the Autumn.

Additionally, despite mounting pressure from the green economy for an official response to the US and EU’s multibillion-dollar subsidy packages during the Spring budget, the Government failed to seize the opportunity.

Westerman explains that in the political sphere, there’s a prevalent narrative that spending money is irresponsible. However, with the possibility of a general election on the horizon, there’s a shift happening in politics.

“Politics is changing. People are getting fed up. Government will pay if they continue to do nothing,” says Westerman.

It bears noting that one of the major reasons stated by the Government for the pushback is the cost of implementing net-zero. The Prime Minister defended his strategic shift as a means to relieve financial pressures on households and small businesses.

Nevertheless, research shows that with the establishment of a strong green industrial sector, there is a potential to contribute £72bn in UK’s Gross Value Added (GVA).

It is to harness these economic benefits of industrial decarbonisation while developing resilient, sustainable industries, that the Biden administration introduced a $369bn investment in green technology as part of the IRA last year.

Decoding the Inflation Reduction Act: Its essence and benefits

The IRA injects the investment into green technology through grants, credits and tax incentives. This legislation requires green technology production and assembly in the US to qualify for tax credits, a move aimed at boosting domestic manufacturing.

The US Department of Energy (DOE) anticipates a considerable reduction in net greenhouse gas (GHG) emissions, aiming to reach 50-52% below 2005 levels by 2030.

According to the DOE’s estimations, the combined impact of the clean energy measures embedded in the IRA of 2022 and the Bipartisan Infrastructure Law of 2021 could slash emissions by 1,000 million metric tons (MMT CO2 e) in 2030, equivalent to about a gigaton.

Beyond emissions reduction, the Act aims to lower energy costs, enhance national energy security, improve public health, combat climate change, generate high-quality jobs and create new economic opportunities while addressing historical disparities within the US energy system.

In one year after the IRA was signed into law, private industry has announced at least 210 major new clean energy and clean vehicle projects across the country, according to E2’s findings.

Drawing from publicly accessible data within 178 out of the 210 announcements, encompassing new job prospects and investment projections, these projects, upon successful completion, are poised to generate more than 74,181 new jobs and attract nearly $86.3bn in private investments.

Westerman highlights that the US recognises the profitability linked to investing in the green economy. He says, “one of the problems we have in the UK is we talk a lot about green spending, but what the US is doing is to talk about green investment. The US acknowledges that this investment is going to make money.”

Additionally, the legislation encourages the growth of a domestic supply chain network.

According to KPMG’s energy deal advisory partner Wafa Jafri, the most commendable aspect of the IRA, which the UK should aim to emulate, is the emphasis on localising the supply chain.

“It is not just an end-producer subsidy or an end-user subsidy. The US is ensuring that it is able to extract the value from the entire value chain for its economy,” says Jafri.

Divergence from global trends: UK’s focus on fossil fuels

As global leaders pivot towards fortifying resilient green economies and sustainable energy security, the UK has taken a contrasting step by introducing a new bill that broadens oil and gas licensing, purportedly aimed at ‘strengthening’ national energy security.

The International Energy Agency’s (IEA) 1.5C-aligned pathway to a global net-zero energy system by 2050 includes an immediate halt to all upstream oil and gas projects with long lead times.

Nevertheless, the UK’s North Sea Transition Authority (NSTA) offered 27 new licences for oil and gas production projects last month, despite concerns voiced by green groups and the UK Government’s own advisors at the Climate Change Committee (CCC).

While the Government persistently claims that the recent legislation would strengthen the country’s energy security and contribute to the net-zero transition by 2050, recent findings from the Association for Renewable Energy and Clean Technology suggest that the Government’s rollback on its green policies has led to declining confidence in both the public and political spheres regarding the energy transition.

The findings emphasise that for investors to be drawn to the UK’s energy transition, there must be clear patterns of governance and regulatory stability. Presently, these signals are not strong enough to instil confidence in potential investors.

Respondents to the survey, forming the basis of the findings, believe that introducing measures equivalent to the IRA would accelerate progress towards the energy transition in the UK.

International competition threatens UK industries

The confidence issues extend beyond the energy sector, as highlighted in a recent report by the House of Commons Business and Trade Committee. The passing of the IRA has intensified global competition within the electric vehicle (EV) supply chain. This shift has resulted in a surge of investments directed towards US gigafactories, consequently drawing attention away from Europe.

Palmer Automotive’s founder Dr. Andy Palmer explains the urgency to respond to the international competition to safeguard the future of the UK automotive industry, and the critical role of the Autumn Budget in shaping this response.

“With the IRA and the EU’s response to it, the UK has to take the leadership role. To some extent, we already risk the industrial infrastructure in this country by delaying what we have delayed,” Palmer says.

He adds that constructing a Gigafactory typically spans three years, with a year dedicated to planning. Using numbers as a guide, the UK has only achieved half the journey toward reaching its battery manufacturing capacity. Therefore, the window between the imperative to act and the actual delivery time is rapidly narrowing.

According to the Committee’s report, the UK currently has just one gigafactory, Envision AESC’s facility near Nissan’s Sunderland plant, with less than 2GWh capacity.

There are plans for two more gigafactories including a significantly larger AESC plant in Sunderland capable of producing up to 38GWh, and Tata’s proposed 40GWh factory in Somerset for Jaguar and Land Rover.

However, even with these additions, the report concludes that the UK will fall significantly short of the required 100GWh by 2030 and 200GWh by 2040.

“This means that the autumn statement requires a very clear intention in terms of both fiscal and non-fiscal industrial strategy. If not, then I fear for the future of the car industry,” he adds.

The IRA: A beneficial tool or a detrimental force?

As anticipation builds regarding the Chancellor’s response to the IRA in tomorrow’s budget, it is evident that the green economy is calling for increased policy stability and certainty.

“When we talk about the IRA, we talk a lot about how the UK can’t compete or the UK can’t match it, and that misses the point entirely. It is not about matching the spending. It is about to learning different ways to policy making,” explains Westerman.

Last month, the Institute for Public Policy Research (IPPR) warned that the UK is failing to seize the economic advantages presented by the global shift towards a net-zero carbon future, primarily due to the lack of a green industrial strategy.

Westerman explains that policy stability, emerging from a long-term green industrial strategy, can give the private sector the certainty to invest in sustainable projects by de-risking the investments.

The imperative need to respond to the IRA-driven global competition and capitalise on the economic opportunities presented by the decarbonisation of the industrial sector has been further exemplified in research conducted by the Aldersgate Group.

Earlier this year, the Group revealed that neglecting to strengthen the industrial sector and respond to global competition, such as the IRA, can put the UK at risk of losing £224bn by 2050.

With the urgency of the need for response in mind and considering the limited opportunity for action until next year, it is hoped that the Chancellor will unveil a robust and decisive response to the IRA in tomorrow’s budget. This moment might represent the final tangible chance for the UK to secure its leadership in the global race to net-zero.