The Inflation Reduction Act (IRA) is a landmark federal law in the US with the primary objective of reducing the country’s carbon emissions. The Act represents a historic investment to confront climate change on the part of the US. It offers incentives to companies and individuals to become more climate friendly, and includes huge government investments in new energy production, covered by ‘Buy America’ laws.
The law includes major subsidies and tax deductions for companies and private individuals. It will become easier and cheaper to both produce and consume climate friendly products, including heat pumps, wind power and electric vehicles. We are concerned by the large scale of the subsidies, which could lead to a subsidy race where countries compete with targeted aid. Such a situation would be worrying because it would distort competition and would be an inefficient use of taxpayers’ money.
We are particularly concerned about the local content requirements in the Act. For example - in the case of electric vehicles – tax credits are available at different levels. These depend on whether the vehicle is ‘assembled’ in North America, whether the battery components are manufactured or assembled in North America, and whether the minerals for use in the batteries are extracted, processed or recycled in the US or come from a country with which the US has a trade agreement (e.g., Chile, Australia, Canada or Mexico). The EU and the US have no free trade agreement.
Swedish companies, which are often at the forefront of developing new, environmentally friendly technologies, have a great deal to offer in the transition to a greener economy. Companies with production facilities in the US, or those thinking of establishing such capacity in the US, will most likely be able to take advantage of the subsidies offered through the IRA. At the same time, the new rules will limit the manufacturers’ choice of subcontractors, making them choose domestic suppliers over foreign, which could affect European subcontractors in a negative way. It will make it difficult to export finished cars and batteries to the US from the EU. Companies in the EU must, in addition to customs duties, compete with companies that stand to benefit from the tax credits.
We disapprove of local content requirements, as they limit global trade and put restrictions on companies both on where they establish their production and from where they can source materials and supplies. This in turn risks slowing down the green transition, as efficient trade in climate-friendly goods and services is imperative to reduce emissions. Incentives such as the IRA should be built solely upon climate-related criteria that allow all manufacturers and subcontractors the best possible opportunity to deliver on climate commitments.