The US Congress’s August approval of the Inflation Reduction Act (IRA) came as a surprise to most observers. With the mid-term elections just months away and no majority in Congress, no one expected new legislation to be passed. Yet, the Democrats and Republicans managed to reach a compromise. We discuss below the measures announced to promote the environmental transition, which is the centrepiece of the act. Europe has much to gain from looking more closely at the modalities of the new US green industrial policy.
The IRA includes in particular $369bn in spending over a ten-year period in favour of decarbonisation, renewable energies and energy security. This is more than four times the amount that the 2009 American Recovery and Reinvestment Act devoted to investments in renewable energies and green technologies, making it the largest federal legislative package in US history in this area.
The IRA aims to accelerate the transition towards renewable energies. In extending several tax credits for decarbonated electricity generation and the purchase of new electric vehicles until 2031, the legislation aims to stimulate investments. The IRA thus marks a shift in US industrial policy and in Democratic Party doctrine.
Paradoxically and despite the law’s name (the Inflation Reduction Act), it is unlikely to slow down inflation on the horizon of our forecasts. Whatever impact there is on prices, it will be minimal and will take several years to play out, with a lower fiscal deficit, an increase in raw materials supplies via investment in production and other critical infrastructures, and a reduction in drug prices (our focus here is the measures in favour of the energy transition). Additional downward pressure is expected on oil and gas prices by reducing consumption. Princeton University’s REPEAT project estimates that crude oil prices will be lowered by about 5% and US natural gas prices by some 10-20% in the medium term (2030-35).