America’s Inflation Reduction Act (IRA) is one of several major pieces of legislation underpinning the bold new economic agenda of the Biden administration. Its name is misleading as it will have little impact on US inflation but is the combination of a domestic industrial policy and an ambitious strategy for net zero, offering $369 billion in investment and tax breaks over the next ten years.
Across the pond, the IRA has been sharply criticised by UK and European politicians and policy wonks due to strict “made in USA” rules that would disqualify European based companies from generous tax breaks and lucrative investment opportunities. UK Trade Secretary, Kemi Badenoch described the legislation as protectionist, stating “it is onshoring in a way that could actually create problems with the supply chains for everybody else.” It risks incentivising companies to re-locate to North America and diverting investment away from the UK and Europe.
Or to quote the Chair of the UK’s Energy Digitalisation Taskforce, Laura Sandys CBE, “the IRA is a game changer… big investors are saying ‘US first, Europe second, Asia third and if you’ve got any spare peanuts at the end of it maybe you can look at the UK.’”
As the US Treasury and Department of Energy are expected to publish IRA guidance in March, UK and EU energy ministers are haggling with their American counterparts to secure concessions and minimise the risks to their respective energy markets and economies. For UK investors, it also prompts questions about the state of play closer to home, with the Conservative Government’s approach putting the UK at risk of falling behind in the global race to maximise the growth potential arising from net zero.
Green leadership in the UK
To rephrase an idiom, the Government’s approach could be described as ‘all wind but no power’. Whilst the UK’s net zero ambitions are well rehearsed by politicians and have been written into law, the policies and funding fail to match the rhetoric. This has created a vacuum which the Labour Party is filling with its Green Prosperity Plan and the promise of £28 billion annually for capital spending on projects designed to tackle climate change.
The Government will need to move quickly for two reasons. Firstly, the High Court ruled in July 2022 that ministers need to explain and substantiate how they plan to deliver on the Government’s Net Zero target by April 2023 following a successful judicial review by climate change campaign groups.
The Court-ordered report is likely to be wrapped up with Government’s response to the independent review of net zero, published in January 2023 and chaired by former energy minister, Chris Skidmore OBE. Skidmore’s 340-page review contains 129 policy recommendations that present the economic case for net zero as “the growth opportunity of the 21st century”.
Secondly, as highlighted by Skidmore’s review, many of the UK’s competitor economies have already made bold and ambitious interventions. Both the USA’s IRA and the EU’s €250 billion Green Deal Industrial Plan provide significant funding and the long-term policy certainty that is mission critical to securing private sector investment in their respective economies. If UK investors are left out in the cold, the UK risks not only losing out on new opportunities, but also current economic activity moving away.
What next for investors?
UK investors can expect the Government to act imminently. Ministers are acutely aware of the competition concerns arising from the USA’s IRA and will want to exploit the UK’s pre-existing market strengths. While the UK cannot compete with the sheer industrial capacity of North America, it is likely ministers will seek to capitalise on the UK’s strong science base and highly specialised expertise in both clean technologies and green finance.