Green Industrial Strategy

The Inflation Reduction Act is the most significant piece of climate legislation in US history. Alongside its three other major legislative achievements, the Biden administration has passed between $500 billion and $1.2 trillion worth of new climate spending, depending on projections of future demand. This translates to an average of at least $100 billion per year, which would not only be the largest climate spending package of any nation, but more than the total economic output of over 130 countries.  

Together, the Inflation Reduction Act (IRA), Infrastructure Investment and Jobs Act, as well as limited sections of the CHIPS and Science Act, and American Rescue Plan represent a green industrial strategy that puts the US in reach of its highly ambitious climate goals and marks a turning point in federal economic policy. Not only is this projected to help cut US emissions by about 40 percent by 2030, but this strategy will reconfigure technology trajectories, global capital flows, and the international rules and norms that shape them. In late April, National Security Advisor Jake Sullivan officially branded this as the “New Washington Consensus,” prompting commentators to proclaim the of “death of neoliberalism” and the victory of “Bidenomics.” 

In this new paradigm, “Green Industrial Policy” is not only a climate strategy, but the centerpiece of a multi-faceted political economy project designed to boost growth, counter China’s dominance in clean energy sectors, and tackle domestic inequality. In many respects, it is the synthesis of economic, foreign policy, and political debates stretching back to the Great Recession. In economic policy, it reflects the pivot from market-liberal neoliberalism to state-interventionist “Hamiltonianism;” in foreign policy, a shift from globalist peace theory to realist multipolarity; and a direct response to the “Calamity Thesis” of deindustrialization and the rise of Trump-ism among the working class.  

But nowhere is this shift more pronounced than in the climate debate itself. Ten years ago, we were “prisoners of the wrong dilemma,” stuck in a neoclassical view of climate change as a global externality to be fixed through collective action and international cooperation. Today, the success of Biden’s green industrial strategy emphasizes the power of rapidly improving technologies to drive positive feedback loops of economic growth and political coalition-building. As Kingsmill Bond at RMI has argued:

“[t]he energy transition is a shift from a concentrated, expensive, polluting commodity-based system with no learning curve, to an efficient, manufactured, technology-driven system that offers continuously falling costs and is available everywhere. It is moving from heavy, fiery molecules to light, obedient electrons; from hunting fossil fuels to farming the sun.” 

This technological and economic shift has fundamentally altered the political horizon of what constitutes feasible climate action. 

In a recent column, Paul Krugman identifies the core feature of green industrial policy as the attempt to “reshap[e] the economy to limit climate change,” rather than any particular policy or program. This conforms with the analysis of a group of scholars who in a 2021 paper characterize green industrial strategy as “the intent to restructure and transform the economy into a green economy” and contrast it with carbon pricing, a market-based approach which had long dominated climate policy and eschews the idea of a large role for the state. They point out that “[t]his new opportunistic frame for climate action has further effects on international institutions and geopolitics, heightening competition and presenting new challenges for cooperation.” As Todd Tucker at the Roosevelt Institute notes, what’s distinctive about the Biden administration’s approach is that it is no longer “kicking away the ladder” from countries trying to pursue their own industrial strategies according to their own political-economy needs, but instead places the goals of decarbonization, growth, geopolitical stability and income equality over first-best policy solutions. 

 This is important since few countries will be able to match the US’s fiscal weight or feel so compelled to address so many internal and external crises in a single administrative term. Green industrial strategy as implemented in the US is bigger than in Europe, more impactful than in Australia, Canada or India, and more reliant on private sector investment than in Japan, Korea, or China. 

The politics of $1 trillion

Biden’s green industrial strategy is both impressive in scale and in its passage amidst highly complex political circumstances. After fractious negotiations, Congress authorized over $4 trillion in new investment between its four major pieces of economic legislation. Officially, around $500 billion of that spending goes towards climate-related spending, most of which is contained in the Inflation Reduction Act. According to our estimates, the US federal government will spend an average of over $100 billion each year on climate mitigation over the next ten years, about two and a half times the annual average from 2009-2017.

Even this figure is likely a significant underestimate. Since many of the tax credits contained in IRA are uncapped, total public expenditure is limited only by private demand for these incentives. If deployment of key clean energy technologies, such as solar or green hydrogen, were to be in line with a 2050 net-zero pathway, we estimate that total spending in the IRA alone could reach $1 trillion. A recent Brookings analysis reached a similar figure even without the net-zero constraint. This discrepancy is particularly large in renewable energy spending, which could see twice as much spending in a climate-aligned pathway—green hydrogen could see five times the spending, and the electric vehicle (EV) supply chain a staggering ten times the official Congressional Budget Office (CBO) estimates if consumers rush to buy cheaper EVs.

Official estimates also don’t include additional loan authorizations included in the administration’s green industrial strategy. In the IRA, there is a further $390 billion in public loan authorizations, which will crowd in significantly more private investment into the clean energy transition. Again, several of these programs, such as the Greenhouse Gas Reduction Fund, have no upper limit and could end up lending in excess of ten times their official budget allocation. Assuming these programs end up with the same leverage ratio as the Loan Program Offices’s (LPO) Clean Energy Loan Guarantee programs, they could collectively finance more than $800 billion worth of investments across a range of clean energy sectors.

 Biden’s green industrial strategy is of course an innovation in the practical challenge of cutting carbon emissions, but just as importantly, it is an innovation in the political challenge of doing so through the US Congress. The public’s appetite for austerity was at an all-time low by mid-2022 following five separate Covid-19 welfare-expanding packages each exceeding $200 billion. At the same time, the use of tax credits and loan guarantees effectively hid the true impact of the bill, since the credits received a predictably conservative score from the CBO, while only the credit subsidy costs and administrative expenses of the loan programs are officially counted as budget expenditure. Finally, all of the spending had to be perceived as dis-inflationary given concerns around rising prices, prompting a rebrand from the“Build Back Better” moniker that had carried all the way through the election. 

The IRA is therefore a masterclass in political pragmatism, effectively negotiating a 50-50 Senate, the rules of budget reconciliation, and a shifting macroeconomy. But as Jake Sullivan pointed out, the real political challenge goes much deeper. In particular, three profound shifts in the broader political economy environment have shaped the Biden laws: 1) post-crash stagnation and rediscovery of state role in directing private investment; 2) geopolitical concerns over China’s dominance manufacturing exports, particularly in clean energy technology supply chains 3) racial and regional inequality contributing to rising polarization and populism. These factors have deeply informed the design of key provisions and policies.

Economic stagnation and the (more) visible hand

The history of industrial policy in the US goes back as far as one of America’s founding fathers, Alexander Hamilton, who laid out the case and many of the mechanisms of industrial policy in his famous Report on the Subject of Manufactures. In his words, “the public purse must supply the deficiency of private resource.” The Biden administration has pointed to climate change, supply chain resiliency, productivity stagnancy, and economic inequality as the particular private “deficiencies” it sees in need of public redirection.

Hamilton’s ideas found renewed currency in the stagnant macroeconomic environment that followed the financial collapse of 2008. Referred to as “secular stagnation” by Larry Summers and others, the US and other major economies suffered from a persistent deficit in aggregate demand that, in many respects, they are still recovering from. With interest rates approaching zero, central banks could do little to address the deficit even as the grip of the “austerity mindset” held back fiscal stimulus creating a “lost decade” that left millions of Americans no better off in 2016 than they were in 2007. If the US had returned to its average growth rate from 1989-2007, the economy would have been roughly $1.5 trillion larger by the time of the Covid recession.

The US economy was deeply “scarred” by the Great Recession, with both labor and capital taking the better part of a decade to return to pre-crisis levels. Secular stagnation, however, appeared to be a phenomenon going back decades, with business investment falling in line with real interest rates since the mid-1980s. As the figure below shows, private investment as a share of GDP has fallen with each business cycle over that timeframe, reaching new lows in the 2010s. At its core, industrial policy focuses on renewing this rate of total public and private investment through a particular focus on industries seen to have an outsized role —or as Mariana Mazzucatto has described it, a “Supermultiplier” effect on economic output.

US productivity growth has been in decline in recent decades, which can be explained, in part, by falling private investment, itself a product of governments across the developed world taking their hands off the wheel. The turn in industrial policy—or what Treasury Secretary Janet Yellen calls “modern supply side economics”—is a clear and targeted attempt to reverse this phenomenon. 

In its mission to stimulate productive investment, the Biden administration has been very careful to emphasize that its version of industrial policy is “about crowding in private investment—not replacing it.” Ultimately, very few of the key provisions within the administration’s strategy will have much impact without private sector uptake. The largest line items, such as the Clean Electricity Investment, Clean Vehicle, or manufacturing Tax Credits all work solely by incentivizing private investment. An important caveat to this is the “direct pay” option in several tax credits—state governments, NGOs, and other public entities without a tax liability can then invest directly in clean electricity capacity. Some have critiqued this approach as the “Wall Street Consensus,” arguing that it limits the state’s capacity to do more than “de-risk” private investment. But given the Congressional split and the need to secure every Democratic vote, this may have been the only politically palatable option. 

China and the race for clean energy

The second structural trend that has shaped the political and economic context of Biden’s green industrial strategy is the extraordinary rise of China. In the post-Trump era, one of the few areas of bipartisan agreement is that China’s continued expansion is a direct threat to US geopolitical hegemony and economic supremacy. A direct line could be drawn from Obama’s Advanced Manufacturing initiative and tariffs on Chinese-made solar panels, through Marco Rubio’s “Made in China 2025” report and Donald Trump’s continued protectionism, to the manufacturing initiatives of Biden’s green industrial strategy.

China’s economic rise was an historic “shock” to the global economy, and particularly the manufacturing communities of the American heartland, where it had profound political and social implications. While technology also clearly played a role, the political blame has firmly been laid at China’s feet. In 2001, the year China entered the World Trade Organization, the US was responsible for producing 28 percent of global manufacturing value added—twenty years later that figure has fallen by 10 percentage points, and China now produces three in every ten dollars spent globally on manufactured goods.

Between 2001 and 2010, the US lost more than 5 million manufacturing jobs. Manufactured goods as a share of exports has also declined by about 20 percentage points since its late ‘90s peak, and the US now runs a trade deficit in advanced manufacturing. As the figure below illustrates, the US had the largest decline in manufacturing employment in the 2000s, while only Taiwan among high income countries has had faster manufacturing growth over the 2010s.

What is true broadly of manufacturing is especially true of clean energy technology supply chains. With the exception of wind turbines (where manufacturing is generally located near demand to reduce transportation costs), China dominates in almost all components of clean energy supply chain manufacturing. This creates significant vulnerabilities for the US’s decarbonization trajectory, but it also means that many of the economic benefits of the transition could accrue to China.

At the same time, China’s long standing investment in clean energy has helped speed up the global transition. Thanks to economies-of-scale afforded by China’s huge investments in clean energy manufacturing, the cost of wind, solar, and battery technologies have dropped precipitously over the last decade. All three are now cost-competitive with incumbent fossil fuel technologies, and as manufacturing advances, these costs are expected to continue to fall. Falling costs are key to understanding both the accelerating pace of the energy transition, but also the burgeoning race between manufacturing powers to capture global market share.  

The Biden administration has therefore made manufacturing a central focus of its green industrial strategy. Within CHIPS, BIL, and IRA, there’s around $120 billion for clean industry and manufacturing initiatives alone, mostly in the form of production tax credits and additional loan guarantee authority. While economists remain divided over the benefits and the efficiency of such an approach, this manufacturing-centric strategy has a political upside —it enjoys bipartisan support. Of the fifteen states receiving the most incoming investment since passage of the IRA, only California is a solidly Democratic state. According to RMI analysis, the states positioned to see the largest federal spending on a per capita basis are all solidly Republican, including Wyoming, North Dakota, West Virginia, Iowa, Louisiana, and Nebraska.

The automotive industry, in particular, has responded to these incentives with gusto. In just seven months there have been thirty-six major project announcements totaling more than $40 billion in new capital expenditures and over 30,000 new jobs. The bulk of EV supply chain projects are being developed in the so-called “battery belt” that runs from the gulf coast of Alabama to the shores of Lake Huron in Canada:

Many of the announced projects are pre-empting implementation of the largest of IRA’s clean energy manufacturing programs;, such as the Wind, Solar, and Battery Manufacturing Production Tax Credit, which the CBO expects to cost around $30 billion. Known as 45X, this Advanced Manufacturing Production Tax Credit is the clearest example of federal subsidies to directly compete with Chinese manufacturing and regain global market share.  Overall, Credit Suisse estimates that the subsidized cost of a solar module represents about 20 to 40 percent of the unsubsidized costs, and wind turbines could fall by over 50 percent. Remarkably, they predict US solar modules will be 50 percent cheaper than China modules with these tax credits.

While the Advanced Manufacturing Credit tries to catch up with China in mature technologies, the Green Hydrogen Production Tax Credit tries to establish an early mover advantage in a relatively new industry. Offering $3 per kg of green hydrogen production, the tax credit will be more than double the value of the current market price of hydrogen in the US. Officially, the CBO estimates it will offer $13 billion in tax credits, while our estimate of how much hydrogen needs to be produced by 2030 in a climate-aligned pathway increases this figure five-fold to some $61 billion.

Controversially, the IRA also includes several provisions requiring that certain inputs are produced domestically or within countries with whom the US has a free trade agreement to promote both onshoring and so-called “friend-shoring” of manufacturing capacity. Most notably, the new EV tax credits require that 80 percent of critical minerals are extracted or processed in the US or its allies, that 100 percent of batteries are manufactured or assembled in North America, and that final vehicle assembly occurs in North America. There are also bonus “adders” in the electricity tax credits for using domestic content.

These subsidies have raised opposition among US allies and trade partners. Unsurprisingly, countries with existing automotive manufacturing expertise have expressed concerns that these provisions are protectionist. Biden administration officials, on the other hand, have described these initiatives as part of a “race to the top,” whereby expanded deployment lowers the cost of critical clean energy technologies, allowing more countries to get access and share in their climate and economic benefits. 

The administration has been trying to carefully walk the line between placating its allies and angering political supporters who see any concessions to foreign counterparts as a betrayal of the legislation’s “intent.” In March, the US and Japan signed a fairly benign Critical Minerals Agreement to include mineral imports from the nation for purposes of the EV tax credit. Not long before, Biden put out a joint statement with European Commission President Ursula von der Leyen that announced the beginning of negotiations on an agreement that would allow European mineral extraction and processing to similarly count towards key IRA requirements. These are early indications of the types of “modern trade agreements” touted by Jake Sullivan, although it remains to be seen whether they can both meet legislative requirements for free trade agreement eligibility and represent the “foreign policy for the middle class” promised by this administration.

Every President since Bill Clinton has tried desperately to staunch the bleeding in the US manufacturing sector. Despite Biden’s early success in attracting clean energy technology manufacturing, it remains unlikely that manufacturing will return to its position as a fundamental driver of the US economy. The administration has tried hard to temper expectations, promising that it aims only to “de-risk” not decouple from China, and further diversify regional economies instead of returning to a nostalgic past of a bygone era. But this is at odds with a political agenda that hopes to return blue-collar workers to the Democratic tent.

Addressing inequalities

While Americans have grown more “concerned” about climate, the issue consistently falls among the bottom when listed alongside other priorities. Since climate policies inherently create winners and losers, they are intimately linked to inequities. A core feature of Biden’s industrial strategy has therefore been to directly link climate mitigation to deeply rooted political identities and existing political priorities, particularly the inequities of place, race, and class. Since climate policies inherently create winners and losers, they are intimately, indeed inextricably, linked to inequality. Roughly quarter of all spending in Biden’s green industrial strategy contains specific place, race, or class-based provisions. Not only does this approach improve the viability of climate policies, but attaches climate change to the Biden administration’s broader goal to “restore the soul of the nation” and steadily erode political polarization.

Inequities of place, or the “density divide,” increasingly defines the landscape of US politics. Where regions across the United States used to converge in income and well-being, since the early 1980s, the gulf between the richest and poorest parts of the country has widened. Changes in life expectancy vary starkly by where one lives in the US, with a remarkable 68 percent of counties seeing their life expectancy decline between 2014–2019.

The fastest wage growth has been concentrated in just the top 2 percent of metro areas nationwide. Since 2014, 96.4 percent of population growth and two-thirds of output growth in the US has been in just 53 metro areas, who account for just over half the total population. As digital technologies and innovation have become more important features of the US economy, the demand for labor has been concentrated in these big, coastal cities, leaving most smaller cities and inland regions behind. Significantly, these left-behind places overwhelmingly vote Republican. In 2020, Trump won 83 percent of US counties, but the counties Biden won represented 71 percent of economic activity.

As a result, Biden’s green industrial strategy is full of “place-based” economic policies, once considered anathema to efficient policymaking, designed both to address economic inequities and political vulnerabilities. In particular, the $8 billion hydrogen hub and $3.5 billion direct air capture hub programs in the infrastructure bill cleverly tied a technical need to demonstrate relatively immature clean technologies with a political desire to channel investments to the “people and places that have been forgotten and overlooked.” Other important place-based provisions include the designation of “energy communities” as eligibility criteria for bonus “adders” and LPO financing, and the $16.5 billion worth of “regional innovation strategies” contained in the CHIPS bill, of which about a fifth is likely to go towards climate-related technologies. 

Racial inequities add another layer to this challenge. Inequalities of race have long plagued the US, and racial ideologies and identities are key factors in the rise of political populism and dysfunction. The Biden administration focus on race-based inequities is most clearly expressed in the Justice40 initiative, which commits to direct 40 percent of climate and clean energy investments to disadvantaged communities.¹ A number of provisions also have tax credit “adders” for tribes, provide direct pay options for tribal governments, or are explicitly targeted at Native American communities, such as the $20 billion Tribal Energy Loan Guarantee Program.

Finally, the new laws also attempt to address education inequities, mostly targeting lower-educated Americans by creating jobs in industries that require fewer college degrees, such as manufacturing and construction. There are also a number of adders and eligibility conditions to meet wage and apprenticeship requirements. 

Among the many goals of Biden’s green industrial strategy, there are perhaps none loftier than this attempt to combat political populism and deeply ingrained inequalities, or as Joe Biden likes to put it, “restore the soul of America.” However, Biden is not exactly getting credit for early successes, which include channeling investments to middle America, creating historic levels of black employment, and overseeing a labor market that is disproportionately benefiting lower-income Americans. It could be too early for everyday Americans to see the impacts at the kitchen table, but solutions to core inequities likely require more than infrastructure projects and tax credits alone, and much will likely rest on whether Biden can win a second term with a mandate to move from the green economy to the “care economy.”

Conclusion

By situating Biden’s green industrial strategy within the broader political economy landscape, we can begin to understand the key tensions and tradeoffs required for the passage of this landmark legislation and its ongoing implementation. This strategy will continue to face the challenges rooted in America’s geopolitical positioning and domestic political structures. How can an effective industrial policy wielded by the strong hand of the state find success within a federal government long deprived of key resourcing and capacity-building? Can a revived American manufacturing sector “de-risk” rather than “de-couple” the relationship with China, such that gains of China’s investment into clean energies and cost-cutting effects remain unspoiled? Will the targeted provisions to reduce place-based, racial, and education gaps help confront today’s increasingly polarized political climate? The path forward not only depends on the details of the legislation’s implementation and the responses of the private investors, but, crucially, the results of November 2024. 

The views expressed in this essay are those of the author and do not represent the views of RMI.