Game-changing and costly: The IRA one year later

Washington — In the year since the Inflation Reduction Act was enacted, the clean energy law has supercharged electric vehicle production and transformed the global auto landscape to reroute investment to the United States.

Around 210 projects worth $86.3 billion in private investment have been announced since the IRA was signed a year ago this week, according to E2, a clean energy business group. More than half of those — 130 projects worth $68.5 billion — are in the battery and EV sector.

Companies plan to invest $860 billion globally in EV and battery projects by 2030, with nearly a quarter ($210 billion) expected to be in the United States, according to an analysis by Atlas Public Policy, prompted primarily by the IRA.

“Very simply, it’s made U.S. manufacturing a major hub again,” said Michelle Krebs, an executive analyst at Cox Automotive. “It hasn’t been that in a long time.”

The Inflation Reduction Act — passed through Congress by Democrats without Republican support — created or expanded myriad incentives to promote domestic clean energy and EV production. It included a point-of-sale discount for consumers buying EVs; new tax credits for companies producing clean energy components, including EV batteries and critical minerals; additional funding for EV charging and more.

Experts say it has rapidly changed the game for where automakers are looking to invest, especially among those with major footprints in other regions.

"You can see very, very quickly how developers who didn't have a (production or expansion) option in the U.S. are now creating that option almost overnight," said Ricardo Morales, associate consulting director at Benchmark Mineral Intelligence. "Because that's what the market wants to see — they want everyone trying to access the benefits."

They have been so popular among automakers that it has expanded the estimated cost of the legislation well beyond the nonpartisan Congressional Budget Office's estimate when lawmakers were considering the proposal.

The climate and clean energy provisions of the IRA were initially estimated to be around $391 billion between 2022 and 2031. New analyses have said it's likely to be much higher: The University of Pennsylvania's Wharton Budget Model says those subsidies will be around $1.04 trillion, and analysts at Goldman Sachs say it is likely to be closer to $1.2 trillion, "the most supportive regulatory environment in clean tech history."

The changing estimates are driven by the advanced manufacturing and clean vehicle provisions of the law. The advanced manufacturing production credit is likely to have five times the demand that Congress estimated, according to an analysis by Morales. Demand for the consumer-facing EV tax credits could be nearly 30 times higher than Congressional estimates, if U.S. EV adoption goals are met by 2031.

Overall, the IRA provisions related only to the EV battery value chain could cost nearly twice as much as the total estimated cost of the IRA when it was approved, Morales found.

Republicans opposed the IRA's clean energy provisions, characterizing them as a Democratic spending spree that would hurt the country's energy reliability and benefit wealthy Americans. They sought to repeal major provisions during debt ceiling negotiations earlier this year, and the updated estimates on expected cost have been met with additional frustration: Ways and Means Committee Chair Rep. Jason Smith, R-Missouri, said the administration "is sacrificing America’s economic and national security for the sake of writing as many green corporate welfare checks as quickly as possible."

The administration has welcomed the analyses and argues the legislation still will cut the deficit over time. John Podesta, who is leading the White House's implementation of clean energy policy, said the outsized demand for clean energy manufacturing subsidies "has been really phenomenal."

“That is a good thing, because we need to go fast in this decade in order to have a chance of stabilizing the atmosphere,” said Podesta. “Those investments, those jobs that are being created … is a very good thing.”

Global reactions

The IRA's incentives, designed to push production to the United States, initially inflamed tensions with allies like Canada and the European Union, which argued the legislation was discriminatory and would substantially impact trade.

The Biden administration has since worked to soothe those concerns by including them in law, such as an agreement with Japan on battery minerals that many other countries are now seeking to emulate. Jennifer Safavian, CEO of Autos Drive America, said in a statement on the IRA that more such agreements would "allow automakers to diversify and secure supply chains while fostering widespread consumer adoption of clean vehicles."

But it also has prompted some of those allies to consider clean energy subsidy packages of their own. The European Union has proposed its own $270 billion incentive package and Canada has put forward an $80 billion plan. Some experts have argued a subsidy war would hurt international trade and make a green energy transition harder in developing countries.

The political balancing act reflects the complications of the United States' shifting approach to trade relations. Beginning under former President Donald Trump and continuing under the Biden administration, the U.S. federal government has moved from seeking economic progress primarily through international ties to a strategy centered more on self-reliance.

"We used to talk about the auto industry in terms of globalization and mutual advantage among trading partners. That conversation is kind of over. Today, it’s much more about independence and less about interdependence," said John Bozzella, CEO of the Alliance for Automotive Innovation, in a LinkedIn post about the IRA Wednesday.

That raises a number of questions, he argued: "How does retaliation by other industrial economies, the continued retreat of international trade and investment, and geopolitics — not to mention domestic politics — play out? Could we see an inflationary impact from redundant supply chains and intense global competition for raw materials? And what happens if there’s a shift away from the IRA or other policies in the future?"

Southern (and Republican) beneficiaries

Investments over the last year have underscored the industry’s shift to its new geographic homes. Traditional manufacturing strongholds like Michigan and Ohio shared the top of the investment list with southern states like Georgia, South and North Carolina, Tennessee and Texas, according to E2.

Foreign automakers and Detroit companies setting up joint ventures to build batteries are drawn to the southeast for a number of reasons, said Sam Fiorani, an industry analyst at AutoForecast Solutions, including the lower likelihood of having a unionized workforce and higher labor costs.

"Moving to Tennessee, Kentucky, North Carolina, South Carolina — they all make sense to take advantage of the infrastructure that's already there, the customers who are already there, and the tech belt that has been built up," Fiorani said.

Michigan has sought to counter that pull with generous state incentives and the promise of being a future mobility hub. Michigan has received the fourth-highest amount of private investment since the IRA passed after Georgia and the Carolinas and tied South Carolina for the second-highest number of announced projects (after Georgia.)

The Southward shift also has made Republican areas some of the major beneficiaries of the clean energy boom. Of the ten states that received the most private investment in clean energy in the last year, seven have Republican governors and six voted for former President Donald Trump in the 2020 election. More than 87% of investments have gone to congressional districts represented by a Republican, according to E2.

While the IRA has prompted massive changes, some uncertainty remains: It is unclear how many EV models will be eligible for subsidies as increasingly stringent requirements for EV tax credits go into effect, automakers will be competing for a limited supply of critical minerals needed to build batteries, and sales will depend on consumers' readiness to adopt the new technology.

More EVs were sold in the United States in the second quarter of this year than any other, per a Cox analysis, though the total EV share of the market is just 7.2% (up from 5.7% a year ago.)

Consumer demand hasn't yet caught up with industry output, Krebs of Cox Automotive said: "Expansion of EV charging infrastructure will be helpful, but how many people will actually using the EV tax credit is hard to know."

rbeggin@detroitnews.com

Twitter: @rbeggin