New Shores - An Experiment in Green Industrial Policy

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This transcript is from a CSIS podcast published on September 28, 2023. Listen to the podcast here.

President Biden: For too long we fail to use the most important word when it comes to meeting the climate crisis, jobs. When I think climate change, I think jobs.

Allegra Dawes: That's President Biden explaining his vision for America's energy transition. A transition that aims to both address climate change and revitalize American industry. These two goals addressing climate change while stimulating domestic economic growth are united in a green industrial policy that prioritizes domestic production and manufacturing.

And the cornerstone of this policy is the Inflation Reduction Act, or the IRA, passed on August 16th, 2022, roughly one year ago.

News Clips: The Inflation Reduction Act.

News Clips: The Inflation Reduction Act.

News Clips: The controversial legislation.

News Clips: Tax credits for electric vehicles.

News Clips: Raised by Democrats and criticized by Republicans.

News Clips: Have incentives for consumers to go green.

Allegra Dawes: For businesses to fulfill the requirements of the IRA. Onshoring or friendshoring supply chains is the most effective strategy. The recent push towards bringing production back home or placing supply chains with allies also emerged from global shocks, the pandemic, Russia's war in Ukraine. These events eroded policymakers and companies belief in the security and resilience of global supply chains.

Thus begins America's new experiment to stimulate investment and broaden political support for green technology. And like all experiments, this one is not guaranteed to succeed. I'm Allegra Dawes, an associate fellow with the Energy Security and Climate Change team at CSIS. And this is New Shores, a series about America's experiment in green industrial policy.

The passage of the IRA launched a new era of industrial policy and as a result, re-popularized on and friendshoring. But why has onshoring and friendshoring green supply chains become the driving policy? And what will this new industrial policy mean for the energy transition? Can the U.S. counter rivals like China while building inclusive supply chains with allies? During this episode, we'll try to answer these questions to see if this new experiment in climate and industry will work.

To understand this new green industrial policy, we first need to understand what onshoring and friendshoring are. Onshoring supply chains means moving manufacturing and production domestically. Jane Flegel, a former White House official and architect of this new industrial policy, describes the strategy of onshoring this way.

Jane Flegal: The Biden Administration is really focused on raising the productive capacity of the U.S. economy in specific sectors in a way that still creates space for individual firms to compete in win or lose while promoting greater inclusion, a higher standard of living and positive climate outcomes.

Allegra Dawes: Friendshoring is a related concept. It is an effort to move supply chains to friendly countries. For David Victor, a professor of innovation and public policy at the School of Global Policy and Strategy at UC San Diego. This means...

David Victor: Friendly allies and exporters from countries with whom we have good trading relationships that they could supply to the American market.

Allegra Dawes: And furthermore, why they've reemerged as popular strategies. The IRA is one of the main drivers of the recent onshoring and friendshoring efforts for clean energy supply chains. Onshoring specifically helps to meet domestic goals. Friendshoring works more on the foreign policy side, which we'll get to later in this episode. The IRA is in part a made in America bill. The bill incentivizes domestic manufacturing and requires domestic content for clean energy projects to qualify for tax credits.

The tax credits for clean energy projects, investment and advanced manufacturing all included bonuses for meeting domestic content minimums. For EVs, domestic sourcing or sourcing from free trade agreement partners is required to receive bonuses. Onshoring supply chains has emerged in part because of the IRA's domestic content provisions. But why did the IRA include these provisions?

David Victor explains that these provisions reflect the political challenges of passing climate legislation in the U.S.

David Victor: Well, I think one of the most important things about the on shoring/friendshoring provisions, especially in the Inflation Reduction Act, is that they reflect American politics. You would not have the votes to get that done without a big pulse of that money confidently going to American investments, American firms and so on.

Those politics are reflective of the country more broadly and they're reflective of the fact that you just barely got this through the Senate. And so I think we have to recognize that political reality.

Allegra Dawes: Gaining political support for the IRA meant that the bill needed to include more than just climate. It needed investment and domestic economic development, which took the form of onshoring. Further, onshoring supply chains is also a strategy for stimulating more ambitious climate action down the road. So the policy was perfect for building a bipartisan coalition and for the goal of creating broader political support for general climate policies. Jane Flegel explains this.

Jane Flegal: It kind of gets back to theory of change on a climate action. So one theory of how we get more ambitious climate action at a more rapid rate is that you adopt a policy and political strategy focused on growing the concentrated interests that stand to benefit from more aggressive climate policy over time.

One strategy for doing that is getting regions and states that have so far been somewhat oppositional to climate action, both for ideological reasons but also for real economic reasons having to do with the composition of their local economies and their fossil fuel dependence have opposed, stood in the way of climate action. So one sub-strategy for addressing that is drive investments in those places that show tangible benefits to communities from climate action. Build new manufacturing industries for clean energy technologies there.

Allegra Dawes: This is one of the hypotheses being tested in the U.S.' green industrial policy experiment. Can tying climate to good jobs, generate broader support for climate action? Put another way, the IRA and the Biden Administration's approach to climate policy is aimed at reinvesting in U.S. communities that have suffered with the loss of manufacturing capacity to China. Jane explains this strategy further.

Jane Flegal: A lot of our productive capacity shifted to China. By 2011 or so, the U.S. had lost more than 2.4 million jobs. And importantly, I think those jobs were often quite concentrated in particular geographies. And there's evidence that the economic effects of that shift contributed to some of the growing political and ideological polarization that we're seeing now.

And so there is a part of this reinvesting in places that have been left behind by the sort of laissez-faire approach to these things in the last several decades that is explicitly about building capacity in those places.

Allegra Dawes: To recap, onshoring arose from the political compromises in the IRA and the strategy to broaden support for future climate policies. Increasing political support for climate policies is only one goal of onshoring. The policy could also turn the U.S. into a major player in green technology production.

Jane Flegal: The U.S. really has an opportunity to establish IP, build the technologies, lead the technologies globally. That is a significant economic opportunity for the United States. I will admit that it is slightly more complicated for the technologies where there are already quite significant supply chains globally and the U.S. is sort of fighting to claw them back.

Allegra Dawes: Clean energy supply chains depend on different inputs than traditional oil and gas. The U.S. will need more minerals like lithium and cobalt and nickel, more processing for those minerals and more advanced manufacturing for battery cells, electrolyzers and solar panels. Today, these supply chains are dominated by China with upwards of 90% of global processing capacity in some segments. How much of these supply chains the U.S. can claw back remains to be seen.

David Victor believes that the side effects of the IRA could be a larger global role for the U.S. in clean energy.

David Victor: I think the politics are very much focused on the U.S. I think the possible side effects of this could be that global side effect. One of the great opportunities is a bigger and a stronger American clean energy production system, gives us an export incentive that's similar to the Chinese export incentive, that's similar to some of the European export incentives, for example, around electrolyzers.

Allegra Dawes: Beyond creating the potential for export capacity, David also believes that the U.S. needs to invest in green tech and climate mitigation to build credibility and cooperate internationally on climate.

David Victor: The United States has a lot to offer right now on the clean energy front and advanced technology. You have to have something to offer, but you also have to be able to make the offers credible. Astrid Dannenberg, Marcel Lumkowsky, Emily Carlton and I have a paper out in Nature Climate Change last fall, which assesses the credibility of countries pledges around climate change and the American credibility is low.

It's very clear from that work. And we have a problem in convincing other countries to go along with our schemes to create international cooperation on climate.

Allegra Dawes: International cooperation on climate is critical to addressing emissions. The U.S. cannot undertake the energy transition alone no matter how attractive tax incentives are for investment. Building coalitions of friends to address climate and de-risk supply chains is one of the most significant challenges and opportunities in this industrial policy experiment.

Joanna Lewis, a professor of energy and environment at Georgetown sees the IRA as a potential diplomatic tool.

Joanna Lewis: This should really, I think, be part of our broader sort of diplomacy strategy on climate change. We talk about climate finance. We talk about loss and damage. We don't talk a lot about the role of the United States and building technical capacity in other developing countries so that they can play a role in a constructive global supply chain for clean energy and they can directly benefit from the jobs and local economic benefits of the low carbon transition.

Allegra Dawes: Building a coalition of friends implies that there are some countries that are not friends. Countries that the U.S. sees as a risk to energy security or to technological leadership. I'm talking of course about China. I think it's fair to say that the U.S.-China relationship is strained.

News Clips: The two biggest global economies are also the two biggest competitors. Deeply baked into that competition are security concerns.

News Clips: The rising tensions between the world's two most powerful countries, the United States and China, after several military close calls.

News Clips: The U.S. essentially as China sees it is a bad player on the international state.

News Clips: China represents the most consequential geopolitical challenge that we face today.

Allegra Dawes: This tension has resulted in a new assessment of energy security. One that sees the U.S.' reliance and the world's reliance on China for many of the materials and components required for the energy transition as a risk to energy security. We've talked about the domestic view of the IRA, but there is another take on the bill.

Rather than a policy made for domestic economic development, some view the IRA as an energy security policy. Friendshoring provisions are in part an attempt to secure energy supply chains and reduce reliance on China. Jane explains why friendshoring entered the scene.

Jane Flegal: In the wake of the multiple crises, the Biden Administration was confronted with after the election, the COVID crisis being one of them. And then not too long after the Russian War in Ukraine. I think one of the things that revealed was sort of the potential risks of a frail supply chain or a supply chain that is maybe optimized for efficiency, but insufficiently resilient.

Allegra Dawes: The COVID pandemic shed light on the weaknesses of current supply chains. And Russia's war on Ukraine forced countries like the U.S. to reckon with their economic entanglement with countries that are geopolitical rivals. Suddenly relying on China for key materials, components, and technologies for green energy seemed less secure and less resilient to economic or political shocks.

Both crises played a role in the push toward friendshoring, an effort to de-risk supply chains by moving them to allies and friendly countries. China's dominance of these supply chains makes this effort particularly important. Joanna explains.

Joanna Lewis: Just to give an example, in the solar industry, China controls more than 70% of global production in every supply chain segment, and it's even much higher in some areas. Polysilicon production, more than 80% of production and more than 85% of cell manufacturing, over 70% of module assembly, et cetera. We see in wind is a little different because it's harder to ship wind turbine components than solar.

Allegra Dawes: And how has China managed to dominate these supply chains? Industrial policy. Joanna explains how China has strategically used industrial policy.

Joanna Lewis: Well, China for the last several decades has really launched a broad-based industrial strategy to grow out its own clean energy technology sectors. And it's been very successful at doing this. Just over the time I've been working in China, two plus decades, you've seen China go from having almost no solar energy deployment or manufacturing, wind energy deployment manufacturing to being now the largest manufacturer and deployer in the world of these key technologies in the clean energy transition.

Allegra Dawes: China has pursued these industries for several different goals.

Joanna Lewis: So China's been doing this for a variety of reasons, climate, air pollution, but also I think this was about broader international competitiveness and understanding these were going to be key technologies both for China to deploy domestically and then for other countries as well.

Allegra Dawes: The U.S. and other countries are wary of China's dominance. Relying on one supplier for key materials is not a resilient strategy. However, diversifying supply chains away from China is a massive challenge. One that may run counter to the necessary speed and scale of the energy transition, according to David.

David Victor: I don't see how we're going to scale quickly the technologies of the clean energy revolution without a big role for Chinese supplies. They dominate lithium and they dominate a lot of other critical materials. They dominate lots of technologies. Solar production, we've talked about. Battery's a little more diversified, big role for Korean suppliers, but the Chinese are huge as well. Large significant Japanese production.

I mean this is trade and this is the gains from trade. And so this is a little bit like talking about how we're going to do all this while setting aside the laws of gravity. The Chinese economy is giant. It's heavily enmeshed in global trade and that's reality.

Allegra Dawes: Diversifying away from China will also require friends. The U.S. cannot do it alone.

Joanna Lewis: What can the United States really do without China? And I think it's really quite challenging because if you are going to try to diversify away from China, and we've done some modeling to sort of show a variety of scenarios for what this could look like. Do we sort of do a partial diversification or a full diversification? And then where would this sort of missing technology come from?

And of course, this is against a backdrop of the fact that our demand is going to increase and not just our demand. Every country is going to be scaling up their deployment of renewable energy. So we sort of do an assessment of, "Okay, well how much wind, solar, batteries, et cetera, do you need to meet ambitious global climate goal, like a 1.5 degree stabilization goal?"

And then if you were getting this from countries other than China, where could this come from? The problem is that there's sort of limited capacity in a lot of countries to scale up production, manufacturing, refining, and a lot of what we need. There's constraints on just any single country's ability to meet the gap that would be caused by essentially not importing from China.

Allegra Dawes: Trying to diversify supply chains away from China or at its extreme, trying to decouple clean energy supply from China could also be at odds with the goals of supply chain resilience and more ambitious climate action.

David Victor: Some companies turn themselves into pretzels to find a way to not depend at all on Chinese suppliers. That's going to drive up costs. That's going to make supply chains more brittle. It's going to make them much more opaque. We're going to be focused on all kinds of questions, country of origin issues that are going to be hard to manage and are going to turn the supply chains into pretzels as well. So I think this is easily taken too far.

Allegra Dawes: Reducing reliance on China has become a cornerstone of U.S. energy security, but it comes with many short-term challenges, including potentially countering domestic efforts seen in the IRA. Moving forward, acknowledging these trade-offs is important, both for evaluating the IRA and designing the next generation of climate policy. But the tension between domestic and international strategy isn't the only issue facing the IRA and the energy transition.

Despite the excitement surrounding the potential of the IRA, it could bring new challenges in both the short and long-term. For one thing, the IRA is expensive. Green industrial policy has many goals. Should subsidies target innovation? Should they target deployment? Should they target specific sectors to counter China? Right now, the answer to all these questions is yes, and that's not sustainable. Here's David.

David Victor: It's not sustainable politically or fiscally in my view. It'll have to be revised. And the concern that I have is that the bulk of the funding is still going more or less into technologies that we already know how to do somewhere. Subsidies, for example, around solar and wind are longer in duration than the subsidies for other technologies. The role of government should be the opposite.

We should not be subsidizing things that we know how to do unless there's some other reason that government should be there, and we should be subsidizing things in smart ways with exits on the subsidies and some of the things we don't know how to do.

Allegra Dawes: The subsidy cost is not the only question of expense. The affordability of these clean energy technologies is also important. Here's Joanna.

Joanna Lewis: What is this going to do to the cost of wind, solar, battery, EV, other crucial fundamental technologies to the low carbon transition? How is that going to affect the availability and affordability of these technologies across the developing world? And then how will that affect our ability to achieve global climate goals? Because ultimately, we need all countries to be deploying clean energy technology as quickly as possible.

If climate change is our priority, The U.S. national security priority is avoiding some of the worst impacts of climate change, which it is a stated strategy. Then we need a global consideration of what we're doing domestically to meet our own climate goals is how that is affecting other country's ability to meet their climate goals.

Allegra Dawes: One of the benefits of free trade and global supply chains is lower costs. For example, the solar supply chain saw significant cost declines in part because of global research development, manufacturing, and deployment. If costs increase, reaching the scale of deployment at the required speed to counter climate change may be impossible.

The IRA is not the end of climate policy. It likely will not be enough on its own to reach a net-zero worlds. So what comes next?

Jane Flegal: I mean, I think everyone is pretty clear that IRA is mostly carrots and not so many sticks, and I'm not sure we can "carrot" our way to net-zero or net negative. That feels like probably not plausible. So there's a whole bunch of things in the stick universe. There's a whole bunch of things in the trade universe that I think need to be next.

Allegra Dawes: What comes after the IRA and the policy space is unclear. Getting to net-zero will likely require more than the IRA. Assessing the success of the IRA in year one and in the longer term might depend on the goal you have for the effort. Moving clean energy supply chains is seen as critical for building political support for climate action, bringing good jobs and manufacturing back to the U.S. and countering China's growing domination of clean energy supply chains.

These are ambitious goals. Linking climate and jobs might be the first step to achieving them. Next time on New Shores, we dive into the battery supply chain to see how friendshoring and onshoring policies are being put into action.