New Shores - In the Wake of the IRA

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

Allegra Dawes: The passage of the Inflation Reduction Act in August of 2022 was met with excitement among many advocates of more aggressive climate action in the U.S. Proponents of the bill saw the wide-ranging tax incentives for building and deploying clean energy as a much-needed acceleration in the U.S. strategy on climate change. But it soon became clear that the IRA was not only a climate bill. It was a step toward a green industrial policy that would target everything from emissions reductions to domestic economic development to geopolitical competition With China. Paired with the Infrastructure Investment and Jobs Act, the Biden administration had launched a new policy experiment with ambitious domestic and international goals. The key to achieving these goals is rewiring clean energy supply chains, specifically moving the manufacturing and production of these technologies to the U.S. or to allies abroad.

This effort materializes as onshoring and friendshoring supply chains, a dramatic change from the past decades of offshoring supply chains to the lowest cost producers. Can this new strategy achieve the Biden administration's diverse climate and energy goals? Can friendshoring and onshoring build more resilient supply chains? Will these policies stimulate a broader coalition of support for climate action? In short, will this experiment in green industrial strategy actually work?

I'm Allegra Dawes, an associate fellow with the energy security and climate change team at CSIS, and this is New Shores, a podcast series about the U.S.' step into green industrial policy and how friendshoring and onshoring have become pillars of the U.S.' strategy to address climate change. Over the next five episodes, we'll hear from policymakers, academics, and industry representatives to assess the first year of the IRA and to explore how onshoring and friendshoring are rewiring the energy transition and energy security. In today's episode, we'll hear from Joseph Majkut, the Director of the Energy Security and Climate Change Program at CSIS, and Deputy Secretary at the Department of Energy, Dave Turk.

Joseph Makjut: One year and a bit after the IRA, we'd love to hear your key takeaways on the successes and challenges of implementing industrial policy for clean energy. What's the DOE watching that's working really well and where do you think continued effort is necessary given the signals you've seen so far?

Dave Turk: I think it's important to focus on the IRA, but also to focus on the bipartisan infrastructure legislation and just as you said, put it all under an industrial strategy kind of lens and focus. That's the way we're thinking about it, is we're implementing these historic pieces of legislation, and all the other tools that we can bring to the table. I firmly believe history will look back upon this moment as a watershed, and we're already starting to see some real signs of that, even just one year in on the IRA.

So since that one year, $110 billion in private sector clean energy manufacturing investments across the country, and having had a chance to visit different battery manufacturing facilities or other huge employers, there's about 170,000 new jobs in the private sector from that kind of investment. I think that's just the tip of the iceberg. It's just one year in. Not all the tax incentives have been fully clarified. We're working with Treasury on that going forward, so I think we're going to see a lot more of that and we're going to see more and more communities on the manufacturing side, but a lot of consumers too with the rebates and the tax incentives. The consumers really benefit from it. So, I think perception is lagging reality of how big of an impact this has, but I think perception will catch up with reality.

Joseph Makjut: You mentioned the Bipartisan Infrastructure Law and the way these two things are working together. Would you be able to offer an example or a brief explanation of how those two mechanisms are different for our listeners who might not know much about this? 

Dave Turk: Yeah, Thanks, Joseph. It is useful to think of all these tools coming together. So let me give you one real concrete example and that's on hydrogen. We, in our country, just like other countries around the world, are trying to take advantage of clean hydrogen, especially as a way to decarbonize harder to decarbonize sectors, different industrial sectors, heavy duty transportation, et cetera. So within the IRA, there's game-changing tax incentives. One of those is on clean hydrogen production, up to $3 per kilogram for the cleanest kind of hydrogen production.

That is a huge tax incentive, and in and of itself is going to be hugely helpful to spur this clean hydrogen economy. But when you add that on with the funding, the grant funding and the bipartisan infrastructure legislation, which provided $8 billion for hydrogen hubs to build out hydrogen hubs across the country, take advantage of existing infrastructure, do it where the costs are going to be lower, you put the tax incentives, you put the grant program together, you try to think of them as a unified whole, and having a coherent hydrogen strategy, we just came out for the first time ever with a U.S. National Hydrogen Strategy about a month or two ago. So, we're trying to figure out how all these tools fit together and we're organizing ourselves accordingly. One of our joint strategy teams internally at the Department of Energy is on hydrogen, so that we do think of all these tools together and it all adds up to spurring, in this instance, a clean hydrogen economy in our country.

Joseph Makjut: That's really interesting. Hydrogen's also a great example because one of the big questions we're trying to understand is does the clean hydrogen industry have a big international footprint? Are we going to see markets there like we see in other places? This also raises one of the tensions or one of the challenges of this kind of industrial policy, which is how do we interact with other countries? How does a focus on securing supply chains help our allies through decarbonization? Do you have thoughts in that direction?

Dave Turk: Yeah, I think there's huge opportunities here. There's no doubt there's some issues and challenges, but huge opportunities, and maybe two of those that I would mention. First of all, we're going to need not only the critical minerals, I know critical minerals get an awful lot of attention, but there's an awful lot of steps after the mining takes place, the process to move up that value chain. We're going to need these clean energy economy supply chains that are just enormous, and they're going to be even bigger and bigger as we move to more EVs and more solar PV, and more onshore wind and offshore wind, more batteries, you name it.

That is a huge opportunity for countries around the world. I mentioned all the jobs in the U.S. There's a lot of jobs and economic opportunity for countries around the world, and I've had a lot of good meetings with different ministers, other key leaders, public and private sector, whether it's the Philippines or Indonesia where I was just a few weeks ago, or in Latin America or in Africa, for countries not just to take advantage of the resources from a mining perspective, but to move up that value chain in a way that's very complimentary in terms of what we're looking for in the U.S. from diverse supply chains, from partners who share our values. So I think there's a huge, huge economic opportunity and a huge opportunity to have more resilient supply chains across the world and a lot of economic opportunities for all of us in that space.

The second part, which I think is also beneficial for everybody, is the more we do things at scale, which we're certainly doing now, especially with the Inflation Reduction Act and the bipartisan infrastructure legislation, that drives down costs. So as we build our offshore wind energy economy here in the U.S. just like Europe has done, that's going to drive down costs not only for us, but those learnings benefit other countries as well. Similarly on EV, similarly on PV, similarly on all these clean energy supply chains. So I think the more we all lean in, the more we all get our act together, the cheaper it's going to be going forward and there's a momentum that carries it forward. So I think that's a really exciting place, including with our international partners.

Joseph Makjut: I totally get the idea that we want to recreate the massive cost declines we saw with wind, solar, and now batteries, because that's such a big part of making the energy transition faster and better, but a lot of the story for wind and solar was manufacturing innovation and low costs of Chinese supply chains. Now, we find ourselves a little bit behind on certain technologies, EV batteries being the highlight example. How do you think about striking the right balance between cooperation on technology and integrating Chinese technology or knowledge into U.S. domestic supply chains?

Dave Turk: So I think this is where Bidenomics and industrial strategy actually kick in, and I view Bidenomics as just another word for industrial strategy, and it's all to me a very common sense, pragmatic way to actually be smart about what we're doing. So, you mentioned solar PV. We in this country, including from the Department of Energy, our National Renewable Energy Lab and some of our other national labs worked on solar PV for a long time, and drove the costs down significantly in that laboratory work, but we had no industrial strategy in terms of our domestic manufacturing for those PVs. So a lot of that, almost all of that manufacturing capability moved to China, and China was very aggressive in terms of some of the things that they did in order to capture that market. There's no reason we have to just sit by when those kinds of things happen.

We can have the kinds of policies, kinds of tools in the tool belt like we have now with the Inflation Reduction Act, with the bipartisan infrastructure legislation, to make sure that we're capturing the economic opportunities to jobs in particular from those sectors that can still drive down costs, and we get economies of scale that are useful not only in terms of what happens in the U.S., but what happens in other countries as well. There's a way to do this I think that's fair, that's equitable, and that tries to have the benefits of these cost reductions from going to scale in our country or other countries as well. So it's a common sense kind of thoughtful, proactive kind of strategy and approach along those lines. So, I think we're finally competing. I feel really good about that, feel good about this administration for really stepping up and taking these issues head on.

Joseph Makjut: There's a very positive story to be told here. We've got the BIL, the IRA, bunch of significant investment in projects, either manufacturing facilities, clean energy supply chains. What's your assessment of how much we've seen and how much more we need? The Biden administration has ambitious climate goals. We want to make clean energy supply chains secure and reliable. What's your one to two-year outlook of where you want to see this go, where you want to see these trends go?

Dave Turk: So I think it's first of all important to realize that we have momentum, and you want to put it in competition terms? We're winning, and we're seeing the kind of private investment, and again, the numbers are impressive, the hundreds of billions of dollars, but it's even more impressive to visit some of these plants, which I've had a chance to do, some of these new manufacturing facilities, and sit down with the mayors and local community leaders and the union members, and others who are going to benefit in such a tangible way again, not only from a decarbonization accelerant, but from real jobs and affordability and communities having a new wind turbine facility or having a new battery manufacturing facility. So, the first thing I would hope over the next few years is let's recognize that we're winning. Let's recognize that we're having momentum here and let's not put a brake on it.

Let's not repeal policies. Let's not repeal some of the tax incentives or other kinds of things. We're winning, we're succeeding, let's get the benefits from that. Momentum is a very powerful thing. It takes a lot to get momentum, but now that we have momentum, let's really ride that. Let's really utilize that going forward along those lines. Second piece is we need to make sure that everyone who can benefit from the tax incentives and the rebates and all the other offerings in these historic legislation from the Biden administration's Invest in America agenda can benefit from that. So companies with flotillas of lobbyists who are looking at the tax code, I'm not as concerned about them. They will look and find out ways to make money in the private market with these tax incentives, but we do need to continue spreading the word to consumers, whether it's the tax incentives on EVs or heat pumps or other kinds of energy efficient appliances in particular that's going to be coming here soon to consumers as rebates.

Consumers get rebates, very generous rebates. It's federal funding that it's done through the states, some states are ahead of the curve, and will have that coming out already this year, many others next year. That's rebates for everything from full house retrofits, and low-income folks get an even greater percentage in terms of the federal government paying for that. So, we need to spread the word and make sure everyone who can take advantage of these phenomenal opportunities is able to, so that seems like a really key focus area this next certainly six months to a year.

Joseph Makjut: Can you give us a little more details on the relationship between the clean energy supply chains and having them friendshored and onshored, and our evolving understanding of energy security as we go through the energy transition?

Dave Turk: Yeah, I think we've seen certainly during COVID with all the disruptions to supply chains just how vulnerable you are not only as a company, but as the whole industry or society more broadly when supply chains get disrupted, and when supply chains are not diverse, and you have a number of sources of the key inputs that need to go into various supply chains as well. So, I hope that that was a wake-up call in and of itself. We need to have a diversity of supply chains and we need to have some resilience in the system as well. That's the kind of thing that we're working on in any number of ways.

One of the new offices we've created at the Department of Energy is the Manufacturing and Energy Supply Chain Office as a group, not only with some analytical rigor, so you can actually do the detailed analysis looking at what's needed in the supply chain and that supply chain and where it's currently mined and where it's currently processed, and doing the analytical rigor piece, but then that informs how we use our policy tools. We're also very much looking at this, just as you said, Joseph, not only in terms of the U.S. domestic manufacturing, but how does this work with friendshoring? How do we think about working with allies around the world? As I mentioned earlier, having traveled extensively and meeting with a variety of other key leaders from around the world, key ministers, and private sector CEOs, there's an appetite to work with the U.S. in a transparent and open and a free supply chain that's mutually beneficial. So, we just need to execute and take advantage of that opportunity.

Joseph Makjut: Let me ask you one more long-term question because at some point, markets arrange around efficiency, around low cost. It's an open question, where's the best place to have a solar facility or an EV battery manufacturing facility or a minerals processing facility. So I'd love your thoughts, especially as you're looking and meeting with folks abroad, at what point does onshoring give way to efficiency or how do you think about the long-term development of a larger and more resilient supply chain for clean energy? Do we need to worry about that, or we're just going to let it happen?

Dave Turk: So, I guess a couple answers for you. One, the size and scale and pace of what we need to have the clean energy economy be achieved is so immense that there's a lot of economic opportunity to the upside for everyone, certainly U.S. workers, U.S. companies, U.S. manufacturing opportunities, but we're not going to be able to mine everything, process everything, produce everything. So I think there are a lot of mutually beneficial opportunities around the world including and maybe especially in developing countries if we work with them in true partnership mode, which I think the U.S. is working with allies very much able to do, and that the motive is certainly there as well. Secondly, I think we need to be intentional here.

We've got agency, and I think that's what Bidenomics and investing in American industrial strategy is about, is through democratically elected governments working with other democratically elected governments, we can have a conscious strategy to have more resilient supply chains, to decarbonize those supply chains. The market and private sector actors are so potent, but they need guardrails, they need rules, they need internalizing externalities. All of these kinds of things can be very intentional, and that's where both the challenge is, but there's a huge opportunity space if we get right and do this in a smart, efficient kind of manner. I think that's going to be a huge, huge task, but an essential task ahead.

Allegra Dawes: The first year of the IRA has seen significant investment in the U.S. clean energy sector. Deputy Secretary Turk and Joseph touched on many of the trends and questions this podcast will explore moving forward. After the IRA's successful first year, how will green industrial strategy play out in the long run? How effective will this policy be in bolstering energy security by diversifying supply chains away from China? We'll dive into these questions in the coming episodes. Next time on New Shores, we'll investigate the political origins for onshoring and friendshoring to see how theory is being implemented in reality.