Climate crisis: US passes transformative Inflation Reduction Act

Sophie CameronTuesday 11 October 2022

In mid-August US President Joe Biden signed the Inflation Reduction Act (the Act) into law in what the White House terms the country’s ‘most aggressive’ attempt at tackling the climate crisis. The Act aims to reduce carbon emissions by at least 40 per cent by 2030 and transform the US’ climate and environment-related policies, including by expanding clean and renewable energy production.

According to Roger Martella, Education Officer for the IBA Section on Energy, Environment, Natural Resources and Infrastructure Law and Chief Sustainability Officer at General Electric, the Act has three notable elements. Firstly, it offers an incentives-based approach; secondly, it’s technology-neutral; and finally it brings certainty, due to the long-term nature of the goals.

‘These three elements are attractive when discussing climate action on a global scale’, explains Martella. ‘Many emerging economies want to contribute to decarbonisation while also building resiliency in their systems. The three elements of the Act provide a strong model for realising these dual goals in other nations. I anticipate other nations will look to the Act as a potential model for their own approaches, and that this will be a strong subject of discussion at COP27 [the 27th Conference of the Parties of the UNFCCC due to be held in November 2022].’

Michael Showalter, a partner at ArentFox Schiff in the US, highlights the novel approach taken to environmental regulation with this new law. ‘The Inflation Reduction Act in large part drives greenhouse gas focused changes by subsidising private party behaviour’, he says. ‘This approach has been criticised for deviating from historic regulatory practice in the US, in which environmental regulators use regulations built out from major environmental statutes – in this space, generally the Clean Air Act – to shape behaviour through compelling or proscribing actions.’

The combination of subsidies provided by the Act, alongside similar state-level activities –such as California’s new electric vehicles incentives programme and New York’s decision to mandate zero-emissions vehicles by 2035 – and decisions by private actors, are seen by some commentators as potentially powerful tools to address climate issues in the US. The Act itself is a key cog in the country’s acceleration towards a clean energy economy.

I anticipate other nations will look to the Act as a potential model for their own approaches, and that this will be a strong subject of discussion at COP27

Roger Martella
Education Officer, IBA Section on Energy, Environment, Natural Resources and Infrastructure Law

However, the new law has raised concerns outside the US, particularly from the country’s trading partners, due to its focus on incentivising the scaling up of domestic manufacturing.

The Act includes a ‘clean vehicle credit’ of up to $7,500 for purchasers of electric vehicles that are assembled in North America and that meet certain requirements for battery components and critical minerals. South Korea, in particular, has voiced concern that the Act’s onus on domestic manufacturing of electric vehicles over goods manufactured elsewhere could harm relations between the two countries, although both countries are in talks to resolve the issues.

Matthew Kronby, Co-Chair of the IBA International Trade and Customs Law Committee and a partner at Canadian law firm Borden Ladner Gervais, explains that, previously, credits to purchasers of electric vehicles were offered in the US regardless of where the vehicles were made. However, under the Act, the eligibility for such credits will be determined according to the jurisdiction in which the electric vehicles and their batteries were manufactured.

To be eligible for half of the credit, at least 50 per cent of the value of the battery’s components must be manufactured or assembled in North America, beginning in 2023. This percentage grows by increments, to 100 per cent of the value by 2029. To be eligible for the other half of the credit, at least 40 per cent of the battery’s critical minerals must have been extracted in the US or a US free trade agreement partner, or else recycled in North America. This percentage also grows incrementally, to 80 per cent by 2027. The vehicles themselves must be assembled in North America.

Because the new rules require assembly in North America and content from a limited number of countries, some commentators suggest that they may be a repudiation of the General Agreement on Tariffs and Trade’s (GATT) most-favoured-nation (MFN) principle and of the World Trade Organization (WTO) Agreement, which prohibits a WTO member from favouring a product of any country over products originating from any other WTO member.

‘The clean vehicle credit requirements in the Act do seem to be vulnerable to a WTO challenge, including under the MFN obligation in Article I of the GATT’, says Kronby. ‘While there are exceptions to MFN in the GATT, including (under Article XXIV) for free trade agreements, it’s not at all obvious that they would apply.’ Kronby adds that the clean vehicle credit requirements might also be challenged under other WTO Agreement provisions too, including as a de facto violation of national treatment, under Article III:4 of the GATT, and as a prohibited import substitution subsidy under Article 3.1(b) of the Agreement on Subsidies and Countervailing Measures.

‘There are other requirements for the credit too that might also provoke a WTO challenge’, adds Kronby. ‘The credit will not be available for vehicles if, beginning in 2024, their battery components were manufactured or assembled by a “foreign entity of concern” or, beginning in 2025, contain critical minerals that were extracted, processed, or recycled by a “foreign entity of concern”’. Kronby explains that this includes entities owned by, controlled by, or subject to the jurisdiction or direction of, the government of China. ‘It’s likely that if these requirements were challenged, the US would seek to rely on the national security exceptions in the GATT (Article XXI) as a defence.’

The US Departments of Commerce, of Energy and of the Treasury all declined to comment when requested by Global Insight.

Concerns over potentially discriminatory aspects of the clean vehicle credit are unlikely to be resolved at the WTO as long as its Appellate Body remains non-functioning and the US can appeal any adverse panel decisions. However, countries with a free trade agreement (FTA) with the US have the option of challenging the credit under their FTA, but would likely need to frame this in terms of national treatment discrimination.

Kronby believes that it’s more likely that vehicle manufacturers will seek to revamp their production and supply chains to qualify for the credit or that affected trading partners will attempt to negotiate solutions with the Biden Administration. ‘In this sense, the clean vehicle credit is symptomatic of a broader shift away from global rules-based trade and toward new kinds of trade arrangements emphasising considerations like industrial policy and national security’, he adds.

Image credit: Andrey/

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