Why Biden’s Domestic Content Incentives Matter
May 12, 2023
By Todd N. Tucker
Today, the Biden administration announced the latest pillar in its industrial policy strategy, this time on clean energy supply chains. In just the last few months, the White House and federal agencies have released announcements on subsidies for semiconductors, electric vehicles, electric vehicle charging infrastructure, and more. Today’s guidance is significant, because it defines the conditions under which clean energy investors and producers under the Inflation Reduction Act (IRA) can get additional subsidies if their supply chains are “Made in America.”
In this post, we’ll examine some of the reasons domestic content incentives matter for the success of industrial policy programs. But first, let’s look at what’s in the new rule.
Biden’s New Domestic Content “Adder” Combines Enticements and Flexibilities
The core of this new announcement is that clean energy producers and investors can get an IRA subsidy up to 10 percent higher if the products they use in their projects are deemed “Made in America.” Products receive that designation:
- For steel and iron, if they were totally made in the US;
- For mining, if they were totally mined in the US; and
- For other manufactured products, if a certain percentage of the value of their components are made in the US.
The Department of Energy estimates that having this bonus credit available could drive an additional 50 gigawatts of clean energy deployment by 2030. (For a longer thread on the details of this announcement, see my Twitter thread here.)
It’s important to underline: The so-called domestic content “adder” is an addition, not a requirement. It adds to the total subsidy that a clean energy producer or investor can receive. As Dan Gearino of Inside Climate News has shown, projects that want to claim, say, the investment tax credit, get a baseline of 30 percent of their cost covered by the federal government, and up to 30 percent more if they invest in certain communities that are low-income or formerly reliant on fossil energy production. Combined, that would mean that 60 percent of the project cost could be covered by the public sector, even without sourcing domestically. But for firms and nonprofits that want to go the extra mile, up to 70 percent of the costs can be covered.
“This type of balancing between incentives and flexibility is key to a successful economic development plan that firms can actually execute,” says Marissa Guananja, the Roosevelt Institute’s chief programs officer. “The government has long encouraged domestic supply chains through Buy American procurement preferences. This now extends that strategy to firms and nonprofits that benefit from taxpayer dollars.”
Why Countries Favor Domestic Production
Favoring domestic over imported production has been a mainstay of economic policy since the beginning of modern states. The motivations have varied, but common ones include the fostering of nascent strategic industries and the stimulation of “forward and backward linkages” —additional economic activity and employment in upstream and downstream value chains.
Nonetheless, this strategy has been frowned upon during the era of neoliberalism, which aimed at disembedding policy from a national or local context in favor of lowest cost production. The consequence: substantial deindustrialization of regions and countries that once had substantial manufacturing presence.
Indeed, recent academic research shows that domestic content requirements (often called “local content requirements” or LCRs) like Biden’s adder are commonplace in many countries’ clean energy strategies. In a 2020 article for the academic journal Renewable and Sustainable Energy Reviews, researchers from the Technical University of Denmark and University of Cape Town find that LCRs are most likely to succeed in countries with large markets, historic manufacturing capacities, and thresholds for domestic production that phase in and increase over time. The US ranks favorably on all of these conditions, and with the idea of “Buying American” popular across the political spectrum, it is unlikely that either party will want to be the one to roll back LCRs.
“Efforts to rebuild domestic manufacturing capacity certainly can’t be indifferent to costs,” said Isabel Estevez, a development economist and deputy director at the Roosevelt Institute, “but calculations have to adequately account for all ‘costs’, including the long-term economic costs of attrition of the country’s productive base and the sometimes-immeasurable but very real impacts of economic decline on local livelihoods and the social fabric.”
What Comes Next
Today’s notice of intent is the beginning of a longer process. Over the coming months, the Treasury Department will be soliciting feedback from the public on whether it got the structure of the incentives and flexibilities right.
As Roosevelt Institute President and CEO Felicia Wong says, “It will be important as the implementation process continues to sync up the domestic content requirements with the administration’s all-of-government equity plans to lift up and invest in regions and communities left behind by past public investments.”
Wong, who also serves as a member of the Department of Treasury Advisory Committee on Racial Equity, added, “This won’t be easy. But with this approach to a new industrial strategy, and with the IRA specifically, we have an opportunity to do one better than the New Deal, by ensuring that what’s Made in America is made by all of America.”