The Unprecedented Green Industrial Policy Wins in the Inflation Reduction Act

With the announcement late Thursday night of a deal with Sen. Kyrsten Sinema (D-AZ) to support the Inflation Reduction Act (IRA) after adding provisions to tax extractive stock buybacks, the Senate is poised to vote on this landmark legislation as soon as Saturday. In previous posts, Roosevelt Institute scholars have told you how this bill will help bring down prices, improve tax fairness, and give new monies towards environmental justice. Today, we focus on a truly novel aspect of the IRA: its unprecedented levels of support for green industrial policy.

While the US has long practiced industrial policy, it has done so largely for the defense industry. But in recent years, the US has fallen behind its foreign competitors in cultivating the green industries that will power the 21st century and beyond. In some essential industries, this has led to extreme geographic concentration in single countries like China, which has in some cases twice the level of concentration in green energy as OPEC has in petroleum. This means that the US is not only losing out on jobs and innovation, but is exposing itself to national security crises. After all, energy is upstream from the rest of the economy: who controls it, controls destiny.

The IRA begins to change that. Not only will it put the US on track to meet nearly 70 percent of its Paris Accord obligations in emissions reductions, it could mean 3,900 fewer premature deaths and the creation of 1.4 million to as many as 9.1 million high-quality jobs.

Let’s focus on the last piece: good jobs. How does the IRA make such impressive gains? It does so in two ways: first, by overhauling the ways the US deploys historically indirect tools like tax credits to fund industrial development, and second, by boosting the use of more direct tools like the Defense Production Act (DPA).

Unsubmerging the State 

First, tax credits have long been the typical American way of encouraging producers and consumers to undertake desirable activities. Scholar Suzanne Mettler has termed these tools a core aspect of the “submerged state.” These mechanisms obscure the true extent of government intervention in the economy—meaning that voters remain unaware of the positive contributions that government is making, as well as the ways that government ceding so much of the on-the-ground decision-making to private market actors in turn fuels inequality. Combined, these effects fuel distrust of government.

But the IRA’s are not your mother’s or grandmother’s tax credits. Rather, they attach many of the types of conditions that have historically only been linked to direct government procurement and grants for goods and services—think Buy American rules, or prevailing wage laws, or junior apprenticeship requirements for new workers—and grafts them on top of tax credits, where they have rarely if ever been before. This means that a firm that is not contracting with the government for anything—just filing its taxes and tax deductions—now has to take on greater social responsibility for producing domestically and creating good jobs. Thus CEOs in industries from solar, to wind, to carbon capture, to nuclear, will now see the rate of subsidy go up the more they take on high-road labor practices. 

Structuring tax credits in this way gives government more of what industrial policy scholars call “policy steer,” which refers to the ability of public sector officials to ensure that money doesn’t just incentivize desired activities, but does so in ways that drive toward a more comprehensive social justice mission. And because workers on the ground will see improvements in their wages and jobs, it creates an opening for policymakers to tell the story linking these outcomes back to the IRA. But it is not a guarantee that voters will draw this connection—which is why IRA implementation will need to be used as an organizing opportunity, or, as social scientists would put it, the IRA needs feedback loops to help build on, sustain, and legitimate its gains. 

Steering and Leveraging Resources

Second, the IRA deploys authorities that date back to the Roosevelt and Truman era and allow the government to directly invest in desirable economic activities. For example there is $500 million appropriated for enhanced use of the Defense Production Act (DPA). This is more than twice the historic high-water pre-COVID mark for Defense Department uses. Coupled with the more than $100 million that Rep. Cori Bush (D-MO) secured earlier this year for the DPA, impactful public sector investments in green infrastructure are a real possibility.  

Notably, the IRA language is open-ended in terms of process. It does not say that the Defense Department would be the gatekeeper for these funds, allowing the possibility for other agencies such as the Department of Energy to drive DPA measures. However, this has been a source of tension with Congress in the past. These funds could help bring to fruition the Biden administration’s June announcement that they will use the Defense Production Act for solar, heat pumps, and other key US clean-tech manufacturing capabilities. 

Beyond the expanded DPA provisions, the IRA has a green bank and a new $250 billion loan authority that would be funded with just $5 billion in appropriations, or a leverage ratio of 50-to-1. Provisions like this can make government funds go further without adding to the budget deficit—a key concern of Sen. Joe Manchin (D-WV) and others. And all of this second category of provisions maximizes the policy steer for government, since policymakers have control over who gets the resources, and when and how they carry out any projects.

In short, the Inflation Reduction Act reimagines the role of government for an era of economic transformation. Coupled with the CHIPS and Science Act—which will drive investment in reshoring the long-offshored semiconductor industry—the IRA turns its back on decades of government outsourcing real-world outcomes to private industry, and sets up government to lead on solving today’s most urgent problems. 

(For a deeper dive into the details of the 725-page legislation’s provision for green industrial policy, read this Twitter thread.)

Read more Roosevelt analysis of the Inflation Reduction Act.