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A spoonful of subsidies helps the climate medicine go down

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NZ should take lessons from how President Joe Biden is leveraging targeted investment incentives to stimulate large investments in clean technology – with the assistance of an unlikely ally

Opinion: For the first time ever, the US Senate might pass a substantive piece of climate legislation. Hence the bill is called ‘historic’, even though it involves surprisingly little money. Those two features offer us lessons in the politics and economics of climate action here in Aotearoa.

Indeed, it is a significant moment. It is almost half a century since the first climate memo landed on a US president’s desk. It was written by Frank Press, President Jimmy Carter’s chief science adviser and director of the Office of Science and Technology Policy. In a single page, Press laid out the science and impact of global warming.

And in 1988, NASA scientist Jim Hansen was the first person to tell Congress about climate change. Yet Washington politics were too tribal and dysfunctional to get a single substantive piece of climate legislation through Congress. Instead, a few Presidents made some progress through executive orders.

But now the Supreme Court has begun to overturn those, beginning with its recent ruling on the Environmental Protection Agency’s regulations on power plant emissions.

So, the first lesson is about the politics. The big surprise is Senator Joe Manchin, the West Virginia Democrat who built his personal wealth and political career on coal. As chair of the Senate Energy and Natural Resources Committee he has helped craft the bill and is backing it after rejecting all kinds of climate legislation over the years.

The bill was still hanging by a thread though. It would live or die on the vote of Senator Kyrsten Sinema, an Arizona Democrat. Then she has revealed her price for supporting it. Taking a lesson from Manchin, she nixed a tax designed to close an egregious loophole enjoyed by private equity investors. 

The Build Back Better Act was the name of an earlier version of the bill which Manchin roundly rejected. This version is called the Inflation Reduction Act. The money in it for reducing the federal budget deficit is so small it’s economically inconsequential.

But the bill’s incentives for more renewable energy will reduce household energy costs compared with current fossil fuel prices, Rhodium Group says in its analysis, illustrated in this chart below.

Change in household energy costs (2021 to 2030, US$)

The high, central and low emissions scenarios reflect uncertainty around future fossil fuel prices, economic growth and clean technology costs. Source: Rhodium Group

Thus, the non-climate title of the bill and the household benefits it offers plays strongly to American politics. When pollsters ask voters political questions about climate they get polarised responses – strongly negative from Republicans and strongly supportive from Democrats.

But ask them in non-political terms what practical action they think needs to be done, the responses are far more positive. Even more so if there’s something in it for them, such as energy efficiency and lower household costs.

This critical dynamic is analysed in depth in two recent major surveys, one from Yale and George Mason universities and the other from the Pew Research Centre, with one of its charts below.

Two-thirds of American support incentives for more EVs

The percentage of US adults who say they favour the above proposals to reduce the effects of climate change. Source: Pew Research Center

Our political system and culture are different from America’s in many respects. But one man, Winston Peters, still held inordinate influence when he was last in coalition government with Labour. He and his New Zealand First party supported the Zero Carbon Act. That was easy because it is a long-term framework with no short-term impact.

But he blocked substantive immediate action, such as decarbonising the light vehicle fleet.

Now the big block on meaningful climate action comes down to just a few major agricultural organisations, in particular Federated Farmers, DairyNZ and Fonterra. They have inordinate influence on the National Party, making its climate commitments unconvincing. So perhaps they all need lessons from Manchin in negotiations and communications. Then hopefully we could break the log jam, as the Americans are hoping to do.

Lowering the cost of clean energy

The second lesson is about economics. The US’s pledge under the Paris Agreement is to reduce its greenhouse gas emissions by 50-52 percent by 2030 from 2005 levels. According to Rhodium’s analysis, current policy settings would deliver a 24-35 percent cut; and the Inflation Reduction Act would push that to a 31-44 percent reduction.

Putting the 2030 climate target within reach

US greenhouse gas emissions (new million metric tonnes of CO2-e). The range reflects uncertainty around future fossil fuel prices, economic growth and clean technology costs. Source: Rhodium Group

Other analysts, such as Energy Innovation and Princeton’s Repeat project have reached similar conclusions.

“This bill does about two-thirds of the work we need to do to hit our climate goals, which for a single piece of legislation is a really big deal,” said Jesse Jenkins, an energy systems engineer at Princeton who helped lead its modelling effort. “And by driving down the cost of clean energy, it can make it easier for states or cities or companies to take further climate actions on their own.”

“When I hear climate, I hear jobs.”
– Joe Biden, US president

Indeed, the US benefits greatly from local action, as the New York Times analysed in a recent article. For example, Colorado’s state government has passed more than 50 climate-related laws since 2019 despite a powerful, local fossil fuel lobby.

If Wellington empowered and resourced local governments much better, we too could take much more action on climate regionally and locally. Doing so would also help grow political support, locally and nationally, on climate. We need all the help we can get. Our 2030 climate pledge is broadly similar to the US’s but our emission reductions are minimal so far.

Made in Realpolitik

The pending US climate bill also offers lessons on leverage. Small incentives will likely stimulate large investments in clean technology. The bill will only supply US$385 billion of help over 10 years, of which US$230b will be tax credits, US$120b in other climate and energy spending and $35b in clean energy incentives for consumers.

(The bill’s other two areas of spending are US$100b on prescription drugs and US$305b to pay off a tiny amount of federal government debt. Funding for the bill comes mainly from a new 15 percent minimum federal tax on corporate profits worth US$315b and US$320b in prescription drug savings by the government.)

The climate spend in NZ dollar terms is $614b over 10 years. But adjusted for our population (we’re 1/33rd the size of the US) that works out to only $2b a year here for 10 years. Our government’s 2022-23 budget has $2.9b allocated for climate. If the government wanted to act with conviction, it could easily make that $5b a year.

How can so little money have such a big impact in the US? Tax credits are the big key. They will be paid directly to companies investing in a wide range of clean technologies, established and new. Also, the bill gives them long-term certainty whereas current tax incentives are subject to the whims of Congressional renewal every few years.

“We find that avoided air pollution in the modelled scenarios could lead to between 3,700 to 3,900 avoided deaths in 2030, in addition to 99,000 to 100,000 avoided asthma attacks, and 405,000 to 417,000 avoided lost workdays.”
– Energy Innovations

Here in New Zealand we’ve had a doctrinal aversion to targeted investment incentives since reforms purged the economy in the 1980s. Yet, targeted tax incentives would be far more effective across the economy than our current practice of government doling out small sums to supplicants.

The US bill has a strong “Made in the USA’ emphasis. As President Biden quips often: “When I hear climate, I hear jobs.” For example, the tax credits require EVs to be assembled in North America (the US has a long-standing cross-border auto manufacturing pact with Canada). And lithium, copper and other critical minerals used in the cars extracted from mines in the US or friendly countries that have free trade agreements with the US.

As the Financial Times noted in its analysis of the bill: “This could go a long way towards rewiring global clean energy supply chains. It could also raise the ire of clean energy companies that will have to navigate, and pay for, the complex rules.”

As for the economic impact, Energy Innovations says: “Our modelling finds the bill’s provisions could create 1.4 million to 1.5m additional jobs in 2030 … and could increase GDP by 0.84-0.88 percent in 2030.”

As a tiny country, there’s no way we can emulate such attempts at industrial strategy. However, insightful analysis of how we can use the clean tech revolutions to make our economy far more sophisticated is still lacking from business organisations and government agencies.

And, yes, Manchin did get into the bill a range of favours for the fossil fuel sector, such as some more exploration licences and more funding for carbon capture and storage.

But for every additional tonne of emissions those could create, the clean energy incentives will reduce up to 24 tonnes of emissions by 2030, Energy Innovations models. Similarly, it models public health gains:

“We find that avoided air pollution in the modelled scenarios could lead to between 3,700 to 3,900 avoided deaths in 2030, in addition to 99,000 to 100,000 avoided asthma attacks, and 405,000 to 417,000 avoided lost workdays.”

Thus, the bill shows that raw politics – done constructively to meet many interests – can deliver useful outcomes. Hope this bill passes so the US can increase its climate credibility and leadership; and offer us some further illuminating climate lessons.



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