Can The US & Its Allies Compromise On Climate Pacts?

The US and its allies are trying to agree on climate pacts to resolve major international tensions over the Inflation Reduction Act (IRA). Officials abroad want to carve out some of the benefits of the Biden administration’s new climate legislation, a $370 billion bill that attempts to significantly reduce greenhouse gas (GHG) emissions by 40% below 2005 levels by 2030.

The bickering comes at a time in which the World Bank has projected that the global economy’s “speed limit” is set to fall to a 3-decade low. The economists are worried that climate change is the one factor slowing things down and may weigh more heavily in the future. Climate pacts are a necessity, yet much of the $100 billion that the world’s wealthiest countries promised at COP27 in climate finance exists only on paper.

In March, negotiations began over an agreement focusing on the critical minerals that go into electric vehicle (EV) batteries with the EU, UK, and Japan to determine if some type of limited new agreement could be struck that would also offer companies abroad certain benefits under the law.

The Biden-Harris administration’s landmark climate legislation can usher in at-scale solar, wind, nuclear, carbon capture, and other alternatives to fossil fuels. It can make it easier for businesses to make the switch through rebates or tax credits. Homeowners can invest in upgrades, such as electric vehicles, electric stoves, heat pumps, up-to-date electric panels, or energy-efficient windows. It has the potential to make a real difference in people’s lives.

Economist Paul Krugman, for example, believes the IRA is a huge step toward reducing US dependence on fossil fuels and GHGs as well as other forms of pollution, like nitrogen oxides and sulfur that have negative effects on death rates, illness, and crop yields. According to Krugman, the IRA will:

• catalyze progress in green technology
• offer economic benefits will make passing additional legislation easier
• give the US the credibility to lead a global effort to limit greenhouse gas emissions

It’s that remarkable US credibility that has many allies worried.

You see, if a consumer is to receive a tax credit toward an EV purchase, the selected EV must be assembled in North America with battery materials sourced from North America — or at least from countries with which the US has a free trade agreement. Here’s the rub: the US does not have a free trade agreement with the EU, Japan, or the UK. Allies are lashing out against the IRA, saying it penalizes them at a time when they’re already compromised by the Russian invasion of Ukraine and resulting high energy prices.

The EU & US Continue to be Strategic Partners Committed to Net Zero Emissions

A joint statement released on April 4 by the EU and the US following the 10th EU-US Energy Council affirms that the EU and the US are strategic partners who remain committed to achieving net zero emissions by 2050. The EU-US Energy Council is the lead transatlantic coordination forum on strategic energy issues for policy exchange and coordination at political and technical levels. Transatlantic energy cooperation continues to contribute to the stability and transparency of global energy markets by promoting energy diversification and security, endorsing energy efficiency measures, developing technologies contributing to the transition towards net zero emissions by 2050, and through research, innovation, aligned policies, and business cooperation.

Accelerating the energy transition, reducing dependence on fossil fuels, and reducing energy consumption, they say, are key to strengthening energy security and countering attempts to weaponize energy.

An agreement might allow a company based in the EU to supply lithium, nickel, or other battery materials for EVs made in North America. One irony is that neither the EU nor the US is a major source of the critical minerals needed for EV batteries.

A Treasury official said that any new trade agreements would be evaluated during a rule making process to ensure that they comply with the critical mineral requirements in the legislation. Then again, a white paper published by the US Treasury Department in December acknowledged that the IRA did not define the term “free trade agreement” and that the Treasury secretary could identify additional free trade agreements for the purposes of the critical minerals requirement going forward.

One in a Series of Climate Pacts: US – Japan on Critical Materials for Car Batteries

Late last month, the US and Japan announced they came to agreement over supplies of the critical minerals to make car batteries. Negotiators are taking a deep breath, as the understanding will alleviate the animosity that was growing between the two allies. Insiders hope the result will become a resolution prototype to apply toward other trading arrangements.

A fact sheet describes how the Agreement supports workers and businesses in both countries’ electric vehicle sectors and sets standards for other economies to emulate.

“This announcement is proof of President Biden’s commitment to building resilient and secure supply chains,” said Ambassador Katherine Tai. “Japan is one of our most valued trading partners, and this agreement will enable us to deepen our existing bilateral relationship. This is a welcome moment as the United States continues to work with our allies and partners to strengthen supply chains for critical minerals, including through the Inflation Reduction Act.”

Specifically, the Agreement operationalizes shared commitments by the United States and Japan with respect to the critical minerals sector in order to facilitate trade, promote fair competition and market-oriented conditions for trade in critical minerals, advance robust labor and environmental standards, and expand cooperation in efforts to ensure secure, sustainable, and equitable critical minerals supply chains.

Heat Pumps Take Center Stage

As the US moves forward to make the ideas in the IRA concrete, US allies may have good reason to be worried.

The White House on Tuesday hosted a first-of-its-kind roundtable with 17 of the nation’s largest heat pump manufacturers and distributors, as reported by the Climate 202. Participants discussed how to overcome supply chain roadblocks, enhance workforce development, and broaden consumer education and adoption. Officials including White House national climate adviser Ali Zaidi, White House senior adviser John D. Podesta, and Energy Secretary Jennifer Granholm reaffirmed the administration’s commitment to investing in manufacturing capacity and supporting deployment of heat pumps, including through the tax credits in the Inflation Reduction Act.

“Heat pumps are a pro-consumer technology that meets the moment by harnessing clean electricity to cut utility bills,” Zaidi said in a statement. “By deploying the Defense Production Act, offering consumer incentives, and mobilizing private capital, President Biden is driving a massive expansion in heat pumps stamped ‘Made in America.’”

US American consumers bought more heat pumps than gas furnaces last year, according to data from the Air-Conditioning, Heating and Refrigeration Institute.

The Biden administration on Tuesday also announced new investments in “energy communities,” or places that have historically relied on fossil fuels to power their economies.

• The Treasury Department and Internal Revenue Service will release guidance on how developers of clean energy projects can claim billions of dollars in “bonus” tax credits for projects in energy communities under the Inflation Reduction Act.
• Treasury and IRS will partner with the Interagency Working Group on Energy Communities to provide a searchable mapping tool that helps identify areas that may be eligible for the bonus credits.
• The Energy Department will allocate $450 million from the bipartisan infrastructure law to advance renewable projects on lands that have been used for coal mining, potentially creating as much as 90 gigawatts of clean energy — enough to power about 30 million homes — across nearly 1.5 million acres.

One year ago this week, Presidents Joe Biden and Ursula von der Leyen launched the US – EU Task Force on Energy Security. A new press release tracks the Task Force’ progress in meeting goals to reduce the EU’s reliance on Russian energy and transition the EU to renewable energy.