The UK Must Play to its Strengths in its Response to the Inflation Reduction Act

Joe Biden’s Inflation Reduction Act is a shot in the arm for the green economy in the US - but nowhere else. Providing huge subsidies to green products only if they bear a ‘Made in America’ tag has ruffled feathers and provoked responses across the Atlantic. The EU is relaxing its commitment to free and open markets and boosting subsidies for clean technologies.

So, how should the UK respond? Without the fiscal might of the US federal government or the economic clout of the European single market, the world’s largest economy, the UK’s best hope of becoming a clean energy superpower is to play to our strengths. 

Since President Biden signed the Act into law in August 2022, 25 new US battery manufacturing projects have been announced - representing $32 billion of capital investment, and 20,000 new jobs. Some electric vehicle manufacturers, such as Arrival, have abandoned plans for operations in the UK and take their activities to the US. Others, such as Ford, are moving EV manufacturing from the UK into the EU.

In the UK, the collapse of Britishvolt has been accompanied by warnings from car manufacturers that their second largest export market - the US - has closed its doors to British-made electric cars. That is bad news indeed: 8 in 10 cars produced in the UK are exported, mostly to the EU or the US. As both these blocs seek to promote or protect their domestic manufacturing, the warning lights are flashing on the dashboard of the UK’s green industrial transition. 

With public debt at 100% of GDP, taxes at their highest for a generation and a budget deficit, the UK cannot hope to out-spend the US Treasury. Last year, the Department for Transport ended grants for electric cars. In November, the Chancellor announced that from 2025, electric car owners will start paying road tax at £165 per year. Far from putting more public money into electric cars, the UK Treasury is eying them up and licking its lips.

To respond to the Inflation Reduction Act, the UK should play to its strengths: an ability to pass laws, a framework Climate Change Act, and a civil service that is experienced at designing policies that harness the power of markets for the public good. This is how the UK has driven decarbonisation of the power sector. When the Climate Change Act 2008 was passed, wind power produced around 1% of electricity in the UK; now it is a quarter. The little-known revolution in the way we produce electricity has a yet lesser-known founding father: a market-based policy known as the Renewables Obligation (RO).

The success of the RO is instructive. It obliged all electricity generators to produce more clean power. If they could or would not, they had to purchase a credit, the proceeds of which were recycled back into clean competitors. Before they closed for good, Britain’s coal furnaces not only powered homes, they provided the capital that laid the foundations for an era of cheap, clean and plentiful electricity that is currently being built.

The RO’s success can and should be replicated to divert capital towards sustainable objectives. But we should ignore the siren call of carbon offsets with vague and unaccountable claims about carbon saved by other means. In a well-functioning carbon market, the polluter must not only pay, but pay for the most direct clean alternatives. 

The Climate Change Act contains seldom-used provisions that allow ministers to create these trading schemes. The government has committed to introduce such a scheme for electric vehicles, and there are (dare I say oven-ready?) plans for a market-based scheme to support sales of clean cars and vans, known as a Zero Emissions Vehicle Mandate (ZEV Mandate). The scheme could also be adapted to favour electric cars containing UK-made batteries, if necessary. Either way, stimulating electric vehicle sales stimulates battery manufacturing; the difficulties of transporting batteries long distances means that there will always be compelling logistical and financial reasons to manufacture them near to where the vehicles are sold. 

Sadly these proposals are gathering dust on the Transport Secretary’s desk. Now is the time to dust them down and improve them in light of developments in America. Rather than acting as an ‘insurance policy’ to meet carbon budgets, as some officials have suggested, they should form the core of the UK’s approach to get UK battery manufacturing out of reverse by driving up demand for those vehicles. Not only would this create jobs, it would accelerate the rollout of a technology that will reduce logistics costs for businesses and the cost of motoring for individuals, reducing inflation, not to mention satisfying the moral imperatives of clean air and climate stability.

The ZEV mandate should be just the beginning. Ministers should look at finding new ways for the purveyors of fossil fuels, to use their huge profits to fund clean alternatives. Oil companies selling petrol should be obliged to fund the UK’s EV charging roll-out. Gas companies should be financing heat pumps, and so on. The US’s industrial policy cannot be out-gunned, but it can be out-smarted. Climate activists used to argue for these schemes just to achieve emissions reductions. Now, these schemes are essential to the economic and industrial future of the country; we cannot afford to wait.