US clean energy rollback would be a strategic blunder

Welcome back. While Donald Trump racks up investment deals (and a new plane) on his tour of the Gulf, Republicans in Washington are working to implement his pledge to destroy the “Green New Scam” of low-carbon energy policy. What does it mean for the clean energy sector — and for the country’s economic prospects?

CLEAN ENERGY

Republicans take aim at green energy tax credits

When future economic historians write their accounts of the 21st-century contest between the US and China, they’re likely to devote at least a few lines to the legislative wrangling that began this week on Capitol Hill.

A Republican-led committee in the House of Representatives has launched an effort to slash the fiscal support for green energy provided by former president Joe Biden’s Inflation Reduction Act. While they present this plan as a boon for US industry and households, it’s likely to prove the opposite.

With convenient timing, the FT’s visual journalism team has just dropped an invaluable dive into the very different policy path that China has been pursuing, initiated by President Xi Jinping over a decade ago.

True, China still has a vast fleet of coal-fired plants — but renewables now account for 56 per cent of its installed generation capacity, and 86 per cent of the capacity added last year. With renewable electricity in China now significantly cheaper than the fossil-fuelled sort, the green power boom is boosting competitiveness across the whole economy.

China’s also been moving much more rapidly than the US (and Europe) to shift transport systems and industrial processes away from fossil fuels and towards electricity. And it’s built an astonishingly powerful position in many key areas of the clean energy supply chain, from mineral processing to finished solar panels and electric vehicle batteries.

The IRA, passed in August 2022, marked the US’s big push to close the gap, principally through clean energy tax credits that were initially projected to amount to $270bn (subsequent estimates were significantly higher).

It showed signs of working. Between the middle of 2022 and the middle of 2024, US clean energy investment reached $493bn, according to the Rhodium Group — up 71 per cent from the prior two-year period. But that investment slowed after Trump’s re-election. Six clean tech manufacturing projects worth $6.9bn were cancelled in the first quarter of this year, as businesses worried that the tax credits would be slashed.

It looks like those fears were justified. The draft legislation published this week by the House of Representatives’ ways and means committee would dramatically cut back the fiscal support provided by the IRA.

Tax credits for electric vehicles would be out after 2026, while those for clean energy projects would be phased down from 2029 and dropped entirely from 2031 (previously, they’d been scheduled to expire from 2032 — but crucially, only if the US had met the unlikely goal of cutting its carbon emissions by 75 per cent from 2022 levels).

As this useful analysis from Heatmap’s Robinson Meyer explains, the details of the bill could make its impact far greater than the headline numbers suggest. Perhaps the most chilling move for many clean energy developers would be on the timing of when they can claim the credits. This would now be linked to when a project enters into service, rather than when construction starts. That would mean huge uncertainty for any developer hoping to benefit from the programme before it expires, since projects can face long and unpredictable delays around grid connections and permitting.

The proposed law would also block tax credits for projects that use any component or minerals sourced from China. Given China’s current domination of so much of the clean energy supply chain, that provision alone could render most projects ineligible.

For a party that’s been increasingly characterised by fearful conformism, there’s an interesting lack of consensus among Republicans on this issue. This is perhaps less surprising when you consider that the cannily designed IRA has disproportionately driven clean energy investment in Republican congressional districts, notably in the south and midwest.

Thirteen House Republicans issued a joint statement against the committee’s proposed law. Five of them have co-sponsored an alternative bill, the “Certainty for our Energy Future Act”, which would allow IRA tax credits for projects where construction begins any time before the end of 2030.

In contrast, a group of hardline Republican lawmakers countered with their own alternative draft bill, which would simply strike down all the IRA tax credits from the end of this year. “If Republicans want to unleash American energy dominance . . . we have no choice but to fully — and immediately — repeal the Green New Scam,” said congressman Chip Roy, who is leading this push in the House.

The inconsistency of Roy’s position is glaring. In order to secure “energy dominance”, he and his colleagues want to give a huge effective tax rise to a renewable power sector that is now the country’s key source of potential growth in energy supply.

This reflects the broader incoherence of Trump’s energy agenda. Even if he’s successful in engineering a new surge in US fossil fuel production — and the early signs don’t look encouraging for him — it will not counterbalance the near-term hit to renewable power, which can be developed far more quickly than thermal power plants. Waiting lists for turbines used in gas power plants now stretch to the end of this decade and beyond.

Meanwhile, nuclear and geothermal plants — two power sources the Trump administration has publicly championed — are both set to lose their tax benefits under the committee’s bill.

The situation would be less serious if Trump’s talk of an “energy emergency” were pure invention. But US energy demand is set for extraordinary growth over the next decade and beyond, driven in part by surging expansion of data centres to power artificial intelligence.

Slowness to bring supply online, and the inevitable implications for power prices, will weigh on household finances, industrial competitiveness and the US prospects in the AI race — all areas that Trump’s government supposedly treats as top priorities.

There is still much to play for in Washington, and the moderate Republicans may yet make some headway with their effort to limit the cuts to the IRA credits. But as China pushes ahead with its “electrostate” strategy, the US looks set to hack away much of its own version.

Some might see this episode as new evidence that authoritarian governments are better placed to tackle the climate crisis than their democratic counterparts. That would be simplistic. It may, however, prove an expensive symptom of the damaged state of the US political system.

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