IRA a Boon for Red States

IRA a Boon for Red States

September 11 2022

We’ve been adamant that the Clean Energy Transition must utilize the proven power of capitalism to succeed. We could go on at length why trying to counter capitalism with regulation and government intervention to cut greenhouse gas emissions won’t work. It took, just as an example, decades under the 1970 Clean Air Act regulations to cut toxic air pollution – and the law also hollowed out US industries that took their polluting factories offshore where there was no regulation.

The climate change provisions of the Inflation Reduction Act are the antithesis of regulation under the Clean Air Act. The tax credit provisions of the IRA are the very modest nudges to capitalism that we have been calling for to empower the US to both solve for climate and continue to economically lead the world. And they are already working!

In just a few weeks since its passage, there have been multiple announcements from companies to build new battery, EV, and solar panel factories in the US and to accelerate existing plans for more factories. The law is the most substantial climate policy ever passed by Congress with a 30% cost-reducing tax credit on solar panel and battery manufacturing. Then, once made, there are further credits to purchasers of these panels and the EVs that use the batteries.

Last Monday, Honda and LG announced a joint venture to build a $4.4 billion factory, probably in Ohio, that will produce 40 GWh of EV batteries (enough for about 500,000 vehicles) per year. This plant adds to a wave of over a dozen new battery plant projects hitting the US. The batteries will be installed in Honda and Acura EVs. Construction is scheduled to start in 2023, with mass production starting by 2025.

First Solar, America’s largest solar panel manufacturer, announced plans to build a $1 billion plant in the US Southeast with a production capacity of 3.5 GWh. The announcement, which cited the passage of the IRA, also included $185 million to expand First Solar’s existing Ohio manufacturing footprint, taking the company's total US production capacity to over 10 GW per year by 2025.

Though it hasn’t yet been publicly acknowledged, PV Magazine has reported that Korean solar producer, Hanwha Q CELLS, plans to build a massive 9 GW solar panel manufacturing facility with Georgia, South Carolina, and Texas in the running.

Tax credits only supply 30% of the capital for these plants; 70% is funded by the foreign and domestic corporations that build them. So, one dollar of tax credits creates over two dollars of further investment. These dollars generate construction jobs to build the plants and then the jobs to operate the plants. These jobs generate multiple additional jobs for barbers, teachers, accountants, and so on. Research has shown that the multiplier on dollars spent on domestic manufacturing can be as high as 3.6, meaning there’s a 10x impact for every tax credit dollar invested in new domestic manufacturing. In the case of First Solar’s $1 billion plant, the government’s $300 million investment could produce $3.6 billion in additional GDP from the multiplier effect. For a state like Mississippi, with a 2021 GDP of about $125 billion, that’s a big deal.

A large share of the economic benefit from these new factories will be enjoyed by the communities in which they’re built – almost exclusively in red states. Despite this, no Republicans voted for the IRA. The bill passing on party lines is sad but not surprising in today’s political climate, but it does beg the question - can Democrats gain the populist high-ground with America’s beleaguered working class as the party that delivers the manufacturing jobs of the future?

The US clean-energy transition is critical to another GOP priority: competing with China. China produces 80% of the world’s lithium-ion batteries and more than 80% of the world’s solar panels. Moreover, recent events including drought, an energy crisis, and COVID lockdowns have made reliance on Chinese materials and components problematic. The costs of Chinese lithium and nickel needed to make EV batteries and solar panels remain extraordinarily high. In order to create domestic supply chains for vital materials like these, the IRA also includes requirements for green tech manufacturers to source their materials from the US or its free trade partners.

As floods, droughts and high heat intensify across the Southern and Western states, citizens are increasingly calling for action. Capitalist solutions, like those under the IRA, are sure to become ever more popular.

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