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September 5, 2022

Cop27: US Inflation Reduction Act fuels climate hopes

The world’s biggest carbon emitter finally has a climate plan in place, sparking optimism that the US’s new Inflation Reduction Act can help focus minds and drive progress internationally.

By Elizabeth Meager

Inflation Reduction Act, Cop27
A fair wind: new US legislation includes $369bn in incentives for clean energy. (Photo by MephitBlueStudio via iStock/Getty Images)
  • The US finally made progress on climate legislation last month with the passage of the Inflation Reduction Act, sparking investor optimism on clean energy.
  • Despite being subject to huge delays, the law could help keep global climate negotiations on track at November’s Cop27 summit.
  • The US is still lacking a commitment to international climate finance, thereby falling well short of its pledge under the UN process.

When world leaders gather for Cop27 in Sharm El Sheikh in November, the global outlook will be very different from that during the previous climate talks in Glasgow a year earlier – not least because the US will be at the table with a seemingly credible environmental strategy this year, fuelling optimism among investors and others that progress can be made, particularly on clean energy.

Certainly, other events since Cop 26 – most notably the lingering Covid pandemic, a summer of extreme weather events and record-smashing temperatures around the world, plus Russia’s invasion of Ukraine and the subsequent global energy crisis – have served to reinforce the need for a transition away from fossil fuels.

They have, at the same time, distracted many governments from thinking meaningfully about preparing for and adapting to the changing climate.

At least Washington sprang a surprise by finally passing its most ambitious climate bill yet last month, after being notably quiet on the global climate stage since President Joe Biden took office in late 2020. The Inflation Reduction Act, which includes $369bn in tax and investment incentives for clean energy, was heralded as a major breakthrough from the nation responsible for the most carbon emissions historically.

A global influencer

Given the US’s clout, this progress is hugely significant for global negotiations and may help focus minds of policymakers elsewhere. For the first time since the UN climate process began 30 years ago, America has a credible plan for reducing its emissions.

“The US is back in a major way – the Inflation Reduction Act will be a major help in reigniting the race to the top and increasing ambition across the board,” says Zach Friedman, head of federal policy at Ceres, a Boston-based sustainable investment non-profit organisation. “Every country faces different challenges, but I think it can serve as a strong reference point for others with big fossil fuel interests. Although we haven’t always delivered, the world has always looked to the US.”

Graeme Baker, portfolio manager at London-based asset manager Ninety One, takes a similar view: “We believe this strong commitment to reducing emissions will allow the US to play a much stronger role at the upcoming Cop27 session, because the country can no longer be accused of asking others to take action that they are not taking themselves.”

There had been genuine fear that the US would not meet its prior nationally determined contribution (NDC) – which itself falls short of what is needed at a global level – says Eddy Pérez, international climate diplomacy manager at Climate Action Network Canada. Washington has pledged to reduce domestic emissions by 50-52% by 2030, a target aligned with 2°C of warming, according to the research platform Climate Action Tracker. This is inconsistent with the global commitment under the 2015 Paris Agreement to a 1.5°C limit on warming beyond pre-industrial levels.

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Progress, but some way to go

Even so, progress is progress, and from the US that cannot be taken for granted. Even with Democrat president Barack Obama in the White House, Perez says, the country was responsible for derailing the Kyoto Protocol in 2009. And while the Paris Agreement was signed by 174 countries, it was largely drafted to suit the world’s two biggest emitters, the US and China.

With Cop27 less than three months away, the Egyptian presidency of the summit has made clear that this year’s event will focus on implementation of existing pledges rather than fresh, press-friendly new commitments.

Signing the Inflation Reduction Act into law is a meaningful contribution from the US in that regard, says Joe Thwaites, international climate finance advocate at the National Resources Defense Council in Washington, DC. The law goes some way to demonstrating exactly how the US will meet its NDC, he adds.

“In the past, there’s definitely been frustration that we get nice big pledges announced at the event, and then a few months later the same again, with not enough reflection on previous commitments,” Thwaites says. “The fact there is now an act that puts a substantial investment behind the US’s targets is incredibly welcome – and there’s been a sense of relief from the international community since. This is a sign of hope that the system can deliver.”

Shortfall in climate finance

But while the Inflation Reduction Act may be progressive on the domestic front, it does not address the issue of international climate finance for loss and damage, which was a sore point left unresolved at Cop26 and predecessor events. In 2009, 23 of the world’s richest countries – including the US – pledged to mobilise $100bn a year of climate finance for developing economies up to 2020, but they have consistently failed to do so.

Speaking at a pre-Cop event in London in May, Egyptian finance minister Mohamed Maait said the summit must address the “huge burden” of debt that developing markets face. “Poor countries’ responsibility for this problem is limited,” he added.

Yet they are on the front line when it comes to the consequences. The issue was illustrated particularly starkly this week by catastrophic flooding in Pakistan, which has reportedly left one-third of the country under water. British charity Oxfam, among others, has called on wealthy countries to cancel the country’s international debts to aid its recovery.

The US has a lot of catching up to do on this front, given that it provides less than a quarter of the amount of climate financing as the EU, which has a smaller economy. Congress approved $1bn in international climate finance for 2022, which is woefully short of Biden’s September 2021 pledge to provide $11.4bn per year by 2024 (see chart below).

“As the richest country in the world and the largest cumulative greenhouse gas emitter, the US has a particularly profound responsibility, both to provide financial support and technical assistance,” says Thwaites.

Cooperation or competition with China?

While the US is under pressure to collaborate more effectively on climate mitigation, when it comes to the US-China relationship it seems more likely that environmental progress will come from economic competition than cooperation.

The Inflation Reduction Act creates a new national industrial policy with a view to fostering swift growth in local clean energy industries such as solar power and electric vehicles – areas where China has also been investing heavily. More competition in this space will boost scale and bring down costs, says Ceres’s Friedman.

Investors are certainly anticipating a boom in US clean energy. “We believe the relative economics have continued to move in favour of renewables and cleantech when compared to fossil fuel-based energy over the past few years,” says Ninety One’s Baker. “[The Inflation Reduction Act ] is an inclusive programme for American energy policy and sets the country on track… to building a system that should eventually provide lower-cost energy over the long run.”

That said, some still harbour hopes for Sino-US collaboration. At the end of August, climate envoy and Cop veteran John Kerry urged Beijing to resume talks with the US on carbon emission reductions, which stalled on the controversial visit by House speaker Nancy Pelosi to Taiwan last month.

Kerry took a conciliatory approach, praising China for over-delivering on its commitments and reiterating his hope that the two superpowers could make amends. “The climate crisis is not a bilateral issue, it’s global, and no two countries can make a greater difference by working together than China and the United States,” he told the Financial Times in a 30 August article.

Cop27 will presumably test their level of commitment on this front as temperatures rise both physically and politically.

Capital Monitor is hosting the Webinar series, Making Sense of Net Zero. Find out more information on NSMG.live.

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