The Inflation Reduction Act (IRA) was the largest and most ambitious climate legislation ever passed in the United States.
After just one year, the legislation has changed the landscape for private investment and public policy in the United States — and around the world.
At the inaugural event for the new Climate Change and New American Economy Series, Brian Deese, MIT innovation fellow and former director of the National Economic Action Council at the White House, and principal architect of the IRA joined Vijay V. Vaitheeswaran, global energy and climate innovation editor at The Economist, to discuss the future of climate and clean energy policy in the wake of the IRA.
Read Brian Deeese's prepared remarks here. Watch a video of the event above, and read a transcript below.
Dean Costis Maglaras: Welcome, everyone. My name is Costis Maglaras, I'm the Dean of the Business School. I'm just going to take two minutes and basically introduce to you what we're trying to do here. Climate change and our collective response to this phenomenon is going to really transform our economy. It's going to change the energy sector, of course. But transportation, manufacturing, the food system, all aspects of our lives over the next several decades, and we created this speaker series and a lot of other things that we're doing at the school to be able to basically provide incredible information, action-oriented information to the business community. This is one aspect of what we're doing, the climate change and the new American economy, which is going to be a speaker series that we're going to highlight important developments in that space. And then there's all sort of slew of other things that we're doing at the school that hopefully will get to engage all of you as part of your interest.
But I won't take any more time. I think it's incredible to be launching this today with our speakers, and I look forward to more of these in the future. My biggest partner here is Bruce Usher, so he'll kick us off.
Professor Bruce Usher: Hold the applause for our guests. I know many of you, but not all. I'm Bruce Usher, I'm on the faculty here and I head up our climate program work. And you don't need me to tell you that climate change is one of the greatest challenges of our generation, your generation in particular. And you also need me to tell you there's a wealth of information out there on climate risk and climate science and climate policy and what we need to do to avoid climate catastrophe. But what's missing is a greater understanding of the impact on the economy and how we're going to get to net-zero and what that means for business in that transition.
Or to put it more succinctly, we spent 300 years building a global economy driven by fossil fuels. We're now going to spend 30 years decarbonizing that economy. And there's going to be tremendous repercussions for every country's economy, not least the United States. And as the world's largest economy, the challenges and opportunities here will be felt by nearly every business in the country. When Dean Maglaras and I were thinking about this new speaker series and planning this series, we thought long and hard who could kick it off, who would be the right person to introduce this subject? And we concluded that no one has had or perhaps possibly ever will have a greater impact on the American economy than Brian Deese.
In his role as director of the National Economic Council in the Biden White House, Brian was a principal architect of the Inflation Reduction Act. And this act is not only the largest climate change legislation passed here in the United States, it may be the largest legislation passed anywhere in the world at this point. It also may be the most impactful. Brian's joined this evening by Vijay Vaitheeswaran, who's the Climate Innovation Editor at The Economist. And Vijay is, in my experience, and I've seen him many times, one of the best writers and interviewers I know in the climate sector. Our plan this evening is Brian's going to open with a keynote, some keynote remarks, and it's going to be followed by discussion with Vijay. And then they're going to open it up to questions from you and the audience and we'll have some mics, so we can take any question from the audience. This part of the event will conclude at 7:00 p.m., and for those who wish to join us, there'll be a reception upstairs on the second floor at seven. Please join me in welcoming Brian Deese.
Brian Deese: Well, thank you. Thank you Bruce and Costas and to the entire Columbia family for having me and for sparking this conversation. Climate change and the new American economy. I like every aspect of that. Because I think that there probably is no more important conversation for us to have than the ways in which climate change will fundamentally alter the face of the new American economy and be the opportunity for most private enterprise investment innovation in our economy going forward as well. So, what I'm hoping to do tonight is just offer a few thoughts on the front end, and then looking forward to getting in conversation with Vijay and the rest of you as well. And what I thought I would use my time here today to do is to do two things. The first is a quick mark to market, so to speak, on where we are in the wake of passage of quite significant pieces of legislation affecting the climate to include the Inflation Reduction Act, but also the infrastructure bill passed almost two years ago.
And then also, and perhaps more importantly, a look forward on where does climate and clean energy policy now need to go in the post-IRA world. To start with a mark for market, I'll move very quickly here. The IRA, a lot has been said, in some ways it's a very simple piece of legislation. It provides long-term in most cases technology-neutral incentives for private investment with the goal of driving down the cost of clean energy technology and driving up clean energy capacity deployment in the economy. And so while the public incentives make investments more attractive, ultimately the test of this legislation will be the appetite of private non-governmental actors, both businesses, but also rural co-ops, nonprofits and others to put their own capital at risk.
14 months after the IRA's passage, what do we know about that appetite? In one word, strong. In the year ending this June, firms and individuals spent $213 billion in clean energy technologies across the economy. That's according to a new Clean Investment Monitor that we put together and launched last month at MIT. That's up 37% from a year earlier. It's up 165% from five years ago. And now we regularly see the debate in pages on social media or in pages of our newspapers, about whether the IRA will end up being twice as large as we originally projected, or three times or four times as large. Regardless, it's safe to say that the IRA has fundamentally changed the game in terms of private investment in clean energy technologies in the U.S. The IRA has also changed the paradigm for clean energy and climate policy in two other important ways. The first is that the IRA is mainstreaming a policy approach of making clean energy cheap, rather than making pollution expensive. And traditionally, economists, economic policy thinkers have favored making pollution more expensive. It's an elegant way to externalize the externality of pollution.
But taxing carbon has proved not only politically complicated, but also substantively incomplete. For example, if you think about the issue of EV charging and encouraging adoption. An incremental investment in EV charging infrastructure is orders of magnitude more impactful in terms of EV adoption than a marginal increase in the gas tax. And so many people have come around. Not everybody, many people, my friend and former colleague Larry Summers, I think put it succinctly just a few weeks ago saying, "As much as requiring carbon pricing is important, I believe even more important is the dissemination of economically competitive renewable energy." The second the IRA has shifted the dominant economic challenge we face from one of insufficient demand to insufficient supply. For those of us who have worked in this space, this is an abrupt shift.
In the last decade, if you worked on any clean energy deployment issue, take the issue of electric buses, as I did, you immediately run into problems. Too fewer buyers, too little confidence from suppliers, no federal resources to support production. Today the challenge is the opposite. Every municipality wants to buy an electric bus. There are abundant federal resources, and our problem is insufficient availability of electric buses. And so the question now is how do we radically scale supply in the market? And that same dynamic presents across technologies. These changes, the change in private investment, the focus on making technology cheap, and the focus on supply constraints, they reflect dramatic progress. I used to say to my White House team all the time, as we were wading through the implementation of the IRA, "These are high-class problems compared to the pre-IRA world." But they also demand very new policy approaches. The IRA has rewritten the script and our policy and our political playbook need to change as well. What does that mean for going forward?
I want to just touch on two areas where I think we're going to really need to evolve and change our policy approaches. I put these out frankly as ideas. Because I think a lot of what we need and that you all can contribute to is to fill in what it means to operate effective policy in this post-IRA world. I have more questions than answers, but I'm going to tee up a couple of things for us to think about here. Number one, we need an American building agenda. We need to build clean energy systems and infrastructure at historic speed and scale. And number two, we need the equivalent of a global climate marshal plan to make sure that as we drive down the cost of zero carbon technology, we drive up its adoption around the world.
First on building, there's a growing recognition that we have got to build things much faster and fairer in America. You've probably all seen these eye-popping statistics. One of my favorites is we're going to need to build enough solar in the U.S. over the next 15 years to cover the entire landmass of Connecticut, Rhode Island and Massachusetts combined. But building for net zero requires more than new stuff, more than new batteries or electrical wires, it requires actually building new systems. And that needs to start with us getting to yes more quickly on citing and permitting of projects. There are critical details in this space, legislative and administratives, the details matter, and we could get into that in conversation. But I wanted to raise that at the core of this building agenda we also need to build a new coalition to power the building of America's clean energy economy. We're going to need to bring together activists, policy specialists, private sector innovators and investors around this shared objective of building.
And this is going to require dispensing with old and entrenched impulses in our economy and society. The impulse toward localism, which is about protecting local interests at the expense of public goods and the national building effort. And also some of the impulses in the traditional American environmental movement, which for the better part of 50 years was understandably trained at blocking and slowing down pollution-based building for good reasons. But now in this post-IRA world, those instincts need to evolve, and quickly. We need to change this idea of saying no and protecting at the local level to a national effort with local roots that says yes, and then yes again, and yes again to building clean at scale. And we're going to need to do this in build coalitions in new ways. Senator Brian Schatz from Hawaii who's been a leading thinker on this is right when he says, "There is nothing intrinsically progressive about stopping progress."
And I think just as the last generation was called to action by the phrase think globally and act locally, we and the next generation will need to be inspired by something along the lines of, think urgently and build massively. We also are going to need to distribute zero carbon electricity much more effectively and consume it more efficiently. And again, this is a place where the IRA really supports enormous demand. The demand issues on issues like transmission are no longer the problem. The problem now is we need to build a supply side response that is up to the task. We need to eliminate the kind of regulatory barriers that keep us from building that zero carbon electricity transmission system and building a transportation electrification system as well. If you start with the premise that an efficient, safe grid to move clean energy across this economy is an economic and national security priority, a lot of the technical reforms become no-brainers. Dismantling the byzantine interconnection queues that many of you have probably heard about.
Giving FERC the regulator the authority to designate national transmission corridors to build. Mandating proactive scenario-based analysis and long-term planning processes. Mandating the use of grid enhancing efficiency technologies. All of this is hard, but we can make enormous progress on this quickly if we designate it as the national priority that it is. And finally, we need to inject more competition into America's energy markets, so that zero carbon technologies can actually reach the grid and consumers can actually benefit from rapidly dropping prices. And utilities stand behind many of the obstacles to building clean energy today. Their markets are too often uncompetitive. In many cases utilities use entrenched market power to prevent clean energy technologies from competing on a level playing field. And lack of competition is a major barrier to entry for innovative and cheaper climate solutions. I hear this time and again when I speak to investors in this space. A common refrain I hear is, "Yes, permitting is a headache. Yes, siting is a challenge. Yes, supply chain issues are an issue."
But at the core we have uncompetitive energy markets, because if you can't compete and get paid for innovation like a virtual power plant or like demand response to reduce the actual amount of electricity you use, then you're not going to invest. And that results in less clean energy investment and higher prices. I believe that we have spent insufficient time as a country focusing on what the lack of competition has done to our energy markets. And I think in a post-IRA world that needs to change. We may ultimately need federal legislation to drive toward a single comprehensible market that allows consumer competition and choice. But in the meantime, as consumers, we also need to agitate and inject competition into America's utility market. We have seen very interesting strange bedfellow coalitions emerge at trying to address entrenched monopolistic harms in other sectors like tech and agriculture. And I think same is long overdue in the energy market.
The last thing I want to do before we move to next this part of the conversation is talk about the other half of the equation, or in fact the other 90% and growing part of the equation, which is outside of the United States. And here we must be just as bold in enacting new policy that accelerates the global deployment of clean energy. I am not a political messaging person, I generally am a policy guy. I hope that those of you can help me workshop this and we can figure out the right frame to use. But I think that we need an effort on the scale and the vision of a clean energy Marshall plan for the 21st century.
In his special address to Congress in 1947, president Truman explained that quote, "The United States has taken the lead in worldwide efforts to promote industrial reconstruction. For we know that enduring peace must be based upon increased production and an expanding flow of goods and materials among nations for the benefit of all." Today, America is leading with the IRA with an historic and industrial expansion in clean energy that has massive potential to promote global development and prosperity. Our public investments here at home, by driving down the cost of technology could lead to potential savings of more than $120 billion worldwide by 2030. The IRA could ultimately bring emissions reductions in the rest of the world that are two to four times larger than in the United States. But while that potential is in reach, it is not self-executing. Speeding the deployment of clean energy to the world and supporting the developing world's ability to become more resilient to climate change's unavoidable impacts, requires an effort on the level of President Truman and Secretary Marshall's ambition 75 years ago.
And I think this must mean at least three things. First, we need to harmonize different countries' efforts to make clean energy cheap in a way that achieves maximum deployment, more resilient supply chains and avoids unproductive trade disputes. We should be welcoming additional public investment that drives deployment of clean energy. Then we should do the hard diplomatic work of building new frameworks to accelerate and improve those impacts across jurisdictions. On this score, while there's been a lot of column inches and ink about the disagreements between the U.S. and Europe, underneath the surface we're making enormous progress toward this goal. The United States is now pursuing constructive new arrangements, not an old school trade agreement, but new arrangements with Europe, Japan, Korea, Canada plus allied countries through Asia, through the Indo-Pacific Economic Framework. These arrangements should harmonize subsidies across jurisdictions wherever feasible, and ensure full transparency of public investment.
Second, we need to bring our international trade and climate frameworks closer together, so that trade and tariff regimes encourage rapid decarbonization from emissions intensive foreign producers. Industrial decarbonization of things like steel and cement and chemicals is a good place to start, and it has growing bipartisan support in the United States. And you can envision a framework that actually aligns tariffs on producers that fall outside of their own climate commitments while allowing flexibility for different approaches to decarbonization. I believe this month there's an opportunity between the U.S. and Europe on something called the Global Arrangement for Sustainable Steel and Aluminum that could give us a real life template. And this is a model that should explicitly support the least developed countries by reinvesting the proceeds of carbon border adjustments and fees into sustainable development projects or providing special access to clean tech technology and exports.
Third, we need to massively increase the quantity and the quality of finance that deploys low-cost clean technology in the developing world. We need to dispense with the traditional bureaucratic constraints that operate in this environment. For those of you who have spent any time in the climate finance world, you have probably been to one too many conferences about the potential of climate finance. It's time for us to get down to the actual work of scaling climate finance.
Just to start, U.S. development finance capabilities must be scaled and radically today using existing authorities. The Development Finance Corp, the U.S. Development Finance Agency has the capability to do to $10 to $20 billion more climate lending today. The World Bank has the capacity to increase its climate support by 50% today, with a focus on more efficient guarantees, more ambitious risk insurance, more focus on climate infrastructure. The Green Climate Fund has potential but must be overhauled to meet the actual goals that it was intended to hit. And we're going to need new tools like foreign exchange risk mitigation, advanced purchase commitments, intellectual property transfer agreements to knock down and get at the practical impediments to deploying technology in developing market circumstances. We have an opportunity to do this in practice, because the cost of these technologies is falling dramatically. We can go with the grain of the market to scale. And while the politics of reforming our international financial architecture are hard, and trust me, the politics of every single thing I just said in the last paragraph, each of them is extremely hard in the individual.
In the aggregate, it's much more doable than ultimately the politics of unlocking new money, which we will ultimately need. I will end with this. This year in a couple of months we will have what's called the global stock take under the Paris Agreement. In 2015 the countries of the world came together and they said, "We're going to measure our progress against our own climate goals. And then once we measure our progress, we're going to reassess, we're going to take stock, and then we're going to try to set more ambitious goals." Spoiler alert, we already know what the stock take will tell us. That we are not on track to keep global average temperatures below 1.5 degrees or anywhere really close within that range, so we need to increase our ambition. But we also this year know that for the first time we actually have a viable theory of how we could radically drive down the cost of deployable clean energy technologies and then radically scale up those technologies in the developing world.
And I would not underestimate how pathbreaking ambitious and new that that opportunity is. So, our task in my view is clear. We need a new policy framework and architecture to take advantage of this post-IRA world. And we can do it in this decade if we get to work. So with that, we'll get to the work of having a conversation. Great.
Vaitheeswaran: Thank you for those words. I think everyone will have a sense of your outlook on the world, but they should know already, of course, we have with us a legend, Ladies and gentlemen, this is the godfather of American industrial policy in the 21st century. And as such, I want to praise you for having the courage as this is a lion's den of financial capitalism here at a business school.
Deese: If you've seen any cover of The Economist recently, you'll know how enamored the economy is.
Vaitheeswaran: Exactly. Well, as a European institution, we've lived through the '70s and '80s of industrial policy in Europe. And so we have some questions for you and you've been gracious enough to accept the questions from me, but more importantly from all of you when I'm done with my questions. Can you tell us, the scale of climate change, which is also something the last 20 years I've written often about on the pages of The Economist as real and needing ambitious response.
What is it, do you think that the approach that the Biden administration has taken, which of course even one of the key figures involved in, this approach is suited to the task at hand? Because we do know, I think looking across the U.S. and other parts of the developed world, certainly, and you can look at Latin America and other places. Approaches to try to be over ambitious with industrial policy can lead to some problems. And well documented in the literature we get crony capitalism, misdirection, misallocation, lack of efficiency and so on. I don't need to tell a business audience this. So, why does this set of policies rise to the moment in your view, and how do we avoid the pitfalls?
Deese: Two things, one is scale and the other [inaudible 00:24:50]. First, we need climate policy frameworks that meet the scale of the challenge that we're facing. And for any of you who are working in science of climate change and climate risk, I don't need to tell you, but things do not look good. In fact, we are seeing increasingly working strategies in terms of the breakdown in systems that is already going to occur and may well accelerate. So we need a degree of policy scale that can get close to or we can build to the magnitude of the channel. I think that the combination of piece of legislation of the United States has passed over the course of the last years, not only the [inaudible 00:25:33] production, but also the infrastructure built. The lesser degree to build [inaudible 00:25:39] starts to put the United States in a position where we are starting to get to the scale.
When we talk about the scale of the [inaudible 00:25:50] starting to get towards scale, then it comes to design. And I would say a couple of things and we can get into some specific concerns about industrial policy, industrial strategy. The first is that industrial policies and industrial strategies do in America-
Vaitheeswaran: Let's have you switch mics just to make sure everyone hears you.
Deese: In fact, it's been more the norm than the exception in the United States to have an explicit industrial strategy. But of course there are risks. One of the things that I think is the most powerful about the IRA is that if you look, the vast majority of the incentives in the IRA are long-term and technology neutral. If you are a company and you want to operate against those incentives, you now have a long-term certainty to invest against those incentives. The challenges are more acute in areas where you really don't have a market today. So something like hydrogen where the policy tools we're putting in place are a little more ambitious in trying to actually pull forward demand and also stoke supply as well. And there are risks in those contexts as well. But I think at the core your question is, can we attack this problem through a strategy of policy that is designed to radically reduce the cost of clean energy technologies as opposed to ratchet up the cost of pollution? I don't think we have a choice.
I think that it, particularly in the United States, but also around the world, we have seen progress when we focus on strategies that make clean tech cheap very quickly. And that rather than I think kind of bemoaning the question of can we get back to some sort of globally ideal stylized carbon pricing? We should put our arms around embracing what is good about the scale of this approach and try to optimize around it.
Vaitheeswaran: It's a pragmatic answer, right? Every first principle's answer would say, "There's an externality in the marketplace. We should have carbon pricing, ideally some form of global concerted coordinated utopia and unicorns will also arrive." And having advocated this for 20 years I've learned that we need to be practical. So, I'm with you on the pragmatism, but then you did talk about the specifics of the pragmatism. The triple whammy of legislation, the IRA, but before it the bipartisan infrastructure law as well as the CHIPS plus Science Act. They're related in many ways and move in the same direction, I think is mostly carrots, not a lot of sticks. And so, one could argue, while it achieves your goal of being politically feasible and around the world we do see sticks are not very popular, carrots are very popular. It can be much less efficient than it should be. Is there a prospect that we will see some sticks as well? Because if you have nothing but carrots, you also lead to inefficient outcomes.
Deese: I do want to start by saying, I'm a pragmatist and I think this approach reflects pragmatism, but it is not a simple second-best alternative to the policy ideal. If you gave me-
Vaitheeswaran: Is it the first best? This is the best of all policies?
Deese: Every policy approach reflects the reality that we operate in. But I guess the point that I would say, so is if you gave me free rein, to put in place, whatever climate policy I could in the United States. There is no way that a economy-wide carbon price and forget it would be the right strategy to attack climate change at the speed and the scale that we need. And we know, and we've seen a lot of the economics community come around to the fact that particularly as the deployable cost of clean energy comes down for technologies, carbon pricing alone is not actually the most efficient way to scale. And we also know that this is about systems and about humans and how they interact with the world. And so the question of why people don't do cost-efficient energy efficiency improvements in their home is not about the marginal cost of pollution. It's about the fact that people don't want to spend Sundays cleaning out their attics and have somebody mucking around in their attic or otherwise-
Vaitheeswaran: You could take away their gas stove either.
Deese: Well, I guess that's the point, which is we're operating through trying to change and improve a complicated web of human systems. And I think that we need to acknowledge that it's not just that there is a first best and we have to operate because of political constraints. We need to learn from what we know. So that's, I think, an important lesson and that we need to at least incorporate into our thinking going forward.
Vaitheeswaran: That's a fair point. Prices alone are less important than the ability to respond to prices. I think Amory Lovins, the thinker on energy has said that many times, and I take that point on board. Let's talk a little bit about your idea of a new Washington Consensus. I think you've used that phraseology. Can you tell us what you mean by that? What would a consensus include that might be sort of what comes after the IRA?
Deese: Sure. I think that it is important that we recognize that the IRA and this burst of compulsory legislation is happening in the context of a much broader shift in economic paradigms. And I think it's fair to characterize, over characterize that the period from the end of the Cold War till recently pre-COVID was defined by a consistent march toward market liberalism. That was defined in many ways as a kind of a force of nature that was moving in one direction because the sort of overriding economics Trump's-
Vaitheeswaran: Publication ...
Deese: ... politics.
Vaitheeswaran: ... to keep China priced, et cetera.
Deese: And the like. And I think that that approach missed a lot of realities about the ways in which globally brittle just-in-time supply chains embedded in them with very significant costs that ended up being born by consumers or communities. We all live that in different ways during the pandemic crisis. But also that the promise that reducing relative trade barriers has some macroeconomic benefit and then it has a set of harms and we'll harvest the macroeconomic benefit and at some point in the future we'll get to dealing with the harms. Manifest over years and years and years has developed an understandable sense of skepticism that this system was actually operating to the benefit of lots of people in lots of places, including all over the United States. What does a new consensus look like? First and foremost, a consensus to actually invest in and build productive capacity in the United States. Demonstrating a bipartisan willingness and commitment to do the deferred maintenance, to upgrade our infrastructure, rebuild our water systems, deal with communities that have too long been subjected to environmental injustices to do the work of actually building here in the United States.
And then demonstrate that we can do that in a way that then actually harmonize and partners with like-minded countries around the world. Is that easy? Is that simple? No, but I think that there is a viable strategy to do that in a way that actually harvests the benefits of investment at home and can help to harmonize those around the world.
Vaitheeswaran: So, you won't get an
