Impact of the Inflation Reduction Act on UK’s Green Economy

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A year after the U.S. Inflation Reduction Act (IRA) was launched, fears about its negative impact on the U.K.’s green economy have not fully emerged. However, this does not negate the need for a proactive net zero policy if the U.K. aims to leverage the growing green goods market. This assessment is made in a report published by the Social Market Foundation (SMF), a cross-party think tank.

The report presents the idea that the IRA, which directs vast amounts of funding towards clean technologies in the U.S., has not triggered an anticipated wave of economic protectionism. Instead, it has positively influenced the global green goods sector. Despite this, U.K. experts in trade, clean energy, and technology have raised concerns about potential shifts in investment to the U.S., prompting calls for a more ambitious U.K. green industrial strategy.

Interestingly, the SMF suggests that the IRA’s impact on the U.K. green economy may not be as severe as initially thought. It attributes this to the U.S.’s flexible content requirements for “green” trade, which apply to a limited range of goods in a few sectors. The report also highlights the U.K.’s low exposure to U.S. trade barriers, given that just 13% of U.K. goods are exported to the U.S. It contends that the EU market holds much greater significance for U.K. trade.

Furthermore, the SMF argues that the IRA presents a significant opportunity for British exporters, as it has sparked a global race for clean technologies. This, the think tank suggests, could reduce emissions, lower energy bills, and reduce countries’ dependence on oil-rich nations. It urges policymakers to perceive the IRA not as a threat, but as a new frontier for green economic opportunity.

The United States’ landmark climate legislation presents a significant opportunity for British exporters, as it has sparked a global race for clean technologies.

The report also notes that in response to the IRA, governments worldwide have taken measures such as simplifying permitting for clean energy projects, setting concrete targets for clean power supply and clean technology output, and creating a more welcoming environment for green technology investors and developers.

However, the report warns that the U.K. cannot afford to be complacent. It points out the need for policies and regulations that will keep the U.K. competitive in the green markets stimulated by the IRA.

Moreover, the report suggests that securing a trade deal with the EU should be a priority for the U.K., as it would promote trade of net zero goods in specific industries. It also highlights the need for the U.K. to increase investment in emerging green sectors, to match the efforts of other OECD nations like the U.S., Canada, Japan, and New Zealand.

The UK needs to significantly increase investment that can stimulate and support emerging green sectors.

In this context, the U.K. Energy Research Centre (UKERC) also warns that the U.K. is not on track to fulfill its climate and green energy commitments unless the government formulates an “investment grade” plan to bridge the sector’s investment gap. The SMF’s assessment echoes these concerns, highlighting the risk to businesses posed by the U.K. government’s wavering stance on net zero policies and clean technology targets.

The think tank urges the government to introduce more benchmarks for renewable energy technologies to reassure investors and give British businesses the encouragement and funding needed to invest in the U.K. economy.

The U.K.’s strengths in clean energy development offer no guarantee of maintaining its current position in the sector.

Emma Pinchbeck, the Chief Executive of Energy U.K., describes the IRA as a “game changer for the investment landscape” and warns that complacency could see the U.K. quickly falling behind in the race for clean energy and decarbonization.

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