Lever­age the IRA for Global Clean Energy Leadership

David Williams & Daniel M Kammen

The Infla­tion Reduc­tion Act (IRA) is a pro­found step in advanc­ing cli­mate lead­er­ship par­tic­u­larly from a deeply divided nation. Now is the time to show how this step leads to progress, prof­its and jobs where we are not divided: advanc­ing US over­seas engage­ment and cli­mate lead­er­ship. To do, Con­gress could extend the IRA tax cred­its for US firms work­ing internationally.

The US has much work at home to do to usher in the clean energy rev­o­lu­tion.  We need to act glob­ally, how­ever, or domes­tic progress will mean very lit­tle. We can achieve this by extend­ing proven tax incen­tive tools to unlock the nec­es­sary invest­ment across Africa, Asia and Latin Amer­ica.  This will build mar­kets and cre­ate jobs for the clean energy sec­tor in the US. Devel­op­ers will have an entirely new pool of sophis­ti­cated investors and the cap­i­tal nec­es­sary to match the scale of the cli­mate challenges.

While many bemoan the dom­i­nant role China plays in invest­ing in emerg­ing economies, extend­ing US tax cred­its for clean energy projects pro­vides US com­pa­nies a means to build mar­kets and accel­er­ate global decar­boniza­tion.  Take a look at the oppor­tu­ni­ties in Africa.

The num­ber of unelec­tri­fied Africans has remained nearly unchanged at over 600 mil­lion for over a decade, despite efforts aimed at achiev­ing the UN Sus­tain­able Devel­op­ment Goal (SDG7) to pro­vide global energy access by 2030.  At COP26 in Glas­gow last Novem­ber, the inter­na­tional com­mu­nity made a com­mit­ment of $100 bil­lion to indus­tri­al­iz­ing nations. This is an order of mag­ni­tude smaller than what is needed on an annual, ongo­ing, basis to build decar­bonized, afford­able, and resilient energy future. Clean energy is now cheaper to build and sim­ply oper­ate than exist­ing fos­sil fuel projects.  Africa needs mas­sive and sus­tained financ­ing for new, bank­able projects.

The Africa elec­tri­fi­ca­tion story is com­plex because ‘bank­able’ projects are depen­dent not only on design­ing good projects but also on the twin con­straints of sus­tain­ing cap­i­tal from investors and then also able to nav­i­gate com­plex local reg­u­la­tory issues. Sub-​​Saharan African projects are often held up because of a lack of ‘First loss cap­i­tal’ (high risk) fund­ing that lever­ages bank and cen­tral gov­ern­ment investments.

Pro­vid­ing risk-​​tolerant ‘first-​​loss’ cap­i­tal at scale lever­ages hun­dreds of bil­lions in a global renew­ables indus­try. Oper­a­tionally this could be done by extend­ing the IRA to spe­cific projects in Africa. This would strengthen invest­ment by US firms and sup­port the geopo­lit­i­cal goals of the US. This tax credit would afford the same incen­tives across to the bor­der that already include invest­ments in solar, wind, geot­her­mal, sus­tain­able hydropower, energy effi­ciency upgrades, and trans­mis­sion and dis­tri­b­u­tion projects.

Tax incen­tive invest­ing works. The US Invest­ment Tax Credit is respon­si­ble for the dra­matic suc­cesses of solar across the US since its launch in the Energy Pol­icy act of 2005. The pro­gram has been highly pop­u­lar and an eco­nomic engine cre­at­ing over 230,000 jobs in every state with an annual pri­vate invest­ment of over $30 bil­lion all while mak­ing renew­able energy more afford­able than con­ven­tional energy sources.  The pro­gram has chal­lenges but is resound­ingly suc­cess­ful by rely­ing on pri­vate com­pa­nies to make good investments.

The eco­nomic needs for African energy are tremen­dous and aid is sim­ply not enough. At COP26 the US and Euro­pean Part­ners com­mit­ted $7.5 bil­lion in aid for the ail­ing South African energy sec­tor.  Nige­ria has pub­licly stated a request for a com­pa­ra­ble amount.  These invest­ments are crit­i­cally needed to upgrade or build grid trans­mis­sion assets, invest in new clean energy projects, reduce methane (CH₄) fugi­tive emis­sions, invest in energy access, and launch elec­tric vehi­cle mar­kets.  $400 bil­lion are needed beyond busi­ness as usual for each coun­try to achieve a clean energy tran­si­tion. That is almost a tril­lion dol­lars of invest­ment oppor­tu­nity for US com­pa­nies to sup­port Just Energy Tran­si­tions in just two nations. Reward­ing US com­pa­nies for invest­ing in com­mer­cial clean energy projects in Africa will enable a tran­si­tion that can­not be achieved with pub­lic sec­tor funds alone.

This can be launched quickly and can be in place soon after the Novem­ber COP27 meet­ing in Egypt. The Insti­tute on Tax­a­tion and Eco­nomic Polity found that at least 55 of the largest cor­po­ra­tions in the US paid no fed­eral cor­po­rate income taxes on their 2020 prof­its. Over $8 bil­lion in avoided tax a year is in com­plex off­shore struc­tures. The tax incen­tive we pro­pose cor­rect this by pro­vid­ing the pri­vate sec­tor a clear means to back up their pub­lic state­ments of com­mit­ment to a Just Energy Tran­si­tion via direct invest­ments in the need­i­est and fastest grow­ing markets.

This ‘sim­ple’ solu­tion requires only a mod­est change to the US invest­ment Tax Credit pro­gram to extend eli­gi­bil­ity to cer­tain inter­na­tional projects. The US direct aid and web of sup­port­ing wrap-​​around ser­vices cer­tainly make a dif­fer­ence but are not enough. Extend­ing proven US pol­icy would be a sig­nif­i­cant cat­a­lyst for cap­i­tal directed to indus­tri­al­iz­ing energy mar­kets. In the past year we have seen multi-​​billion-​​dollar invest­ments in solar, stor­age, and elec­tric vehi­cles in Angola, plans in Kenya to move from a 4 GW national grid to 100 GW by mid-​​century, and both Nige­ria and South Africa com­mit to going carbon-​​free if invest­ment flows to solar, wind, energy stor­age, elec­tri­fied trans­porta­tion, and green hydro­gen.  The mar­kets are there, the time is now, and what is most needed is a means to move capital.

The world’s climate-​​vulnerable are sus­cep­ti­ble to the impacts of cli­mate change, and are the most affected by weaponiz­ing energy. This is a unique moment where polit­i­cal will can bring incre­men­tal tax code changes that democ­ra­tize, de-​​carbonizes, and decreases the con­flict costs of energy around the world. This just might be the match that lights renew­able solu­tions for the rest of the world.