Protectionism, Competition, and Elections: Navigating a New Era of U.S. Climate Leadership

Commentary by Allegra DawesandJoseph Majkut

Published April 10, 2024

How should the United States define its role as a leader in the emerging clean energy economy and in addressing climate change globally? Following the passage of the Inflation Reduction Act (IRA) in 2022, the United States has embarked on a new pathway for climate action-one based on industrial policy for the production and deployment of clean energy technologies. This opens new opportunities and new challenges for the United States' global climate leadership. Clean energy supply chains have emerged as a key area for achieving global climate action and are increasingly a part of geopolitical competition. Establishing the United States as a leader in clean energy supply chains will require new tools for commercial engagement, trade, and diplomacy.

Clean Energy Supply Chains and Climate Leadership

A decade ago, a country's claim to climate required (1) the ambition and credible action taken reduce its own emissions and (2) the ability of that country to forge partnerships to achieve global action on emissions reductions. These were the key elements that supported structures like the Paris Climate Agreement. In that frame, cooperation between leaders was essential and delivered significant benefits for climate action; large countries with significant domestic emissions can build international support for climate action. The United States, China, and the European Union have all been recognized as leaders in climate negotiations and agreements and, in the past, worked to cooperate on addressing climate change. But in the near decade following the Paris Agreement, tensions have grown. The United States' commitment to it was shown to be half-hearted when President Trump withdrew from the deal. Internationally, the United States and China's relationship has grown more adversarial and competitive. It is becoming clearer that the opportunities for cooperation on climate change are declining.

How should the United States pursue global climate leadership in a more competitive time? Table 1 shows four leadership modes that the United States and other countries have demonstrated in climate negotiations and action. Countries can lead by example (directional) by setting ambitious goals to reduce emissions and enacting policies to achieve them. The ability to drive negotiations and build coalitions (ideational and instrumental) to address climate change has also been prevalent in climate governance and leadership.

The embrace of green industrial policy has expanded the United States' opportunity to lead on clean technology innovation, production, and adoption; this opens a new mode of structural leadership that could enable the United States to play a key role in producing, financing, and developing key technologies for decarbonization. Along with addressing climate change, this is also an opportunity for the United States to develop new paths toward economic growth, ensure that the technologies and materials of the future are secure, and further its international engagements. To date, that opportunity has largely been seized by China; it has established a leading position in solar, battery, and electric vehicle (EV) manufacturing. China has become the dominant player in clean technology supply chains from the upstream to manufactured products. It produces more than 90 percent of rare earth magnets for turbines and motors and more than 90 percent of the world's poly silicon for photovoltaics. Downstream, China holds a similar position, producing around 75 percent of solar modules and a dominant EV manufacturing sector. In many instances, China now produces leading technologies at the lowest costs globally. This is a commanding structural advantage; China can sway markets for input materials and choke competition.

The United States has lagged China in developing a strategy for structural leadership; in the past, U.S. leadership in this area has revolved around development finance and aid. The IRA has kickstarted U.S. climate leadership in a variety of ways. First, it has accelerated and reinforced the United States' emissions reductions pathway; a recent study found that the IRA will lead to emissions falling by 33-40 percent by 2030, compared with a projected 25-31 percent without the bill. Second, Biden administration officials view the IRA as a blueprint for other countries looking to enact similar policies, with the hope that U.S. leadership will inspire followers to invest in their own clean technology sectors.

The IRA and green industrial policy open new pathways for the United States to become a structural leader on climate change. The bill reinforces the U.S. ability to produce clean technology, reduce the cost differential of these technologies, and to drive global adoption of clean technology for decarbonization. To capitalize on this opportunity, there are several challenges that policymakers will need to address in the coming years.

Challenges for U.S. Clean Technology Leadership

A key part of the argument for the IRA is that the United States will spend handsomely to reduce the costs of clean energy. By supporting technology development, the IRA and other industrial policies can create global public goods through reducing the cost of clean energy technology. The Biden administration has emphasized the structural changes that it hopes the IRA and other programs will incite. Investing in early-stage technologies is a pathway to bring down costs and speed the commercialization of key technologies. Through a combination of IRA funding, export supports, and development finance, the Biden administration is also targeting an international engagement strategy to diversify the supply of clean technologies and support adoption abroad. However, the United States continues to face significant challenges in delivering on a strategy for structural leadership on climate and clean energy technology.

Protectionism

The IRA policy priorities and incentivizes domestic production of clean energy technologies and constituent components of those technologies. Through an array of domestic content requirements and place-based incentives the bill has at times faced criticism from allies and adversaries as protectionist. Prioritizing domestic action on climate change is necessary for establishing a leading position. The United States needs to take credible action on climate and clean technology both to reduce emissions and to further its national interests. However, the trend toward protectionism could hamper the U.S. ability to build effective coalitions on climate action and imped global actions to address climate change.

To address this, new models of trade and partnership with allies will be necessary. The intersection of bills like the IRA or the European Union's carbon border adjustment mechanism (CBAM) that tie accelerated climate action with global trade will impact the pace of decarbonization and opportunities for the private sector. Reforms of institutions like the World Trade Organization (WTO) can help to enable broader consensus and cooperation on these policies. New partnerships like climate clubs that prioritize the trade of low emissions goods could also emerge to drive emissions reductions.

Competition

If the United States hopes to become a structural leader on climate change through a combination of technology innovation, production, export, and international aid, it will have to compete with China. On many technologies where production cost is a significant factor, the United States will be at a disadvantage. For instance, in 2023, China's solar panel production costs fell as low as 15 cents per watt, more than 40 percent lower than U.S. production costs. While the United States can protect domestic manufacturers through a variety of tariff and subsidy schemes, the competitiveness of this product internationally is low.

Identifying areas of competitive advantage in key technologies is then a necessary step in building the U.S. international climate approach. Where U.S. technology is competitively priced, there is a potential export market for U.S. firms. The Boston Consulting Group found that the potential export market for solar, offshore wind, geothermal energy, and carbon capture, utilization, and storage (CCUS) is 25-30 billion per year by mid-century. The United States can also gain an advantage in emerging and differentiated technologies; for instance, there are still significant opportunities to innovate on battery chemistry and long duration storage. Building new trade relationships and partnerships will help to unlock the potential of these domestic investments.

Elections

The changing political landscape in the United States is a significant challenge for establishing a lasting leadership position in the green economy and in addressing climate change. The IRA adds some stability to U.S. policy on climate change; despite criticism from some parties, large segments of the bill is likely to remain in place even with a change of administration. For instance, when President Trump withdrew from the Paris Agreement, it signaled a dramatic break with the international consensus and action the United States had helped to build under President Obama. Variable commitment to addressing climate change weakens the U.S. instrumental and directional leadership on climate. Without solid domestic goals and commitments, partners are less likely to view the United States as a reliable partner in the energy transition. The first-mover advantage is also lessened as countries are unlikely to follow a leader with unstable policies.

Clean technology and supply chain leadership is not only important to address climate change-it is also strategically important for the United States to counter China and support greater resilience and security in changing energy systems. There are areas to build a lasting strategy for structural leadership on clean technologies. During the Trump administration, the trend toward protectionism and policies that supported U.S. manufacturing emerged. Credits in the IRA like the 45X for advanced manufacturing could see continued support from both parties. Securing and growing critical mineral supply chains has also emerged as an area of potential bipartisan support. Defining the U.S. national interest in building and developing these supply chains and technologies can establish a stable basis for growth and leadership.

A Need for a Better Strategy for Structural Leadership

Structural leadership on climate change looks set to become an area of geopolitical, economic, and climate importance. The United States' green industrial strategy simultaneously creates the opportunity to take a larger role in addressing climate change and exacerbates challenges in establishing this role. Addressing the challenges that green industrial policy creates in building a strategy for climate leadership will be an important step for the United States in coming years. Developing a leading role in the production and adoption of clean energy technologies is not only a climate imperative, but it is also an important step to ensure that the country remains a leader in innovation and builds supply chains that are secure.

Allegra Dawes is an associate fellow with the Energy Security and Climate Change Program at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Joseph Majkut is the director of the CSIS Energy Security and Climate Change Program.

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