A positive approach to climate policy: What are preliminary lessons learnt from the US Inflation Reduction Act?

For decades, climate economists and policymakers have favored market-driven solutions with minimal government intervention, advocating carbon pricing as the primary climate policy instrument. The Inflation Reduction Act (IRA), enacted in 2022, represents a fundamental departure from this approach, emphasizing positive incentives through subsidies and substantial public investment in infrastructure. This paper examines the limitations of carbon pricing in advancing the transition to a low-carbon economy and contrasts these with the investment-driven approach embodied by the IRA. In particular, it seeks to stimulate discussion on the extent to which this model could inform European climate policy.

To this end, we provide an overview of the IRA’s key provisions and assess its early impact on private cleantech investment, drawing on data from the Clean Investment Monitor. This is followed by a summary of projected effects on emission reductions and macroeconomic developments in the United States. To contextualize these findings, we outline the EU’s current strategies for supporting cleantech industries and its policy response to the IRA. Against this backdrop, and informed by expert discussions, we highlight key lessons from the IRA and identify open questions relevant to European policymakers. We conclude that the IRA has significantly boosted cleantech investments in its initial years, and projections on both its potential for emissions reduction and its macroeconomic impacts are promising. It will, however, be important to monitor its long-term effectiveness and cost-efficiency to confirm the sustainability of these positive impacts.