NEW PARADIGM

A positive approach to climate policy: What lessons can be learned from the US Inflation Reduction Act

The Inflation Reduction Act marks a turnaround in US climate policy - away from carbon pricing and towards government investment. The new Forum study by Thomas Fricke and Isabella Wedl compares the new approach with previous instruments and evaluates the initial effects. What lessons can be learned for European climate policy?

BY

FORUM NEW ECONOMY

PUBLISHED

7. APRIL 2025

READING TIME

2 MIN
  1. Link to the Forum study
  2. Link to the op-ed for SPIEGEL Online

For decades, climate economists and policymakers have favored market-based solutions with minimal government intervention and have advocated carbon pricing as the primary climate policy tool. The Inflation Reduction Act (IRA), which became law in 2022, represents a fundamental departure from this approach by emphasizing positive incentives through subsidies and large-scale public investment in infrastructure. This paper examines the limitations of carbon pricing in promoting the transition to a low-carbon economy and contrasts these with the investment-led approach of the IRA. In particular, it aims to stimulate a discussion on the extent to which this model could influence European climate policy.

To this end, we provide an overview of the key provisions of the IRA and assess its initial impact on private cleantech investment using data from the Clean Investment Monitor. This is followed by a summary of the likely impact on emissions reductions and macroeconomic developments in the United States. To put these findings in context, the current EU strategies to support the cleantech industry and its policy response to the IRA are explained. Against this background and based on expert discussions, we highlight key lessons from the IRA and identify outstanding issues of relevance to European policy makers. We conclude that the IRA has significantly boosted investment in the cleantech industry in its first years and that the projections on its emission reduction potential and macroeconomic impact are promising. However, it will be important to monitor its long-term effects and cost-efficiency to confirm the sustainability of these positive effects.

PREVIOUS ARTICLE Economic Turning Point – But How? What Germans Think

ABOUT NEW PARADIGM

KNOWLEDGE BASE

After decades of overly naive market belief, we urgently need new answers to the great challenges of our time. More so, we need a whole new paradigm to guide us. We collect everything about the people and the community who are dealing with the question of a new paradigm and who analyze the historical and present impact of paradigms and narratives – whether in new contributions, performances, books and events.

ARTICLE OVERVIEW