Breakingviews -zero race

U.S. President Joe Biden speaks during a bill signing ceremony where the president is signing “The Inflation Reduction Act of 2022” into law in the State Dining Room of the White House in Washington, U.S. August 16, 2022. REUTERS/Leah Millis

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MUMBAI, Aug 18 (Reuters Breakingviews) – America’s drive to speed up its energy transition is likely to throw other big carbon emitters off course. A large chunk of America’s $430 billion Inflation Reduction Act that President Joe Biden signed into law on Wednesday will incentivise companies to boost the country’s solar, wind and hydrogen output. The danger is that for the next few years this will give them far greater control over supply chains that poorer countries depend on before the knock-on benefits of increased investment and production make such technology read more more available and affordable worldwide.

Take a big emitter like India. Its goal for 280 gigawatts of solar power by 2030 is credible because current end tariffs of about 2.5 rupees ($0.031) per kilowatt hour make the energy source cheaper than producing power from domestic coal. Indian companies including Adani Green Energy (ADNA.NS), U.S.-listed ReNew Energy (RNW.O) and Singapore sovereign fund-backed Greenko have relied on foreign suppliers and market forces to drive down prices thus far.

Washington’s new tax credits and grants are likely to prompt makers of panels, turbines and other such hardware to shift focus read more to the United States in expectation of a bumper payday. The handouts will at least roughly double the internal rate of return shared by solar and wind projects for developers, offtakers and investors, per a Boston Consulting Group study factoring in the bill’s details as of Aug. 6.

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In a world where supply chains for solar and wind parts are already tight, and contracts are often short rather than long term, it is logical that suppliers stand to benefit too. A similar reprioritising of global customers happened during former U.S. President Barack Obama’s administration after it introduced wind farm subsidies. If Indian companies end up having to compete against prices adjusted for U.S. tax credits, the country’s solar tariffs could rise to about 3.5 rupees, one industry executive told Reuters Breakingviews, a point at which the cost of producing power from domestic coal starts looking competitive again.

India is trying to kick start its own solar module and cell manufacturing capacity by slapping taxes on imports, which mostly come from China, and by offering some sales-based manufacturing incentives over five years. But the effort pales against the larger U.S. scheme that will last for roughly a decade. What’s more, the technological expertise in cleantech sits mostly in China, the United States and Europe but there’s little action yet on transferring this knowledge elsewhere. Meanwhile, rich countries continue to fall short of their pledge to transfer $100 billion per year to help poorer countries deal with climate change.

Elsewhere, innovation might take a hit too. Consider green hydrogen. The U.S. is offering a tax credit of $3 per kg, which might be enough to make it competitive with grey hydrogen, but that is above the $2 per kg Mukesh Ambani’s Reliance Industries (RELI.NS) was aiming to solve for before the end of 2030.

Ramping up production of technology usually brings costs down for everyone over the longer run, while also improving efficiency and other metrics. That has been the case for solar cells, wind turbines and electric-vehicle batteries in the past and is likely to continue. Introducing government subsidies for commercial production is one way to accelerate the process. In the short term, though, America’s new climate win could hamper other countries’ race to net zero – and make it harder for Washington to point a finger at emerging-market polluters if they do fall behind their emissions-reduction goals.

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CONTEXT NEWS

U.S. President Joe Biden signed the Inflation Reduction Act into law on Aug. 16. The legislation passed by Congress includes generous infrastructure grants and tax credits to support the growth of solar, wind and hydrogen industries in the country. The plan is due to go into effect on Jan. 1, 2023.

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Editing by Antony Currie and Thomas Shum

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