Retooling the regulation of net-zero subsidies: lessons from the US Inflation Reduction Act

The US Inflation Reduction Act (IRA) has heralded the advent of a new era of industrial policy within and beyond the USA. As the net-zero economy transition unfolds and national economic security paradigms entrench, industrial policy is here to stay. Net-zero subsidies are employed as multipurpose policy tools to promote domestic manufacturing, de-risk from China, and boost the net-zero transition. This new scenario prompts a fresh look at old questions surrounding environmental subsidies and their justification, actionability, and countervailability. This article makes three contributions. First, it articulates a conceptual framework to assess questions surrounding the justification of net-zero subsidies. It advocates a direct focus on their environmental effectiveness, drawing a distinction between justifiable trade-distorting effects and unjustifiable protective or discriminatory application associated with the pursuit of reshoring or geopolitical goals. Second, it employs a careful analysis of different IRA tax credits to operationalize the article’s framework and test its robustness. Third, it draws on legal and economic insights to shed some light on the environmental effects of different groups of net-zero subsidies. On these grounds, it advances a streamlined three-fold categorization and demarcates the boundaries within which different subsidies should be justifiable, non-actionable and non-countervailable.