What Britain should learn from Biden’s Inflation Reduction Act plan

The UK has lost the habit of thinking strategically. Grappling with the constraints imposed by the global and domestic economies — or reality as it is sometimes known — is deeply out of fashion these days.

Debates on how the UK might respond to Joe Biden’s Inflation Reduction Act and its near $400bn of green subsidies are the latest example. The Government, and economic liberals, want to wish away such protectionism, while for green campaigners and much of corporate Britain it proves we should do exactly the same thing here. The Institute of Directors says “the UK deserves nothing less than its own version of the Inflation Reduction Act — to ensure that the UK becomes the global location of choice for all [my emphasis] forms of green investment.”

These divergent responses share the same flaw: starting from instinctive and abstract reactions to Biden’s bill rather than the nitty gritty of what it means for Britain, a smaller, more open economy. Here are four more promising steps we could take.

First, accept the reality. Like all lasting American industrial policies, this one is underpinned by a powerful combination of national security (competition with China) and politics, as Biden tries to wean a hydrocarbon producer off emissions and a country that recently elected Donald Trump off doing so again. European complaints about the IRA will only get so far when the EU already provides similar or bigger subsidies for clean energy. More importantly for the UK, the EU has now joined the wider subsidy race.

Second, the UK needs to sort out its industrial policy with regards to net zero and focus efforts. Active government must support green growth industries before it is too late. Those opposed to the UK responding say we lack the fiscal firepower to match the US or EU. But it is home market size (ours is five times smaller than the EU and seven times smaller than the US) that should loom largest in our thinking. Increased protectionism means it will play a bigger role in deciding what gets produced where. The response should be to prioritise those green technologies where economies of scale are smaller, where energy security demands it or where we have a comparative advantage (research for the Economy 2030 Inquiry points to tidal, offshore wind and nuclear energy, and carbon capture).

Third, we need to think about consumption. There will be some areas where we should be perfectly happy for US and EU taxpayers to subsidise production, not least where it is likely to mean cheaper prices or more resilient supply chains for us. Diversified solar manufacturing capacity, currently dominated by China, is no bad thing even if it’s not headed for the UK. And there are wider benefits, including knowledge spillovers from advances in green technology.

Fourth, the IRA should act as a wake-up call that a rebooted economic strategy for the UK needs to include, but also look beyond net zero. Accelerated decarbonisation is the central challenge our economy faces in the decades ahead and will grow industries we must be part of. But some are asking it to take more weight than it can bear in ensuring the UK continues to earn its place among the world’s richest countries. The industries involved are too small and it is wishful thinking to pretend others don’t possess big advantages in some areas: South Korea and Japan produce clean patents at around four times the rate we do. So we cannot ignore the UK’s long established advantages, from beverages to aerospace, and as a service-exporting superpower — despite the stereotypes, this includes successful musicians and architects as well as bankers.

Biden’s plan is not something for the UK to ignore or simply copy. But the American approach offers a wider lesson for Britain, living through a 15-year economic stagnation: like it or loath it, this is what strategic economic thinking looks like.

This article was originally published in the Financial Times