Why Biden’s Domestic Content Incentives Matter

This is a pretty good take on what the administration is attempting to do in the US with regard to manufacturing. With some help from Republicans, this could be a change in the US for labor. Labor’s input in manufacturing raw materials and finished product would result in increased income. Much pf Labor could be classified as skilled Labor.

“Why Biden’s Domestic Content Incentives Matter,” Roosevelt Institute. Todd N. Tucker

Today, the Biden administration announced the latest pillar in its industrial policy strategy. This time on clean energy supply chains. In just the last few months, the White House and federal agencies have released announcements on subsidies for semiconductors, electric vehicles, electric vehicle charging infrastructure, and more. Today’s guidance is significant, it defines the conditions under which clean energy investors and producers under the Inflation Reduction Act (IRA) can get additional subsidies if their supply chains are . . .

“Made in America.”

In this post, we’ll examine some of the reasons domestic content incentives matter for the success of industrial policy programs. But first, let’s look at what’s in the new rule.

Biden’s New Domestic Content “Adder” Combines Enticements and Flexibilities

The core of this new announcement is clean energy producers and investors can get an IRA subsidies up to 10 percent higher. The subsidies are available if the products they use in their projects are deemed “Made in America.” Products receive that designation:

  • For steel and iron, if they were totally made in the US;
  • For mining, if they were totally mined in the US; and
  • For other manufactured products, if a certain percentage of the value of their components are made in the US.

The Department of Energy estimates having this bonus credit available could drive an additional 50 gigawatts of clean energy deployment by 2030. (For a longer thread on the details of this announcement, see my Twitter thread here.)

It’s important to underline: The so-called domestic content “adder” is an addition, not a requirement. It adds to the total subsidy that a clean energy producer or investor can receive. As Dan Gearino of Inside Climate News has shown, projects claiming the investment tax credit, get a baseline of 30 percent of their cost covered by the federal government. Another 30 percent more if they invest in certain communities that are low-income or formerly reliant on fossil energy production. Combined, it would mean 60 percent of the project cost could be covered by the public sector, even without sourcing domestically. For firms and nonprofits wanting to go the extra mile, up to 70 percent of the costs can be covered.

Roosevelt Institute’s chief programs officer Marissa Guananja . . .

“This type of balancing between incentives and flexibility is key to a successful economic development plan that firms can actually execute. The government has long encouraged domestic supply chains through Buy American procurement preferences. This now extends that strategy to firms and nonprofits that benefit from taxpayer dollars.”

Why Countries Favor Domestic Production

Favoring domestic over imported production has been a mainstay of economic policy since the beginning of modern states. The motivations have varied, but common ones include the fostering of nascent strategic industries and the stimulation of “forward and backward linkages” —additional economic activity and employment in upstream and downstream value chains.

This strategy has been frowned upon during the era of neoliberalism. Neoliberalism which aimed at disembedding policy from a national or local context in favor of lowest cost production. The consequence: substantial deindustrialization of regions and countries that once had substantial manufacturing presence.

Indeed, recent academic research shows that domestic content requirements (often called “local content requirements” or LCRs) like Biden’s adder are commonplace in many countries’ clean energy strategies. In a 2020 article for the academic journal Renewable and Sustainable Energy Reviews, researchers from the Technical University of Denmark and University of Cape Town are discovering local content requirements or LCRs work They are most likely to succeed in countries with large markets, historic manufacturing capacities, and thresholds for domestic production phasing in and increase over time. The US ranks favorably on all of these conditions. With the idea of “Buying American” being popular across the political spectrum, it is unlikely either party will want to be the one to roll back LCRs.

Development economist and deputy director at the Roosevelt Institute Isabel Estevez . . .

“Efforts to rebuild domestic manufacturing capacity certainly can’t be indifferent to costs. Calculations have to adequately account for all ‘costs.’ This includes the long-term economic costs of attrition of the country’s productive base and the sometimes-immeasurable but very real impacts of economic decline on local livelihoods and the social fabric.”

What Comes Next

Today’s notice of intent is the beginning of a longer process. Over the coming months, the Treasury Department will be soliciting feedback from the public on whether it got the structure of the incentives and flexibilities right.

As Roosevelt Institute President and CEO Felicia Wong says, 

“It will be important as the implementation process continues to sync up the domestic content requirements with the administration’s all-of-government equity plans to lift up and invest in regions and communities left behind by past public investments.”

Felica Wong, who also serves as a member of the Department of Treasury Advisory Committee on Racial Equity, added,

“This won’t be easy. But with this approach to a new industrial strategy, and with the IRA specifically, we have an opportunity to do one better than the New Deal. Better by ensuring that what’s Made in America is made by all of America.”