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PolicyResearchWorkingPaper10988

GlobalRippleEffects

Knock-onEffectsofEU,US,andChinaClimatePoliciesonDevelopingCountries’Trade

EnriqueAldaz-CarrollEuijinJung

MarylaMaliszewskaIrynaSikora

WORLDBANKGROUP

EconomicPolicyGlobalDepartment—TradeNovember2024

PolicyResearchWorkingPaper10988

Abstract

Thethreemajorplayersintheglobaleconomy,theUnitedStates,theEuropeanUnion,andChina,havebeendesign-ingclimatemitigationpoliciesthatwillhelpreducetheircarbonemissionsbutwillalsolikelyreshapedevelopingcountries’trade,prices,andaccesstotechnology.Thispaperexaminesdevelopingcountries’exposuretosuchchanges.Overall,thepoliciesareexpectedtocurtaildemandforfossilfuels,energy-intensivemanufacturing,andagricul-turalexportslinkedtoenvironmentaldegradation.Theyarealsoexpectedtoopenexportopportunitiesincriti-calminerals,electricvehiclesandtheircomponents,andrenewableenergytechnologiesandcomponents.Theexpo-sureofaffectedexportsectorsandtheoveralleconomytothesechangeswillvaryacrosscountriesbasedonthe

orientationoftheirexportsectorstothemarketsintheEuropeanUnion,theUnitedStates,andChineseaswellastheweightofaffectedexportsintheireconomies.Theclimatepolicieswillalsolikelyreduceoilpricesandraisecriticalmineralprices,helpreducethecostofgreentech-nologies,andincreasegreenforeigninvestment.Thepaperdrawsrecommendationsfordevelopingcountries,theEuropeanUnion,theUnitedStates,andChina,aswellastheinternationalcommunity,onhowbesttohelpdevelop-ingcountrieslessenthepotentialnegativecompetitivenesseffectsoftheseclimatepoliciesandmakethemostoftheopportunitiesforafastergreentransitionandeconomicdevelopment.

ThispaperisaproductoftheEconomicPolicyGlobalDepartment—Trade.ItispartofalargereffortbytheWorldBanktoprovideopenaccesstoitsresearchandmakeacontributiontodevelopmentpolicydiscussionsaroundtheworld.PolicyResearchWorkingPapersarealsopostedontheWebat

/prwp.Theauthorsmaybe

contactedatealdazcarroll@,ejung1@,mmaliszewska@,andisikora@.

ThePolicyResearchWorkingPaperSeriesdisseminatesthefindingsofworkinprogresstoencouragetheexchangeofideasaboutdevelopmentissues.Anobjectiveoftheseriesistogetthefindingsoutquickly,evenifthepresentationsarelessthanfullypolished.Thepaperscarrythenamesoftheauthorsandshouldbecitedaccordingly.Thefindings,interpretations,andconclusionsexpressedinthispaperareentirelythoseoftheauthors.TheydonotnecessarilyrepresenttheviewsoftheInternationalBankforReconstructionandDevelopment/WorldBankanditsaffiliatedorganizations,orthoseoftheExecutiveDirectorsoftheWorldBankorthegovernmentstheyrepresent.

ProducedbytheResearchSupportTeam

GlobalRippleEffects:Knock-onEffectsofEU,US,andChinaClimatePoliciesonDevelopingCountries’Trade

EnriqueAldaz-Carroll,EuijinJung,MarylaMaliszewska,andIryna

Sikora1

Keywords:InternationalTrade;TradeandEnvironment;ClimateChange;TechnologicalInnovation.JELcodes:F14;F18;Q54;Q55;Q56.

1TheauthorsaregratefultoPranidhiSawhneyforherinputs.TheauthorsthankSebastienDessus,CarolynFischer,DanielBesley,andETIRIcolleaguesforvaluablecommentsandsuggestions.FundingfromtheClimateSupportFacility(CSF)administeredbytheWorldBankisgratefullyacknowledged.TheCSF’smissionistosupportdevelopingcountriesinacceleratingtheirtransitiontolow-carbonandclimateresilientdevelopmentandelevatethenationaldecarbonizationagenda.

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1.Introduction

Differentapproachestoclimatemitigationpolicyareemergingamongthreemajorplayersintheglobaleconomy,collectivelyresponsiblefornearlyhalfofGHGemissions.

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TheEUledwithapolicymixcenteredaroundemissionspricing,withtheEUEmissionsTradingSystem(ETS)anditscomplementaryCarbonBorderAdjustmentMechanism(CBAM)asitscornerstoneforreducingnetGHGemissions.Bycontrast,theUSInflationReductionAct(IRA)seekstoachieveambitiousgreenhousegas(GHG)reductionsbysubsidizingcleanproductionandtechnologyadoptionwithasecondarygoalofdiversifyingthecriticalmineralssupplychainsawayfromChina.

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Meanwhile,ChinahaslaunchedanETSbasedonintensitybenchmarksthataimstoincentivizeefficiencyimprovements.

Thesedifferentpolicyapproachesareanticipatedtohavevaryingconsequencesontradeaffectingproducersandconsumersindevelopingcountries,atopicnotyetcoveredbytheliterature.ExistingliteraturefocusesonhowclimatemitigationpoliciesfromtheEU,US,andChinaaffecttheirowneconomies.Forexample,Bistline(2023)estimatesmacroeconomicimpactsoftheUSIRAontheUSeconomy,Woollacott(2023)assessesitsdomesticenvironmentalimpacts,andBown(2023)outlinestheimpactsfordomesticEVmanufacturersandtheirsupplychains;Weitzel(2023)quantifiesthemacroeconomicimpactsoftheEUclimatepolicyontheEUeconomy;EU(2021)assessessocioeconomicimplicationsofEUCO2emissionstandardsforpassengercars;andYan(2023)assessestheimpactsofChina’sclimatepoliciesonitseconomy.Theliteraturealsocoverstheimpactsthatclimateregulationscouldhaveonselectedadvancedeconomiesandglobally.Forinstance,Kleimannetal.(2023),Attinassietal.(2023),andBernoth(2023)analyzetheimpactsoftheUSIRAonEurope,whileGründler(2023)discussesglobaleffects.However,thepotentialeffectsofthesepoliciesondevelopingcountrieshavebeenlargelyoverlooked.

ThispaperexamineskeymitigationpoliciesimplementedbytheEU,US,andChina,seekingtoaddressfollowingquestions:

•WhatarethedifferencesinthepolicyapproachesoftheEU,US,andChina?

•WhataretheeconomicchannelsthroughwhichtheselectedEU,US,andChinapoliciesimpactdevelopingcountries?

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•Whichsectorsandcountriesaremostexposedtotheseimpacts?

•Howshoulddevelopingcountriesrespond?

•Whatmeasurescanadvancedeconomiestaketoreducenegativespilloversfordevelopingcountries?

Thepaperfocusesonthreemainchannelsthroughwhichtheseclimatepoliciescanaffectdevelopingcountries:shiftsinsupplyanddemandintradesectors,pricechanges,andaccesstotechnology.Usingdescriptivestatisticsandexistingresearch,thepaperidentifiesthesectorsandcountriesmostexposedtothepolicies.Thepaperdoesnotcoveradaptationpoliciesortheimpactofdevelopingcountries'ownpoliciestomeettheirNationallyDeterminedContributions(NDCs),whicharediscussedinBrentonetal.(forthcoming).

2WorldBank’sWorldDevelopmentIndicators.

3Underthebroad‘subsidy’category,weincludetaxcreditsforcompaniesandconsumers,grantstosupportprograms,andtheprovisionoftechnicalassistance.

4Inthispaper,theterm"developingcountries"willspecificallyrefertonon-Chinadevelopingnations.

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Thisanalysisaimstobroadenourunderstandingofpotentialimpactsofmitigationpoliciesofkeyeconomicplayersondevelopingcountries’tradeflows.TheinsightsgainedcanserveasabasisforfutureComputableGeneralEquilibrium(CGE)modeling,whichcanquantifytheeffectsofthesepoliciesondevelopingeconomies.

Thepaperisstructuredasfollows:Section2introducesEU,US,andChinaclimatepolicies,identifiesthemaindifferencesintheirclimateapproachesandprovidestheprosandconsofusingcarbonpricing,greensubsidies,andregulations.Section3focusesonthechannelsofimpactofthesepoliciesandidentifiesthesectorsandeconomiesthataremostexposedtothepoliciesandhencelikelytobemostimpacted.Section4concludesandprovidespolicyrecommendationsfordevelopingcountriestomakethemostoftheopportunitiesandhelpmitigateharmfulimpacts.

2.ClimatechangemitigationpoliciesintheEU,US,andChinaandtheir

impactsontrade

ThissectionoutlineskeyclimatelegislationintheEU,US,andChina,highlightingthedifferencesintheirapproachesanddetailingmajorpolicyelementsthatareexpectedtoimpactdevelopingnations.

2.1EU,US,andChinaclimatepolicies:Carbonpricing,greensubsidies,andregulations

TheEU’sclimatepolicyrevolvesaroundtheFitfor55package,recentlycomplementedbytheCriticalRawMaterialsActfortheFutureofEUSupplyChains,andtheCorporateSustainabilityDueDiligenceDirective(CS3D)proposalinMarch2024.Thesepoliciesarefurthersupportedbymemberstate-levelmeasures,whicharenotcoveredinthispaper.TheFitfor55packageaimstoreviseandupdateEUclimate,energy,andtransportlegislationtoachievea55percentreductioninGHGemissionsby2030,comparedto1990levels.ItsmeasurestargethighCO2emissionintensitysectorsandenvironmentallyimpactfulsectors,aimingtoreduceenvironmentaldegradationbothwithintheEUandabroad,whilepromotingdiversificationofsuppliersforcriticalinputsinthegreentransition.

IntheUS,federalclimatepolicyisshapedbytheIRA,designedtoaddressenergysecurityandclimatechangemitigation.TheIRAdirectsnewfederalspendingandtaxbreakstowardreducingcarbonemissions.ItearmarksapproximatelyUS$370billionforthenexttenyearsforgreenenergyproductionandtodiversifyitssupplychains,currentlyheavilyreliantonChina,spanningfromcleanenergymanufacturingtocriticalmineralsandEVbatteries.

China’sclimatepolicyfocusesonlow-carboninfrastructurethroughpublicprograms,mineralsourcingviatheBeltandRoadInitiative(BRI),andemissionreductionthroughitsEmissionTradingScheme(ETS),launchedin2021.Chinaisthelargestinvestorinrenewableenergy,havingspentnearlyUS$760billionbetween2010and2019,aheadoftheEU($698billion)andtheUS($356billion)(UNEP2019).Thecountryhasalsoheavilyinvestedinlow-carbonpublicinfrastructure,suchashigh-speedrail,urbanpublictransportnetworks,electricpublictransportvehiclesandEVinfrastructure.

ThemaindifferencebetweentheEU,US,andChinaclimatepoliciesisthattheyrelyoncarbonpricing,greensubsidies,andregulationswithdifferentintensity.TheEUreliesmoreoncarbonpricingthanonsubsidies

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initsFitfor55PackageandappliesdomesticcontenttargetsinitsCriticalRawMaterialsAct.ClimatepoliciesatthememberstatelevelrelyongreensubsidiestoasimilarextentastheUS(exceptintherenewableenergysectorwhereEUsubsidiesarefarlarger),buttheydonotincludedomesticcontent

5WhilegreensubsidiesarenotextensivelyusedattheEUlevel,theiruseatthecountrylevelissizeable.

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requirements(Kleimannetal.2023).TheUSprimarilyusessubsidiesundertheIRA,incorporatingsomedomesticcontentrequirements,thoughsomeUSstatesalsousecarbonpricing.Chinareliesmoreonregulatorymeasuresandpublicsupportthanonmarket-basedinstruments(WBG2022).Market-basedinstruments,suchasfiscalpoliciesrelatedtoenvironmentalgovernance,emissionsfees,oremissionstradingarenotyetfullydeveloped.ChinaatpresentgrantsfreeallocationsunderitsETS.Itreliesoncommand-and-controlmeasures(e.g.,investmentsofstate-ownedenterprisesincleanenergy)andsubsidies(solarpanelsbeingthemostnotablecase)initsotherclimatepoliciesbeyondETS.

Theuseofcarbonpricingandgreensubsidiestosupportthegreentransitioniswarrantedbecauseofthepresenceofnegativeexternalities–specifically,thesocialcostsofGHGemissionsfromeconomicactivities,whicharenotbornebythebuyerorseller.Carbonpricingisgenerallypreferredovergreensubsidiesbecauseitallowsthemarkettoefficientlydetermineemissionsreductionswithoutthetargetingchallengesandbudgetarystrainsassociatedwithsubsidies,whilealsogeneratinggovernmentrevenue.Unlikesubsidies,whichcanleadtoincreasedenergydemandanddonotnecessarilypromoteabroadertransitionawayfromfossilfuels,carbonpricingdirectlyincentivizesfirmstoreduceemissionsbasedontheirowncost-effectiveness.However,greensubsidiesalsohavesomeadvantagesovercarbonpricing,astheyaddressmultiplemarketfailuresandprovidefinancialsupporttoincentivizeinvestmentsingreentechnologiesthatmaybeunderfundedduetotheirbroadersocietalbenefits.

Indevelopingcountrieswithlimitedcapacitytotackleclimatechange,regulationscaneffectivelyreduceGHGemissionsandprovidepolicymakerswithvaluableexperienceforfuturemarket-basedstrategies.However,regulationswithdomesticcontentrequirementscanleadtotradefragmentationandhighercosts,hinderingthegreentransition.Inpractice,manycountriesadoptamixofpolicies,withtheemphasisoneachvaryingbasedoneconomiccontextandpoliticalwillingness.

Thevaryinguseofcarbontax,subsidies,andregulationsisexpectedtoleadtodifferingimpactsofclimatepoliciesondevelopingcountries.Acarbontaxraisesthepriceofcarbon-intensive(“brown”)goods,reducingtheirdomesticdemandandimports,andgraduallyincreasingdomesticsalesandimportsoflow-carbon(“green”)productsastheybecomerelativelycheaper.

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Agreensubsidyonconsumption(likeEVrebates)lowersgreenproductprices,boostingdomesticsalesandimportsunlessdomesticcontentrulesapply.Agreensubsidyonproduction(suchastaxcreditsforrenewableenergyproduction)alsodecreasesgreenproductprices,boostingtheirdomesticsalesandexports.Bothtypesofsubsidiesovertimeleadtoreducedsalesandimportsofbrownproductsbymakingthemrelativelymoreexpensive.Regulatorycapsrequiringthepurchaseofemissionspermitscutdomesticproductionofbrowngoodswhilepotentiallyincreasingimportsunlessacarbonborderadjustmentmechanismisinplace.Overtime,intheabsenceofmarketfailures,capspromotedomesticsalesandimportsofgreengoods.Theeffectofcapsisweakerorstrongerthantaxesdependingonwhetherpermitpricesarelowerorhigherthanthecarbontax.

Despitedifferencesinapproachandimplementation,climatepoliciesenactedbytheEU,US,andChinasharesomecommonimpactsontrade.ThesepoliciesrestrictmarketaccessforsectorswithhighCO2emissionintensityorasignificantenvironmentalfootprint.Additionally,thesepoliciesacceleratethetransitiontorenewableenergy,drivingdemandfortransitionmineralswhilereducingdemandforfossilfuels(asseenintheUSIRAforEVs,theEU’sgreenindustrialpolicy,andChina’sEVincentives).Asdemand

6Note,however,thatifgreengoodsfacelargeexternalitiesinthesensethatthebenefitsarenotsignificantlycapturedbytheproducer,theproductionofgreengoodswillbesuboptimalintheabsenceofsubsidies.

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shiftstowardslesscarbonintensiveproducts,developingcountriesthatproducegoodsandservicesinasustainablewayandwithlowcarbonintensitywillbeabletoexpandtheirexportstothosemarkets.Furthermore,somecountrieswillalsobeabletoexpandtheirparticipationincleanenergyandgreentechnologyGVCs.However,theseclimatepoliciesmayalsodistortcompetitiveadvantagesthroughindustrialsubsidiesforgreentechnologies,suchasthoseforgreenhydrogenorbatteryplants(asseenintheEU’sgreenindustrialpolicy,theUSIRA,andChina’sEVproductionincentives).

Thepositiveeffectsofcarbonpricing,greensubsidies,andregulationsonemissionscanbeunderminedandleadtosignificanttradedistortionswhencombinedwithdiscriminatorymeasures,suchasdomesticcontentrequirements.Thetradeimpactoftheseclimatepoliciesdependsonhowtheyareapplied,thescopeofproductcoverage,thecharacteristicsoftheproduct,anditspositioninthevaluechain.Theintroductionofdomesticcontentandothereligibilityrequirementscreatesdistortions,leadingtoinefficientresourceuseandpotentiallysmallerreductionsinemissions.SeeSection

3

fortheframeworkemployedtoanalyzesuchimpacts.

2.2MainelementsofEU,US,andChinaclimatepolicieswithimpactsondeveloping

countries

2.2.1Carbonpricingandpreventingcarbonleakage

TheEUETSplacesapriceoncarbonandhasbeeninplacesince2005.ItistheEU’skeytoolforreducingCO2emissions.

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UndertheETS,companiescoveredbythesystemmustbuyeveryyearallowancesinthemarketfortheirCO2emissions.Acapissetonthetotalamountofallowanceseachyear,whichdecreasesovertimetoencouragecompaniestocutemissions.TheEUETScurrentlycoversaround10,000companiesintheelectricityandheatgenerationsector,energy-intensiveindustries(e.g.,oilrefineries,steel,cement,glass,andpaperproduction),andthecommercialaviationsector(forflightswithintheEuropeanEconomicArea).

AspartoftheEUfitfor55package,whichtargetsa55percentreductioninGHGemissionsby2030,theEUETSisundergoingreformsthatinclude:

•Moreambitiousemissionsreductiontargetsandfewerallowancesonthemarket.

•Gradualexpansiontomaritimetransportbetween2024and2026,aswellasanew,separateETSforbuildings,roadtransport,andsmallindustriesnotcoveredbytheexistingEUETS.

•GradualphasingoutoffreeallowancesforcertainsectorsinparallelwiththeintroductionoftheCBAM–acarbonpricingsystemforenergy-intensiveproductsimportedintotheEUtopreventcarbonleakage.

•IncreasedfundingformodernizationandinnovationfundstodecarbonizeETSsectors.

•A€65billionincreaseinthesocialclimatefundtoprotectvulnerablepeopleandfirmsfromthecarbonpricingimpactoftheETSforbuildings,roadtransport,andfuelsforselectsectors.

TheCBAMisaregulationthatwasadoptedinApril2023andwillbephasedinfrom2026to2034

(OfficialJournaloftheEuropeanUnion2023a).ItisdesignedtocounteractcarbonleakagepotentiallycausedbytheEUETS–whichoccurswhenindustrieswithhighGHGemissionsrelocatetojurisdictionswithlessstringentclimatepoliciesoutsidetheEUorimporthigh-carbongoodsinsteadofproducingthem.CBAMwillrequirenon-EUproducerstobuycertificatesfortheirCO2emissionsthathavenotbeenpaid

7EuropeanCommission,“WhatistheEUETS?”

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fordomestically,mirroringtheeffectsoftheEUETSandcreatingalevelplayingfieldforbusinesses.Thecertificatesalsoencouragenon-EUproducerstoreducetheiremissions.Initsfirstphase,CBAMwillcoverthefollowingsectorswithhighcarbonemissionsandhighriskofcarbonleakage:ironandsteel,cement,fertilizers,aluminum,hydrogenproduction,electricity,andcertainprecursors(e.g.,cathodeactivematerials),aswellasalimitednumberofdownstreamproducts(e.g.,screwsandbolts).ThescopeofCBAMisexpectedtoexpandtomoresectorsovertime.

Atpresent,theEUgransfreeallowancesundertheETStoenergy-intensiveindustrieswithintheEUthatareatriskofcarbonleakage,butthisissettochange.Thesefreeallowanceswillbegraduallyeliminatedbetween2026and2034withtheintroductionofCBAM.

LiketheEU,ChinahasestablishedanETS,launchedin2021,whichistheworld’slargestETSintermsofcoveredemissions.

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Itcoversmorethan4billiontCO2,accountingforover40percentofthecountry’scarbonemissions.Thesystemcurrentlyregulatesmorethan2,000plantsinthepowersector,includingcombinedheatandpowerplants

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andcaptivepowerplants

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inothersectors.Itisanintensity-basedsystem,withallowancesallocatedusingbenchmarksforeachfuelandtechnology,basedonactualproductionlevels.UnlikeintheEU,allallowancesareallocatedforfree,subjecttoacap.Complianceobligationsarelimitedandvarybetweentypesofpowergeneration.TheETSwillinitiallycovercoal-andgas-firedpowerplants,butitwillgraduallyexpandtosevenothersectors.

MarketinstrumentshaveonlyrecentlyplayedaroleinreducingChina’semissions(WBG2022).Thecountryhasbeentestingemissionstradingwithpilotprogramsinsevenprovincesandcitiessince2013.TradingonthenationalETSbeganinJuly2021.

2.2.2Targetsandincentivesforenergyefficiency,cleanenergyandelectromobility

TheRenewableEnergyDirective(RED),updatedin2023,ispivotaltotheEU'scleanenergyagenda.

Initiallyenactedin2018(EU/2018/2001),itwasrevised(EU/2023/2413)tohelpachievethe'Fitfor55'packageandtobolstereffortstodecreasedependenceonfossilfuelsfollowingtheRussianFederation'sinvasionofUkraine.ThedirectivenowsetsabindingtargetfortheEUtoobtainatleast42.5percent(upfromtheprevious32percent)ofitsenergyfromrenewablesourcesby2030,withanaspirationalgoalof

45percent.TheEUhasgrownitsrenewableenergysharefrom19.1percentin2018to23.0percentin

2022.

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TheEnergyEfficiencyDirective(EED)isanotherkeypolicyintheEU'scleanenergystrategy.TheEED(EU/2023/1791)establishesthe'energyefficiencyfirst'principleandmandatesa11.7percentreductioninenergyconsumptionby2030.Effectivefrom2023,itispartofthebroaderEUGreenDealandREPowerEUplan,aimedatdoublingtherateofenergyefficiencyimprovementstomeetthegoalsoftheParisAgreement.

China's14thFive-YearPlanonRenewableEnergyDevelopment,coveringtheyears2021to2025,aimstoescalaterenewableenergyusagesignificantly.Theplantargetsa50percentincreaseinrenewablegeneration,reaching3.3trillionkWh,andaimsforrenewablesaccountingfor33percentoftheelectricityconsumption.Additionally,itmandatesthatover50percentoftheincrementalenergyconsumption—

8InternationalCarbonActionPartnership,“ChinaNationalETS.”

9Combinedheatandpowerisafacilitythatgenerateselectricityandthermalenergysimultaneouslyatthesamelocation,enhancingoverallenergyefficiency.

10Acaptivepowerplantisanelectricitygenerationfacilityutilizedforinternalenergyconsumption.

11https://www.eea.europa.eu/en/analysis/indicators/share-of-energy-consumption-from

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includingbothelectricityandnon-electricformsofenergy,duringthisperiodcomesfromrenewablesources.Keyinitiativesincludeenhancingsolarandwindpower,particularlyinresource-abundantregions,offshorewindexpansion,andenergystoragesolutions,throughacombinationofpublicinvestmentsandincreasedprivatesectorparticipation.Theseeffortsarebeingledbymassiveinvestmentsfrombothstate-ownedandprivatecompaniesaspartofChina'sbroadercommitmenttoagreentransitionandachievingcarbonneutrality,supportedbyresearchthatunderscoresthecountry'ssignificantpotentialforrenewableenergyexpansion(IEA,2024).

TheUSIRAofferstaxcreditsforcompaniesandconsumers,grants,andtechnicalassistancetoencouragecleanenergyproductionandconsumption.However,toqualifyforcertaintaxcreditsandincentives,countriesmustsourcecriticalmineralsandcleanenergycomponentsfromtheUSorfromnationswithwhichtheUShasafreetradeagreement(FTA),ensuringcompliancewithdomesticsourcingrequirements.Thefulllistofmeasuresislongbutthosethatareexpectedtoaffectdevelopingcountriesmost,directlyorindirectly,involve:

•Cleanenergytaxcredits:10-yearextensionsofexistingcreditsforwindandsolar(e.g.,theproductioncreditiscurrentlyapproximately2.6cents/KWh),alongwithprovisionsforheatpumps,rooftopsolarandstandaloneenergystorage,suchasbatteries.Thesecreditsareincreasedifprevailingwageanddomesticcontentrequirementsforsteel,iron,andmanufacturedproductsarefulfilled.

•Supportfordomesticcleanenergymanufacturing(~$60billion):Afive-yearproductiontaxcreditforcompaniesinvolvedincleanenergymanufacturing(e.g.,$3/kgofsolar-gradepolysilicon,$10/batterymodule),whichincludestheproductionofsolarpanels,windturbines,andbatteries,aswellascriticalmineralsprocessing;andtheconstructionofcleantechnologymanufacturingfacilities,

subjecttodomesticsourcingrequirements(seeSection2.2.3

foradetaileddescription).

•IncentivesforEVadoption:A$7,500rebateisgrantedfornewEVsanda$4,000taxcreditforusedEVssubjecttoanincomelimitof$300,000foracoupleand$150,000forindividualfilers.Newvehiclesmustbepricedbelow$80,000forvans,SUVs,andpickups;andunder$55,000forcars,withcertaindomesticsourcingrequirementsapplicable(see

Section2.2.3)

.

•GrantsandloanstopromoteEVmanufacturing:Grants(~$2billion)tohelpconvertexistingautomanufacturingfactoriesintoEVandcomponentproductionfacilities,andloans(~$20billion)toestablishnewEVmanufacturingsites.

Thelegislationraisedconcernsinternationally(e.g.,theEUandRepublicofKorea)duetoitsprotectionistmeasures,promptingadjustmentsthroughimplementingregulationsinthesummerof2022.First,leasedEVsbecameeligibleforrebatesandcreditsirrespectiveoftheircountryoforigin(includingassemblyandbattery),size,orprice.Second,thedefinitionofaUSFTAinthecontextoftheIRAhasbeenbroadenedtoincludeanynationmeetingcertaincriteria(reduceoreliminatetradebarriersonapreferentialbasis,committonotimposingnewtradebarriers,establishhighlaborandenvironmentstandards,andavoidexportrestrictions)(USTreasury2023),inadditiontothe21countriesthatalreadyholdanFTAwiththeUS.

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AsofMarch2024,these21countriesare:Australia;Bahrain;Canada;Chile;Colombia;CostaRica;DominicanRepublic;ElSalvador;Guatemala;Honduras;Israel;Japan;Jordan;RepublicofKorea;Mexico;Morocco;Nicaragua;Oman;Panama;Peru;andSingapore.

EURegulation2019/631aimstoloweremissionsbysettingCO2standardsfor