A Turning Point for US Climate Progress: Assessing the Climate and Clean Energy Provisions in the Inflation Reduction Act

On August 12th, the US House of Representatives passed the Inflation Reduction Act (IRA) after the Senate did the same five days before. The climate change and clean energy investments are the single largest component in the package, out of the many issues that the IRA addresses. When President Biden signs it, the IRA will be the single largest action ever taken by Congress and the US government to combat climate change.

In this report, we provide a detailed assessment of the key energy and greenhouse gas (GHG) emissions impacts of this historic legislation. The IRA is a game changer for US decarbonization. We find that the package as a whole drives US net GHG emissions down to 32-42% below 2005 levels in 2030, compared to 24-35% without it. The long-term, robust incentives and programs provide a decade of policy certainty for the clean energy industry to scale up across all corners of the US energy system to levels that the US has never seen before. The IRA also targets incentives toward emerging clean technologies that have seen little support to date. These incentives help reduce the green premium on clean fuels, clean hydrogen, carbon capture, direct air capture, and other technologies, potentially creating the market conditions to expand these nascent industries to the level needed to maintain momentum on decarbonization into the 2030s and beyond.

We also find that the IRA cuts household energy costs by up to an additional $112 per household on average in 2030 than without it, cuts electric power conventional air pollutants by up to 82% compared to 2021, and scales clean generation to supply as much as 81% of all electricity in 2030. The IRA represents major progress by Congress, and at the same time more action will be needed for the US to meet its 2030 target of reducing emissions by 50-52% below 2005 levels. With the IRA enshrined as law, all eyes will be on federal agencies and states, as well as Congress, to pursue additional actions to close the emissions gap.

A first for Congress: passing major climate legislation

Congress has had climate change on its radar since the first major hearings on the topic in 1988. Now,  with the passage of the IRA 34 years later, Congress has taken decisive action. Though the intervening years have seen plenty of false starts on legislation to tackle emissions, acting late is certainly better than never. The package of new grant and loan programs, tax credits and emissions fees touches nearly every corner of the US economy and will make meaningful progress toward decarbonizing the US energy system for the next decade and beyond. While the overall size of the package is trimmed down compared to the Build Back Better Act (BBBA) passed by the House in November, the emissions reduction components are still robust and effective.

In this report, we provide a comprehensive assessment of the emissions and energy system impacts of the IRA, building on our preliminary assessment published on July 28. To conduct this analysis, we used RHG-NEMS, a version of the Energy Information Administration’s (EIA) National Energy Modeling System modified by Rhodium Group. We model the impacts of the IRA using the three core emissions scenarios—high, central, and low—from our newly updated baselines for 2030 US emissions under current policy in Taking Stock 2022. We compare projected emissions from Taking Stock with the projected emissions trajectories we estimate under the IRA and calculate the emissions impacts of the IRA as the difference between the two policy environments for each emissions pathway. For more information on our methodology and analytical approach, see the technical appendix of Taking Stock 2022.

We first assess the IRA’s impact from an economy-wide vantage point. From there, we consider key impacts in the three largest emitting sectors in the US: electric power, industry, and transportation. We then zero in on the implications of the IRA for a few critical emerging clean technologies and look at its effect in other sectors. Finally, we quantify the IRA’s impact on consumer costs and energy security and conclude with a look to the future.

The IRA cuts emissions across the economy

The IRA contains an array of programs, tax credits, and fees that, in combination, drive a step change in decarbonization of the US economy by the end of the decade. These provisions lower the cost of commercial clean technologies like wind and solar, electric vehicles, and building efficiency, enabling them to become more competitive with incumbent fossil fuel technologies and driving a shift towards cleaner energy. Tax credits and other programs for manufacturing of clean technologies expand production capacity and help to enable accelerated deployment.

Provisions of the IRA also modify fossil fuel leasing on federal lands, including requiring lease sales and changing royalty rates, but we find almost no emissions impacts from the combined impact of these provisions, relative to the benefits of the clean energy provisions.

The net result of all the provisions in the IRA is that US net GHG emissions decline to 32-42% below 2005 levels in 2030. That’s up to 10 percentage points more than under current policy without the IRA, in which we project emissions of 24-35% below 2005 levels in the same year (Figure 1). The range reflects uncertainty around economic growth, clean technology costs, and fossil fuel prices across our high, central, and low emissions scenarios detailed in Taking Stock 2022. In the high emissions case, which features cheap fossil fuels and more expensive clean technologies plus faster economic growth, we find that the IRA can accelerate emissions reductions to a 32% cut below 2005 levels in 2030, compared to 24% without it (Figure 2). On the flip side, in the low emissions case, with expensive fossil fuels and cheap clean technologies, the IRA can drive even larger reductions, from 35% below 2005 levels without it to 42% below 2005 levels with it. In the central emissions case, the IRA accelerates emissions reductions to 40% below 2005 levels in 2030, compared to 30% without it.


This is a huge step forward towards the US climate target of 50-52% below 2005 levels in 2030, though clearly more action is needed. No single action on its own will be enough to meet the target. Still the IRA changes the game, not just with the deep emissions reductions it generates but also by cutting the cost of additional action by the executive branch and states, which could put the 2030 target within reach.

Progress in the three biggest emitting sectors

All told, the IRA cuts emissions and increases carbon removal by an additional 439-660 million metric tons in 2030 beyond what’s projected without the IRA (Figure 3). On the high end, that’s equal to zeroing out all current emissions from California and Florida combined. Put another way, the IRA helps close as much as 51% of the gap between the US emissions trajectory without the bill and the US’s 2030 climate target.


Our preliminary estimate of the impacts of the IRA found a 31-44% reduction over 2005 levels attributable to the policies. Our revised estimate finds a narrower band of emissions impacts of 32-42%, as we’ve honed our modeling to reflect more of the nuance of the bill language. The biggest drivers of the difference from our preliminary estimate are a more refined representation of the EV tax credits; more granular characterization of the transition from the current electric sector tax regime, as extended by the IRA, to the new clean electricity credits; and interactive effects of increased federal fossil royalty rates driving gas prices slightly higher in the low emissions case, leading to more coal generation and higher emissions relative to our preliminary assessment (though still substantially lower than without the IRA).

Looking across sectors, the biggest emission reductions by far occur in the electric power sector, followed by carbon removal (due to forest and soil practices, direct air capture and other actions), industry (including emissions from fossil fuel production), and transportation (Figure 4). The investments that drive these emission reductions will create new economic opportunities across the country and shift the US closer to a decarbonized energy system.

Record-level clean generation in the electric power sector

The suite of long-term, full-value, flexible clean energy tax credits and other programs in the IRA focus on the “4 Rs” of electric generation decarbonization:

  • Reinvigorate new clean capacity additions: production and investment tax credits (PTC and ITC)
  • Retain existing clean capacity: zero-emitting nuclear PTC
  • Retire fossil capacity: US Department of Agriculture (USDA) investments in rural electric cooperatives (coops) and Department of Energy (DOE) loan programs
  • Retrofit remaining fossil capacity: section 45Q carbon capture tax credit

Critically, the IRA includes direct pay and transferability provisions that make it easier to monetize the tax credits by decoupling them from a finite pool of tax equity dollars. Without these provisions, there would be a real risk that developers face financing bottlenecks as deployment expands, stifling the impact of incentives. Now, under the IRA, a broader set of players in the electric power industry can use tax credits and pour investment into achieving an increasingly cleaner electric grid. The manufacturing tax credits and other programs in the IRA will help expand domestic production capacity to support accelerated clean energy deployment across the US. New DOE and USDA programs can support rural electric coops and other owners of coal plants to retrofit or install new clean technologies to achieve CO2 and criteria pollutant reductions.

All of these measures taken together drive clean generation to the highest levels the US has seen in the modern era. Clean generation as a share of total electric generation rises from roughly 40% in 2021 to 60-81% in 2030 due to the IRA, compared to 46-72% without it (Figure 5). The IRA puts the US in a strong position to meet the President’s goal of 100% clean generation in 2035. These shares are achieved by preventing 10-20 GW of nuclear from retiring through 2030 and increasing the annual average capacity additions of renewables to 35-77 GW per year through 2030—more than double per year in the low and central emissions cases than the record set in 2021.


The largest absolute emissions abatement and lowest total power sector emissions occur in the central emissions scenario, which combines central clean technology costs and central fossil fuel prices. In this case, the IRA policy provisions drive large-scale deployment of clean generation, drive down coal generation, and limit the growth of natural gas generation. By contrast, in the low emissions case, natural gas prices are high enough in 2030 to allow relatively more coal generation to remain competitive, though generation from coal plants is still lower than without the IRA and relative to today.

All of this clean energy drives deep reductions in emissions of both GHGs and conventional pollutants. In 2030, electric power CO2 emissions are 69-80% below 2005 levels, which represents a meaningful departure from the 54-66% below 2005 levels that occur under current policy.

Electric power plant emissions of harmful air pollutants like sulfur dioxide (SO2) and oxides of nitrogen (NOx) that exacerbate asthma attacks and cause premature deaths also decline dramatically thanks to the IRA. Without the IRA, SO2 (Figure 6) and NOx (Figure 7) are on track to decline by 39-63% and 51-55% below 2021 levels in 2030 respectively. The shift to clean energy driven by the IRA cuts SO2 emissions down to 59-82% below 2021 levels and NOx to 61-66% below 2021 levels. These cuts will provide important relief to the communities nearby and downwind of major power plants.

Industrial emissions turn the corner

Without the IRA, industrial emissions decrease by 14% and 8% in our low and central emissions scenario and increase by 1% in our high scenario relative to 2005 levels. In Taking Stock 2022, we projected that industry would become the largest-emitting sector by the early 2030s, so progress in this sector is important for meeting the 2030 target and achieving long-term decarbonization. With the IRA, industrial emissions decrease by 3%, 11%, and 16% in 2030 relative to 2005 in the high, central, and low emissions cases, respectively (Figure 8).


There are two main reasons for the IRA-driven decline. First, the enhancements to the section 45Q carbon capture tax credit drive meaningful additional deployment of carbon capture. Without the IRA, we project 74 million metric tons of carbon capture and direct air capture (DAC) capacity will be retrofitted on existing facilities or installed by 2030. With the IRA we project a 35-40% increase, to 100-103 million metric tons of carbon capture and DAC (Figure 9). This additional capacity helps drive down industrial sector CO2 emissions. Importantly, the IRA continues to incentivize further carbon capture and DAC deployment after 2030, as the 45Q provision includes a commence construction deadline of 2032. By 2035, we project that that provision can help to more than double installed carbon capture and DAC capacity from 2030 levels, to 266-313 million metric tons of installed capacity. The longer duration and larger size of the credit also help drive carbon capture retrofits in harder-to-abate corners of industry, including in refineries, cement plants, and iron and steel facilities. The bill also provides an important level of foundational support for DAC deployment, helping to scale a new and necessary clean energy technology.

The other factor behind the decline in industrial emissions in the IRA is a decline in oil and gas production and transmission emissions, which we include as part of industrial sector emissions in our calculations. The clean technology provisions in the IRA lead to small reductions (<1%) in petroleum consumption and larger reductions of 3-10% in natural gas consumption across the economy. The much-discussed fossil fuel provisions of the IRA do not lead to meaningful increases in domestic production of oil and gas, which we discuss in greater detail below. All else equal, less production equates to lower production and transmission emissions. In addition, the IRA institutes a methane fee on emissions from production and transmission above a certain volumetric threshold, driving down oil and gas emissions further still.

Taken together, the policies start to bend the industrial emissions curve in the right direction, but much more needs to be done to drive the levels of decarbonization that will be required from industry. Fortunately, the bill makes an important down payment in that regard in the form of domestic manufacturing conversion grants, additional funding for the DOE Loan Programs Office, an advanced industrial facilities deployment program, and a suite of other provisions to help the industrial sector demonstrate and deploy new technologies.

Diversifying transportation sector energy consumption

Transportation has been the highest-emitting sector in the US since surpassing power sector emissions in 2016. Due to long vehicle stock turnover cycles, it will take decades to fully decarbonize the transportation sector, even with aggressive clean technology deployment. The array of tax credits for clean light, medium and heavy-duty vehicles (LDV, MDV, HDV) in the IRA accelerate the adoption of clean vehicles across the sector.

The new structure of the 30D electric vehicle (EV) tax credit limits its impacts in the near term, as manufacturers race to meet critical mineral and battery component sourcing requirements. This limits the amount of total LDV EVs on the road in 2030 relative to a policy without these requirements, reducing its emissions impact over this decade. Despite that, by 2030 the IRA increases the share that electric vehicles comprise of all LDV sales to 19-57%, up from 12-43% without it (Figure 10). In addition, these requirements and other investments made as part of the IRA can help stand up a meaningful EV supply chain domestically and in close partner countries.

The IRA also provides tax credits for used clean vehicles, improving access to this important clean technology for buyers for whom a new vehicle is out of financial reach. On the MDV and HDV front, the IRA provides a tax credit for the purchase of clean trucks. It also includes a number of grant programs and other fiscal incentives to drive clean vehicle deployment and reduce conventional air pollutants. In total, these provisions drive total transportation emissions down to 18-26% below 2005 levels in 2030, compared with an 18-24% reduction without the IRA.

More to do in carbon removal, agriculture, and buildings

Though we project some emissions abatement in the carbon removal and buildings sectors relative to current policy due to the IRA, in general, these impacts are small compared to the scale of decarbonization needed in these sectors, and continued work on all fronts will be necessary to drive down these emissions.

We find that a suite of provisions in the IRA can increase technological and natural carbon removal. For our accounting purposes, both direct air capture facilities and ethanol facilities retrofitted with carbon capture, which we discuss above, are accounted for as carbon removal. In addition, the agriculture title of the IRA includes agricultural conservation investments, non-federal reforestation projects, and state and private forestry conservation programs, which together increase the ability of natural and working lands to act as carbon sinks.

In the buildings sector, the bill makes important investments in decarbonizing buildings via retrofit and high-efficiency electric home rebates. The Greenhouse Gas Reduction Fund in the IRA may also help reduce emissions from buildings, though we don’t know enough yet about how the program would be implemented to model its effects. The bill also modifies the current tax credit for the adoption of energy efficiency appliances, but the effect is largely to incentivize the installation of more efficient gas appliances, locking in long-lived fossil-consuming assets rather than driving needed progress in electrification. The new energy efficient home credit also helps drive some improvements in new home shell efficiency. But in total, these reductions are modest compared to the rest of the bill. More action, actually focused on decarbonization and not just energy efficiency, is necessary in the buildings sector.

Cutting the green premium for emerging clean technologies

The IRA doesn’t just incentivize the commercial-scale clean technologies like solar and wind available today. It also builds on the investments in the Infrastructure Investment and Jobs Act to cut the cost of deploying a host of emerging clean technologies such as carbon capture and DAC covered above as well as clean fuels, clean hydrogen, advanced nuclear, and other cutting-edge solutions. It does so through new deployment tax credits that reduce the “green premium,” which is the added cost of clean technologies relative to fossil incumbents. The more diverse the set of emerging clean technologies that get to commercial scale, the more opportunities there will be for large, low-cost emissions reductions in the long-term. In other words, the investments in emerging clean technologies in the IRA make achieving net-zero emissions by mid-century more feasible and more affordable.

We find that these new tax credits can make clean fuels competitive with conventional fossil fuel options in this decade. For example, the new sustainable aviation fuel (SAF) credit in the IRA provides up to $1.75/ gallon of SAF produced with very low life-cycle GHG emissions. SAF is a critical technology for decarbonizing long-haul aviation where few other clean technologies are available. There are multiple ways to make SAFs, and they all have different associated costs. We considered low and high cost production pathways that can qualify for the maximum credit value and find that, at least in the low case, SAF could match projected fossil jet fuel prices in 2027, the last year the credit is available (Figure 11).


We find an even more encouraging story with regard to clean hydrogen. Clean hydrogen is sometimes referred to as the “Swiss Army Knife of decarbonization” because it can be used in so many applications across the energy system. Clean hydrogen can be made in a variety of ways including by using natural gas steam methane reformation equipped with carbon capture (“blue” hydrogen) or by splitting water via electrolysis using zero-emitting electricity (“green” hydrogen).

The new clean hydrogen production tax credit in the IRA supports both blue, green and other production pathways, providing higher credit values for lower lifecycle GHG emissions. The maximum credit is $3/kg for the cleanest processes. It is likely that the credit will shrink or eliminate the green premium for a variety of clean hydrogen options. Looking at green hydrogen produced with solar energy through high and low technology cost assumptions, we find that in 2030 the fuel will cost $3.39-$4.92 per kilogram to produce without the IRA (Figure 12). The IRA credit more than eliminates the green premium for clean hydrogen assuming low technology costs and shrinks it to just 40 cents per kilogram using the high technology cost assumptions. With this credit, clean hydrogen will be primed for takeoff through the 2020s.


Cutting costs and bolstering security

Beyond the large emissions impacts and other energy system benefits we’ve discussed, the IRA also has other effects across the economy, chief among them decreasing household energy costs and improving energy security.

Costs go down for consumers

The IRA lives up to its name by reducing the costs that consumers pay for electricity, other residential fuels, and transportation fuels by $27-$112 relative to without it in 2030 (Figure 13). The bill accomplishes this by driving some consumers to adopt electric vehicles, heat pumps, and other electrified and/or more efficient technologies that can help reduce their demand for fuels while meeting the same level of demand for energy services. But it doesn’t just help consumers who are able to go electric—by reducing overall demand for fossil fuels, the bill also drives down their costs for everyone by helping to reduce the price consumers pay for electricity, gasoline, diesel, and home heating fuels.  In addition to the savings from the IRA described above, current policy and improving energy market conditions drive further decreases in household energy costs over the next decade. All together, we estimate household energy costs will decrease by between $717 and $1,146 in 2030, relative to 2021 levels.


Less reliance on imported fossil fuels, improving energy security

We incorporate the IRA’s new leasing requirements and royalty reforms into our estimates of the impacts of the bill. We do not make exogenous assumptions around the impacts of these provisions; instead, the model finds the most economical way to meet demand for energy. As we mention in the discussion on industrial emissions, the clean energy provisions in the IRA drive down demand for petroleum and even more so for natural gas. Domestic production and imports respond accordingly, even though more federal land is available for exploration. In 2030, crude production is effectively flat (Figure 14) when comparing the IRA with current policy, and gas production declines by 2-7% (Figure 15) with the IRA compared to current policy.


As a sensitivity, we also tested the impacts of the IRA relative to a current policy scenario in which no new offshore exploration could occur until 2026. Compared to a future with this more restrictive leasing policy than is currently on the books, the IRA would increase domestic crude production by 0.1-0.2%, effectively flat, and decrease domestic gas production by 1-5%.

In addition to impacting domestic production, fossil fuel demand also drives trade dynamics. The IRA reduces net imports of crude oil by 1-6% and net pipeline imports of natural gas by 9-11%. The liquified natural gas trade remains unchanged with and without the IRA, as the price differential between US production plus transportation costs versus global gas markets isn’t sufficient to drive further LNG export capacity expansion beyond what happens under current policy.

So much achieved, so much more to do

The IRA is a historic step forward in the US’s efforts to rapidly decarbonize in the next decade and beyond. It lays a strong foundation for rapid clean energy deployment and the scale-up of emerging clean technologies, and it cuts conventional pollutants, household energy costs, and the US’s reliance on imported energy. The provisions in the IRA drive meaningful reductions in US greenhouse gas emissions, and at the same time, the IRA alone will not get the US on track to meeting its 2030 climate target of cutting emissions in half. However, it does lower the costs associated with additional action by the executive branch and subnational actors, which can help close the gap to the 2030 target.

All eyes will now be on EPA, DOE and other federal agencies as well as states to push the next wave of policies that build on the IRA and get US emissions down to 50-52% below 2005 levels in 2030. The biggest ticket policies to keep an eye on in the near term are the finalization of EPA’s proposed oil and gas methane regulations, how EPA proposes to regulate CO2 emissions from new and existing power plants, and if EPA and the National Highway Traffic Safety Administration (NHTSA) ramp up ambition in the next round of light-duty vehicle standards.

Congress may also be of further help. A range of policies that were previously part of the Build Back Better Act and other past climate legislation didn’t make the cut for the IRA, including some areas where there’s been recent bipartisan agreement like electric power transmission, CO2 pipelines, and building energy efficiency. The permitting reform bill currently under development is widely expected to contain provisions to accelerate the construction of some fossil fuel infrastructure, which has the potential to push emissions in the wrong direction. But it could also be a vehicle to address some of these and other issues relating to roadblocks to clean deployment of clean energy and associated infrastructure. The 2023 Farm Bill could be an important vehicle for more investments in rural decarbonization and carbon removal on natural and working lands. We look forward to assessing options and impacts across all of these fronts in this new era where the US finally has momentum on the road to long-term decarbonization.

This nonpartisan, independent research was conducted with support from Bloomberg Philanthropies, the William and Flora Hewlett Foundation, and the Heising-Simons Foundation. The results presented in this report reflect the views of the authors and not necessarily those of supporting organizations.

Taking Stock 2022: US Greenhouse Gas Emissions Outlook in an Uncertain World

For the past eight years, Rhodium Group has provided an independent annual assessment of US greenhouse gas (GHG) emissions and progress towards achieving the country’s climate goals in our Taking Stock report series. Each year, we research trends in the key drivers of US GHG emissions—including technology cost and performance advancements, changes in energy markets, policy developments, and expectations for the economy—and estimate a range of emissions outcomes based on these trends.

Given these trends and current federal and state policies in force as of June 2022, we find that the US is on track to reduce emissions 24% to 35% below 2005 levels by 2030, absent any additional policy action. This falls significantly short of the US’s pledge under the Paris Agreement to reduce emissions by 50-52% below 2005 levels by 2030. These estimates represent a rosier outlook for emissions reductions compared to Taking Stock 2021 (which estimated a 17-30% reduction by 2030 under current policy), but this change is largely attributable to slower macroeconomic growth projections and higher fossil fuel prices—not large policy changes. Even by 2035, GHG emissions remain stubbornly high at 26% to 41% below 2005 levels.

In Taking Stock 2022, we focus on a wide range of uncertainties that can affect emissions outcomes. Global and US energy markets and the economy look very different now than they did a year ago, amid the war in Ukraine and high inflationary pressures from COVID-recovery turmoil. These geopolitical and macroeconomic trends affect the energy costs and technology developments underpinning our emissions projections, and this year has reminded us all of the inherent challenge in forecasting the future in these realms. In our analysis, we account for near-term increases in fossil fuel prices attributable to global energy market instability from the war in Ukraine. We also incorporate updated medium-term price forecasts for natural gas and oil, which are generally higher than in the recent past. And we update our technology cost and performance inputs to incorporate the latest forecasts from leading experts.

Uncertainty reigns on the US policy front as well. There has been some policy movement in the past year, although not close to the level of action required to meet the US’s 2030 climate target, and the recent Supreme Court ruling in West Virginia v. EPA has called EPA’s regulatory pathways into question. In our analysis, we update our suite of current policies to include all relevant policies on the books as of June 2022. This includes passage of the Infrastructure Investment and Jobs Act at the end of 2021 and enactment of new greenhouse gas emissions and fuel economy standards for light-duty vehicles on the federal level, as well as updates to state policies like new renewable portfolio standard targets.

Our projections for US emissions in Taking Stock 2022 can help inform policymakers as they design decarbonization approaches that are robust to future developments. And now, more than ever, it’s important for policymakers to focus on maximizing the impacts of policy: the clock is ticking on both achieving the US’s 2030 climate goals and on reducing emissions to avert the worst impacts of climate change.

Detailed national and 50-state results for all Taking Stock emissions baseline scenarios—including GHG emissions and underlying sectoral data—are available in Rhodium’s ClimateDeck data platform.

Key findings

As shown in Figure 1, we find that under current policy and with no additional action, the US is on track to reduce emissions by 24-35% below 2005 levels in 2030, and 26-41% below 2005 levels in 2035. The range accounts for macroeconomic, energy market, and technology costs uncertainty. As is evident from the trajectories, the US is not on track to meet its 2025 or 2030 climate goals, nor does it meet those goals later in 2035.

In addition to the economy-wide outlook for US emissions under current federal and state policy, this report also unpacks key sectoral developments underpinning these topline figures, including the following trends:

  • Industry becomes the largest-emitting sector absent meaningful policies to curtail emissions growth, with emissions remaining relatively flat depending on the scenario.
  • Emissions from the power sector generally continue to decline, but gas and renewable prices have a major impact on the 2035 outcome.
  • Fuel economy improvements and more EV sales drive declines in transportation sector emissions.
  • By 2035, household energy costs drop by 16-25% relative to 2021 bills as more electric vehicles on the road lead to lower costs at the pump.

New for this year, we also model a range of additional cases beyond our core emissions scenarios, which include a steady progress case representing a return to stable declines in the cost of clean energy technologies as well as lower oil and natural gas prices from prolific domestic production; a continued volatility case in which events beyond the scope of the energy sector roil global energy markets and short-circuit clean technology growth; and a high growth case that demonstrates the impact that variation in GDP can have on emissions.

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Circuit Breakers: Securing Europe’s Green Energy Supply Chains

In April 2022, Italy’s first offshore wind farm went into operation at the port of Taranto, powered by turbines produced by Chinese firm MingYang. This marked a first win for the Chinese wind champion in Europe’s offshore market. Just a few months prior, the largest wind farm in Croatia opened in the coastal town of Senj, constructed and run by Chinese company Norinco International. This too was equipped with turbines imported from China. These were produced by Shanghai Electric, another of China’s champions in the wind sector and among the top ten companies globally in the sector.

European countries are investing heavily in the green transition. But projects such as the Italian and Croatian wind farms have taken on new relevance and urgency as Europe deals with the war in Ukraine and works to reduce its energy dependence on Russia. Both projects, however, illustrate the challenges ahead for the European Union in ensuring a future that is both green and energy-secure. In the Taranto project, a European turbine-maker’s failure to deliver products on time provided an opening for its Chinese competitor. At Senj, Norinco International, which is providing both capital and hardware, is not only a Chinese state-owned industrial giant, but also a major defence company and supplier of weapons and equipment to the Chinese People’s Liberation Army.

Though Europe’s oil and gas dependence on Russia is the more immediate chokepoint, its reliance on China for the energy technologies of the future poses a similar problem. China has become a global player across a wide range of green technologies, which makes it indispensable for the green transition that the EU is pursuing. As with Russia, this creates risks of over-dependence on an authoritarian power. Compared to Russia, however, China is a far bigger non-market economy and has much greater sway over global technology markets.

Navigating this situation will require European policymakers to make hard choices. This policy brief reviews some of the major supply chain risks linked to green energy technologies, especially as they relate to China. It proposes the following approaches to guide policymakers’ actions:

  • Reassess the geopolitical risks that affect supply chain resilience. European policymakers need to make green energy supply chains more resilient to any further deterioration in relations with China.
  • Right-size China exposure. Securing Europe’s green energy supply chains will come at a cost – but it is possible to address security concerns without resorting to full-scale reshoring.
  • Prioritise business-friendly policies. Europeans should work to enhance the competitiveness of domestic firms. Their policies should aim to ensure that those European industries that emerge from the transition are globally competitive in the long term.
  • Uphold high environmental and ethical standards to achieve long-term sustainability. Any effective green energy policy will require adherence to high standards of sustainability and ethics that fit with the EU’s values.
  • Work with partners. Building resilient green energy supply chains will demand an unprecedented degree of cooperation with like-minded partners.
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Chinese FDI in Europe: 2021 Update

This report, from Rhodium Group and MERICS, summarizes China’s investment footprint in the EU-27 and the United Kingdom (UK) in 2021, analyzing the impact of the pandemic as well as policy developments in Europe and China. Below are the main findings and a link to the full report:

Chinese outbound investment to the rest of the world stalled in 2021. While overall global FDI rebounded strongly, Chinese outbound FDI edged up by just 3 percent to USD 114 billion (EUR 96 billion). Meanwhile, China’s global outbound M&A activity slipped in 2021 to a 14-year low, with completed M&A transactions totaling just EUR 20 billion, down 22 percent from an already weak 2020.

China’s FDI in Europe (EU-27 and the UK) increased but remained on its multi-year downward trajectory. Last year, completed Chinese FDI in Europe increased 33 percent to EUR 10.6 billion, from EUR 7.9 billion in 2020. The increase was driven by two factors: a EUR 3.7 billion acquisition of the Philips home appliance business by Hong Kong-based private equity firm Hillhouse Capital and record high greenfield investment of EUR 3.3 billion. Still, 2021 was the second lowest year (above only 2020) for China’s investment in Europe since 2013.

The Netherlands received most Chinese investment, followed by Germany, France and the UK. Hillhouse Capital’s takeover of the Philips business made the Netherlands the biggest destination for Chinese investment in 2021. Germany, France and the UK accounted for another 39 percent of total Chinese investment.

The share of Chinese state-owned investors fell to a 20-year low in Europe. Compared with 2020, investment by state-owned enterprises (SOEs) decreased by 10 percent. Their share of total Chinese investment also reached its lowest point in 20 years, at 12 percent. SOE investment was concentrated in energy and infrastructure, particularly in southern Europe.

Consumer products and automotive were the top sectors. Due to the Hillhouse Capital acquisition, investment in consumer products surged to EUR 3.8 billion. Activity in automotive was driven by Chinese greenfield investments in electric vehicle (EV) batteries. Together, the two sectors accounted for 59 percent of total investment value. The next three biggest sectors were health, pharma and biotech; information and communications technology (ICT); and energy.

The nature of Chinese investment in Europe is changing. After years of being dominated by M&A, Chinese investment in Europe has become more focused on greenfield projects. In 2021, greenfield investment reached EUR 3.3 billion, the highest ever recorded value, making up almost a third of all Chinese FDI.

Chinese venture capital (VC) investment is pouring into European tech start-ups. In 2021, Chinese VC investment in Europe more than doubled to the record level of EUR 1.2 billion. It was concentrated in the UK and Germany, and focused on a handful sectors including e-commerce, fintech, gaming, AI and robotics.

Chinese investment in Europe is unlikely to rebound in 2022. The Chinese government is expected to stick to strict capital controls, financial deleveraging and Covid-19 restrictions. The war in Ukraine and expanding screening regimes and scrutiny of Chinese investment in the EU and the UK will create additional headwinds.

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Two Way Street – An Outbound Investment Screening Regime for the United States?

The intensifying competition between the United States and China is forcing changes in the way the global economy is governed. After a significant overhaul of inward foreign investment screening rules globally, legislative proposals are being considered in Washington that would create a regime to review US outbound investment to China and other countries of concern. This report by Rhodium Group for the National Committee on U.S.-China Relations provides background on the genesis of this legislation and discusses its implications. Our top findings are: 

At a time of intensifying competition between the US and China, lawmakers in Washington are taking a closer look at US investment in China and the risks that such investment could pose to national security: While US foreign direct investment (FDI) into China has elicited criticism in past decades, growing geopolitical tensions and the COVID-19 pandemic have amplified concerns. Critics argue that such investments, when not properly controlled, can lead to the transfer of potentially sensitive technologies, the outsourcing of critical production, and a loss of visibility into supply chains.

A bipartisan group of US lawmakers believe that existing tools are insufficient to address these concerns: Members of Congress and some parts of the executive branch now argue that the United States needs to go beyond existing policy tools—such as export controls, sanctions, industrial policies and supply chain security rules—to restrict the flow of technology and production capacity to China.

Proposed legislation would establish a mechanism to screen US outbound investment to China and other countries of concern: While the ultimate design of such a regime has yet to be decided, the leading proposal – the National Critical Capabilities Defense Act (NCCDA) – would establish an interagency committee led by the Office of the US Trade Representative. This committee, according to the language in the current NCCDA proposal, would be able to screen transactions by US businesses in “countries of concern” and where “national critical capabilities” are at stake.

If enacted, the proposed regime could have serious implications for the US-China investment relationship: While the final language of the bill and details around implementation are still pending, our analysis suggests that up to 43% of US FDI to China over the past two decades would have been covered under the broad categories set out in the NCCDA. In addition to slowing new investment, a new regime could also pressure US businesses to reassess existing operations in China because of potential effects on revenue, profits, and market share. The proposed mechanism could accelerate the already visible shift in US-China investment relations away from “active” channels (long-term direct investment) toward more “passive” channels (securities investment and the sourcing of non-sensitive inputs).

An outbound investment screening regime would represent a break from US foreign economic policy tradition: If the legislation is enacted, the US would be one of only a handful of advanced economies with industry specific outbound investment restrictions distinct from traditional sanctions regimes. If not designed in a targeted, predictable manner, this change could negatively impact not only the global competitiveness of US companies in affected industries but also the attractiveness of the United States as an investment location for firms that operate globally.

A new US regime could trigger more restrictive investment policies in other nations: A decision by the US to introduce an outbound FDI screening mechanism might encourage some US allies to consider similar steps. This could help coordination but in a worst-case scenario could also lead to another wave of investment policy reform that creates additional regulatory barriers for cross-border investment flows globally. There is also a possibility that other countries could view US outbound investment restrictions as going too far and refuse to follow suit. US allies could react negatively if the US operations of their companies are suddenly subject to such restrictions. This could complicate, rather than enhance, multilateral coordination in responding to China and put US companies at a competitive disadvantage.

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Comparing a Clean Electricity Standard and a Carbon Tax

As the United States commits to accelerating decarbonization as part of global efforts to combat climate change, the policies it enacts will govern its chances of success. These international ambitions are balanced against domestic realities: the effect of net-zero greenhouse gas strategies on households and the broader economy. Comparing different policy options against one another in terms of specific outcomes, such as emissions abatement and financial impact on consumers, is a useful exercise for policy makers. Because US congressional proposals have focused on two potential policy routes—an economy-wide price on carbon dioxide and other greenhouse gas emissions, and a sector-by-sector approach that starts with a clean electricity standard—this report models outcomes for these scenarios.

A carbon tax and clean electricity standard (CES) are similar policies in some ways. Both have the potential to drive large emissions reductions from the US power sector and beyond. If the CES is designed to be technology-neutral with tradable credits for clean electricity generation, both policies would operate as market-based mechanisms to encourage such generation. They also differ in significant ways, and this report, part of the Carbon Tax Research Initiative at Columbia University’s Center on Global Energy Policy, uses energy system modeling to zero in on those differences to enable policy makers to better understand the advantages and drawbacks of each policy tool.

A variety of constructions even within a single tool—particularly a CES—can be employed. What type of generation is eligible for credit in a CES and how much credit each resource receives, for example, are in part products of political and policy trade-offs. For comparison purposes with an economy-wide carbon tax, this report primarily focuses on a single crediting approach that most closely resembles the incentives new and existing electric power generators could receive under a carbon tax (and is similar to the CES included in the Clean Energy Innovation and Deployment Act of 2020). And for CES comparison purposes, the authors construct a carbon tax pathway that closely approximates the annual and cumulative electric power CO2 emissions of the CES.

Given the equal emissions-reduction ambitions of the two policies modeled in this report, the greatest trade-offs come down to price increases and revenues. The carbon tax raises consumers’ electricity price more than the CES does, but also raises significant revenues that could be used, among other purposes, to offset increases in consumers’ energy-related bills. Other findings from the report include the following:

  • It takes a lower carbon tax rate to get to the same CES emissions outcome when clean energy technologies are relatively cheap. Under a mid-tech-cost CES scenario, the equivalent carbon tax rate starts at $14/ton in 2024 and rises to just over $18/ton in 2030. In the low-tech-cost CES scenario, the equivalent carbon tax rate starts at $9/ton and rises to just under $12/ton in 2030. These rates are far lower than any recent carbon tax proposal in Congress because the cheapest near-term abatement opportunities reside in the electric power sector.
  • The CES could drive US power sector greenhouse gas (GHG) emissions down roughly 55 percent from 2005 levels by 2025, and down 62 percent by 2030, from 2,420 million metric tons (MMT) in 2005 to roughly 920 MMT in 2030. By design for this report, electric power sector emissions with the carbon tax are the same. But because the carbon tax modeled in this report is economy-wide, it could drive total US net GHG emissions down 27 percent by 2025 relative to 2005 levels, and 30 percent by 2030, from 5,999 MMT in 2005 to roughly 4,230 MMT in 2030.
  • While the two policies result in a slightly different electricity generation mix, coal sees the most significant decline in both.
  • Both policies substantially reduce conventional pollutants like sulfur dioxide (SO2) and nitrogen oxides (NOx), but SO2 emissions are 23–54 percent higher and NOx emissions are 7–16 percent higher under the CES on an annual average basis than under the carbon tax, which creates explicit disincentives for coal and to a lesser extent natural gas.
  • Electricity prices increase more under the carbon tax because the tax is applied to all carbon dioxide emissions from electricity generation. In contrast, once generators achieve the mandated carbon intensity standard of the CES, their remaining emissions are effectively unregulated, so no costs are associated with these remaining emissions to be passed on to consumers. A carbon tax, however, brings in revenue that can be used in a number of ways, including offsetting any increases in electricity bills.
  • The higher consumer prices under the carbon tax provide a stronger incentive for conservation of electricity than is found under the CES. The model shows electric retail sales to be 1 percent lower in the carbon tax scenario.
  • Overall electricity generation is 1 percent higher in the CES scenario than in the carbon tax scenario, because the policy goal of the CES is to reach a certain carbon intensity level, providing incentives to both reduce emissions (the numerator of the fraction) and increase generation (the denominator).
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Translatlantic Tools: Harmonizing US and EU Approaches to China

Close cooperation between the United States and Europe is essential if advanced economies are to develop effective responses to the array of challenges presented by China. The transatlantic partners share democratic political systems, open market economies, and a commitment to many of the same values. Washington and Brussels also share concerns about recent developments in China. These include worries about the competitive distortions arising from the role of the state in China’s economy, Beijing’s use of advanced dual-use technologies to repress ethnic minorities and fuel its military, and the spread of authoritarian influence through the Belt and Road (BRI) and other foreign policy initiatives.

Despite the shared concerns, there has been a lack of coordination and cooperation in recent years between the United States and the European Union (EU) (and its member states) when it comes to responding to China’s policies and behaviors. Under the Trump administration, tensions in the transatlantic relationship and differing views about how to address the array of challenges presented by China prevented a common agenda. Although talks took place between the administration and European capitals on issues like investment screening, export controls, and fifth-generation (5G) telecommunications technology, policies evolved mostly in parallel on either side of the Atlantic. This is more problematic than it may have been in decades past. The complexity and systemic nature of competition with China—encompassing trade, technology, security, human rights, climate, and more—makes transatlantic cooperation even more important today.

Washington’s focus on risks to US economic and national security contrasts with an emphasis in Brussels on ensuring reciprocity and leveling the economic playing field. This has yielded two distinct policy approaches with some overlap, but also many differences. The EU is devising complex regulatory instruments to limit the activities of subsidized foreign firms in the EU market, ensure reciprocity in public tenders, and compel corporations to vet their supply chains for environmental harm and human-rights abuses. No similar measures are currently being pursued in Washington. The United States, by contrast, has developed an array of China-related tools that don’t exist in Europe. The Foreign Investment Risk Review Modernization Act (FIRRMA) and Export Control Reform Act (ECRA) of 2018 give the US government far-reaching powers when it comes to investment screening and export controls. Washington has also developed innovative approaches to counter the BRI, and introduced outward financial-investment bans in relation to Chinese firms with military links.

These distinct policy approaches are partly a reflection of the differences in how Washington and Brussels perceive the China challenge. Differences in legal systems and political cultures also make it difficult (or impossible) to introduce rules and regulations that have been implemented on one side of the Atlantic on the other side. But, with the transatlantic relationship back on a better footing under the Biden administration, new structures for transatlantic dialogue being put in place, and a greater focus on the Indo-Pacific in both Washington and Brussels, there is now an opportunity for the United States and Europe to learn from each other and harmonize some of their China-related efforts. The United States can learn from a rules-based, actor-agnostic EU approach that does not define every challenge as a threat to national security. The EU and its member states, by contrast, must learn to be nimbler, adapting their thinking and processes to the new geopolitical reality of systemic competition.

Aligning approaches is important for several reasons. It can close loopholes in defensive mechanisms, reduce the risk of subsidies on both sides of the Atlantic nullifying each other, and limit the burden on firms from complying with two sets of regulations. Alignment also reduces the risk of conflicts in the transatlantic relationship because of diverging, or even competing, approaches. Ultimately, a coordinated approach can lead to a more constructive relationship with China—one that is based on consensus and is less prone to reactive or excessive measures.

To facilitate the transatlantic discussion, this Rhodium Group policy brief for the Atlantic Council takes a granular look at the full range of autonomous policy tools that have been developed in the United States and Europe over the past half decade (Section 2). Among these tools, it identifies three policy areas where the crossover potential is high (Section 3). These are policy areas that have not yet been given top priority under the EU-US Trade and Technology Council (TTC). For each, the paper describes EU and US approaches to date, presents the case for greater transatlantic coordination, outlines possible concrete next steps, maps out barriers to greater harmonization, and proposes avenues for overcoming them. It then offers concluding thoughts (Section 4).

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Pathways to Paris: A Policy Assessment of the 2030 US Climate Target

Over the course of this year, the impacts of climate change have become more immediate and tangible. A cascade of natural disasters—floods, hurricanes, wildfires, droughts, and extreme heat —have touched nearly every corner of the US. Meanwhile, it’s clearer than ever that the planet is on track for even more intense impacts in the decades ahead if action isn’t taken soon to avoid the worst climate damages.

President Biden campaigned on a platform that prioritized action on climate change. Now in office, the Biden administration has taken a whole-of-government approach to the issue, placing staff in key agencies to coordinate federal efforts to cut emissions. As part of this effort, President Biden submitted a nationally determined contribution (NDC) under the Paris Agreement, pledging the US will cut net greenhouse gas (GHG) emissions in the range of 50-52% below 2005 levels by 2030.

Meanwhile, congressional leaders are shepherding a major infrastructure package and a multi-trillion dollar spending bill towards the finish line. The two bills combined have the potential to be the largest action ever taken to abate climate change in US history. In a few weeks, world leaders will meet in Glasgow, Scotland for the UN Climate Change Conference (COP26) to enhance global action and limit warming to 1.5 degrees Celsius. As other countries step to the plate with bold ambition, they will need to be able to trust that the US can deliver on its 2030 promise of a 50-52% reduction.

This report aims to provide an independent, objective, and policy-focused assessment of the US 2030 target. We combine our knowledge of the US economy, energy systems, and policy design with state-of-the-art modeling tools to comprehensively answer two questions: Can the US cut net GHG emissions by 50-52% by 2030 and if so, what does a policy pathway to the target look like?

We consider actions by all key actors in the US federal system, including legislation under construction in Congress, regulations and other actions that can be taken by the Biden administration and key departments, as well as actions by climate-leading states and corporations. The suite of policies we consider is not intended to be exhaustive. Instead, it represents a series of actions that can be reasonably expected to occur over the next nine years if leaders in all levels of government work in earnest to address climate change. Based on this analysis, here is a summary of our key findings.  

Without new action, the US will not meet its 2030 target

Under current policy as of May 2021, with no new action, the US is on track to reduce GHG emissions 17-25% below 2005 levels in 2030. The range reflects uncertainty around energy markets, clean technology costs and the ability of natural systems to remove carbon from the atmosphere. This leaves a gap of 1.7-2.3 billion metric tons of emission reductions required to achieve the US target in 2030 (Figure ES1). The gap is roughly equal to all 2020 emissions from the transportation sector on the low end and all emissions from electric power and agriculture combined on the high end.

While the challenge of closing the gap is daunting, achieving the target is in line with what’s required to avoid the worst impacts of climate change. Not following through on this commitment risks undermining the credibility of the US and reduces the chances of an ambitious multilateral response to climate change.

Joint action by Congress, the executive branch, and subnational leaders can put the 2030 target within reach, but all must act

Our analysis demonstrates that meeting the US’s 2030 target is achievable, if Congress, the executive branch, and subnational leaders all take a series of practical and feasible policy actions—what we refer to as our “joint action” scenario (Figure ES2). This scenario represents passage this year of the infrastructure bill and budget reconciliation package in Congress, coupled with a steady stream of standards and regulations by federal agencies and accelerated action by leading states and companies. Combined, these actions can cut US net GHG emissions to 45-51% below 2005 levels in 2030.

At each level of government, we identify practical policy actions under clearly established authorities (where applicable) that, if pursued on reasonable timelines, can help achieve the target. No one level of government alone can deliver on the target. None of the policies we identify are novel or new, and all federal regulatory action can be implemented with existing legal authority. To close the emissions gap, agencies and states will need to pursue new actions at a pace, scope, and level of ambition that has not been seen to date, but which are also practical and within reach.

Action across all sectors of the economy is required to achieve the 2030 target

We find that the biggest opportunities for emission reductions in this decade reside in the electric power sector—covering 39-41% of total reductions achieved in the joint action scenario. If actions to cut electric power sector emissions are not successful, then achieving the 2030 target may not be possible. Even so, achieving the target will require successful emission reduction actions across all sectors of the US economy, not just the power sector, as well as increased natural and technological removal of carbon from the atmosphere.

Achieving the 2030 target can also cut harmful air pollutants and consumer bills

Getting US emissions on track to reach the 2030 target can be done with little cost to consumers. Long-term tax credits, investments in energy efficiency and other factors cushion consumers from price increases associated with new standards and regulations. On a national average basis, households save roughly $500 a year in energy costs in 2030 in our joint action scenario. Many policy actions that cut emissions also reduce harmful air pollutants. For example, SO2 emissions in the electric power sector decline to near zero by 2030.

If Congress fails to act, the 2030 target may be in jeopardy

Congressional action is critical to achieving the 2030 target for two reasons. First, measures in the infrastructure and budget packages can enable and accelerate clean technology deployment and on their own cut emissions significantly. Second, those same programs reduce consumer and compliance costs of federal and state actions that, combined with congressional actions, put the target within reach. Without the cost reduction assistance of congressional actions, federal and state leaders will face higher technical and political hurdles as they pursue the ambitious policies required to get to the 50-52% target. Congressional investments in emerging clean technologies will also drive innovation to enable the next wave of decarbonization after the 2030 target is reached.

Achieving the target will be a historic feat but is only halfway to the net-zero finish line

If all actors successfully pursue all aspects of the joint action scenario and achieve the 2030 target, it will represent one of the most monumental national achievements in recent decades. Even then, achieving the ambitious goal puts the nation just halfway to the longer-term goal of net-zero emissions by mid-century, which is the level required for the US to play its role in a robust global response to the threat of climate change. Getting to net-zero will require new policies and the commercial scale-up of a suite of emerging technologies like clean hydrogen, direct air capture, and advanced zero-emission electric generation, as well as continued electrification of transportation and buildings. Without near-term progress on these fronts in the years ahead, closing the gap to net-zero emissions by 2050 will be even more challenging than getting to the 2030 target.

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For more information about our approach and methods, read the Pathways to Paris Technical Appendix. 

For a June 2022 progress update, read Progress on the Pathway to Paris?

For the implications of the Supreme Court’s ruling in West Virginia v. EPA, read Has the Supreme Court Blocked the Path to the 2030 Climate Target?

China Pathfinder: Annual Scorecard

China Pathfinder is an initiative from the Atlantic Council’s GeoEconomics Center and Rhodium Group that seeks to measure China’s system relative to advanced market economies. The goal is to shed light on whether China’s economic system is converging with, or diverging from, open market economies. This report examines six elements of the market economy model: financial system development; market competition; modern innovation system; trade openness; direct investment openness; and portfolio investment openness. With the launch of an annual scorecard, and quarterly updates, China Pathfinder aims to put recent developments like the crackdown on private technology companies, Beijing’s “dual circulation” strategy, and the debate over “common prosperity” into a broader framework to help policymakers and businesses assess China’s economic trajectory.


Key Findings

  • China has generally moved toward market economy norms over the past decade. The current fashion in China analysis is to downplay any serious reform effort by Beijing, and to emphasize an enduring Chinese strategy of state control. Both Chinese officials and US strategists repeat this ahistorical view. The China Pathfinder benchmark indicators show that China has made some progress in all six dimensions since 2010.
  • Despite making some progress over the past decade, China in 2020 remains remote from the characteristics typical of open market economies. Movement since 2010 has been modest, and Beijing is well short of expectations set as a condition of World Trade Organization (WTO) accession that it would achieve “market economy” norms. The Xi era pledge to “make the market decisive” remains unfulfilled, seven years after this reform goal was initially announced. China ranks last in five out of China Pathfinder’s six clusters when compared to open market economies.
  • China has made demonstrable progress in some areas, but has a long way to go in most. In openness to trade, China is inside the market-economy range. In most other areas, however, China’s distance from advanced economy norms remains striking and problematic. The biggest shortfalls are in structural areas like market competition, which are hard to measure and harder to discipline with established international tools.
  • Within each of the six areas, we observe a mix of reform, stagnation, and backsliding. China is open in goods trade, but remains closed on digital services trade. Beijing has proceeded to liberalize some inward portfolio flows, while barriers to outbound flows remain high. Within its innovation system, China has progressed on protecting intellectual property, but ramped up industrial policies and distortive subsidy programs.
  • The most recent policy signals are at odds with a market orientation. Since 2016, Beijing has experienced serious reform setbacks and, by 2021, even perennial optimists were shocked by anti-market trends including: resurgent state ownership and extralegal influence; eroding freedom for firms to use capital markets at home and abroad; the overnight shutdown of entire sectors, such as for-profit education; regulations that effectively nationalize the data collected by technology companies; and an overreach by state planners in shaping the market structure of tomorrow.
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Taking Stock 2021: US Emissions Outlook Under Current Policy

For the past seven years, Rhodium Group has provided an independent annual outlook for US greenhouse gas (GHG) emissions under current federal and state policy. This current policy baseline provides a starting point for assessing where additional work—in the form of federal, state, or corporate action—is necessary to achieve mid- and long-term US GHG emission reduction goals.

Given the current state of federal and state policy (as of May 2021) and a range of potential energy market dynamics on the horizon, we find that the US is on track to reduce emissions 20% to 22% below 2005 levels by 2025. Looking ahead to 2030, the US is on track to achieve emission reductions anywhere from 20% to 26% below 2005 levels, absent additional action. Taking into account additional uncertainty in the direction and pace of US economic growth—and in particular, the pace of recovery from the economic disruption caused by the COVID-19 pandemic—we project 2030 emission reductions as small as 17% below 2005 levels, or as great as 30%.

This analysis only considers federal and state actions that are on the books today. It is clear that more policy action is needed if the US is going to achieve deeper emission reductions, including the Biden administration’s pledge to reduce US emissions 50-52% below 2005 levels by 2030. Later this fall, Rhodium Group will publish new research identifying the emissions impacts of a suite of federal and subnational actions that can help close the gap between the current US emissions trajectory and ambitious decarbonization goals.

Detailed national and 50-state results for all Taking Stock baseline scenarios—including GHG emissions and underlying sectoral data—are available in Rhodium’s ClimateDeck data platform.

Key trends by sector

In addition to the economy-wide outlook for US emissions under current federal and state policy, here are the key trends we see by sector under a range of potential energy technology and market uncertainties:

Power sector emissions increase modestly over the next few years as the US economy bounces back from the pandemic, but then continue their secular decline through 2025 due to a continued decline in coal-fired generation. After a temporary rebound in coal generation coming out of the pandemic, coal continues its downward spiral, due in large part to competitive pressure from low-cost natural gas. If natural gas prices fall below $3/MmBTU, more than 50% of the current coal fleet could shutter by 2030. By 2025, these trends help cut power sector emissions in half relative to 2005 across our scenarios.

Going forward, however, the trajectory of US power emissions isn’t defined by how much coal comes offline but rather the pace of natural gas expansion. In scenarios with the cheapest gas, power sector emissions begin to rise again after 2025. Low-cost natural gas, once the primary driver of emission reductions in the power sector, will begin to hamper the pace of decarbonization as it out-competes renewables and pushes out nuclear. Wind and solar capacity increase across our outlook, but cheap natural gas and a moderate reduction in clean energy technology costs could slash this clean build-out by almost 60% by 2030, compared to a future with more expensive natural gas and steeper technology cost declines. Low natural gas prices also put pressure on zero-emitting nuclear power, which could see more than a third of today’s capacity retire by 2030.

After a brief post-pandemic rebound, transportation emissions decline modestly through 2030, driven by fuel economy improvements in passenger vehicles and a shift toward electric vehicles (EVs). Assuming the most optimistic outlook for declining EV battery costs combined with high oil prices—which would increase the EV share of total new passenger vehicle sales to 35% by 2030—transportation emissions fall by 23% by that year. More moderate EV battery cost reductions coupled with low oil prices lead to EVs capturing only 9% of the market in 2030, and transportation emissions decline by 18% from 2005 levels. Across our projected range, steeper emission reductions are limited by consumer preference for larger, higher-emitting vehicles, and robust demand growth for freight and air travel.

Industrial emissions continue to rise and become the top-emitting sector in the mid-2020s. Industrial emissions grow across our scenarios, but climb almost three times as fast from current levels when natural gas is cheap compared to when it’s more costly. The oil and gas industry itself faces an uncertain future. If natural gas prices fall and global oil prices remain weak, emissions from upstream oil and gas activities could fall 12% by 2030 from today’s levels. Conversely, a stronger outlook for natural gas and oil prices could drive emissions up 25% from current levels by 2030.

Building efficiency improves but emissions from residential and commercial buildings remain effectively flat. Low-cost natural gas, increasing building square footage, and economic and population growth put upward pressure on building emissions, even while state policies make homes and businesses more efficient. Even in our highest scenario for natural gas prices, CO2 emissions from buildings fall only 2% below 2005 levels by 2025. By 2030, emissions fall modestly to 1-4% below 2005 levels.

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For more information about our approach and methods, see the Taking Stock 2021 Technical Appendix.