When the US Congress passed the Inflation Reduction Act — or IRA — last year, many environmentalists cheered.
No wonder. Although the bill was presented by Democrats as an inflation-busting measure, it does relatively little to cut prices in the short term. Instead, the more notable feature is that the law offers $369bn of loans, tax breaks and subsidies to back green investments in sectors such as hydrogen — easily the largest such package seen from the White House.
Indeed, the bill is so sweeping that it has prompted complaints from officials in the EU and countries such as South Korea that the IRA subsidies will pinch green business away, because they cover only US-made ventures.
The politicians who co-authored the bill, such as senator Joe Manchin, insist they were simply trying to advance the climate agenda.
But, as the row rumbles on, there is another striking aspect to the IRA that also deserves debate: what it does — or, more accurately, does not do — for the so-called circular economy.
In recent years, many green activists have embraced this concept, which refers to a model of production and consumption that involves sharing, leasing, reusing, repairing, refurbishing and recycling existing materials and products as long as possible, to avoid wasting raw materials. It is usually defined in opposition to a “linear” model of production, where raw materials are used and then discarded.
In western consumer culture, this circularity idea has become increasingly popular. That can be seen in the proliferation of initiatives supporting the sale of vintage — that is, second-hand — clothing, the recycling of plastic waste and paper, and domestic composting. It is also evidenced by the fact that tech companies, such as Apple, are now under pressure from consumers and shareholders to support ways for people to repair devices such as iPhones when they go wrong. The assumption has been that users will discard old equipment and purchase new models.
Meanwhile, younger consumers under the age of 40 are increasingly leasing products instead of owning them, says Aleksandra Bal, a tax technology expert at Stripe, the payments group. “Renting and leasing have been commonplace in the automotive industry for years, but they are now catching on in other sectors, too.”
Stripe experienced a fivefold increase in “money spent on renting clothing, equipment, and tools in the first three quarters of 2022 compared with the same period in 2019”, she notes.
So far, so striking. Intriguingly, however, the IRA does not mention the phrase “circular economy”. Nor does the C-word crop up in explanatory documents issued by the White House or Department of Energy — or in recent speeches from Joe Biden, US president.
One possible explanation may be that the US government is simply engaging in another linguistic sleight of hand to avoid scaring centrist or rightwing voters. After all, as Frank Luntz, the rightwing American pollster, points out, many of the terms that Democrats regularly use to describe their green agenda — such as “net zero” — sound alienating and/or baffling to Republican voters.
The phrase “circular economy” almost certainly falls into this category, since it emerged among progressive groups.
And some observers believe that the details of the IRA contain measures that circularity enthusiasts can celebrate.
Officials at the fund Closed Loop Ventures think the IRA will spur such a rush for renewable energy infrastructure that it will force more recycling of the raw materials needed to build it — even if this is not spelt out in the bill — because there will not be enough new commodity supply to meet demand, without recycling.
“These new installations will not only require ample raw material — they will also accelerate the need for end-of-life solutions for energy infrastructure being replaced or systems being repowered,” noted Aly Bryan, of Closed Loop Partners investment group, in a blog last year. “The bill also has provisions that seek to enable investment into waste-to-energy and biogas operations . . . [which] creates opportunities for new, waste-generated, clean energy sources.”
But another, less benign, way to interpret the absence of “circular economy” is that it may also reveal that the White House is stuck in a 20th-century mindset and wedded to linear forms of production.
After all, the US view of manufacturing has historically been focused on a linear approach, partly because it has not, as a country and as a culture, historically had much sense of resource constraint.
And, in practical terms, the US tax code is entirely linear in its focus: companies and consumers do not get many tax breaks if they try to uphold circular ideals. Leases or rentals where there is no ownership transfer may even create additional tax obligations, says Bal. “Businesses switching to circular business models should be aware that, from a tax perspective, service-based delivery models are more complex than traditional sales,” she warns.
Maybe this will change as the IRA provisions are rolled out. After all, the framework for Europe’s Green Deal climate law does offer explicit support for circularity ideals, by encouraging companies to recycle materials. And, if there is one thing the IRA saga has shown, it is that the US and Europe are locked in competition about which region can offer the most effective subsidies for green business.
Washington may yet copy Brussels in these circularity moves.
Until then, the key point to emerge is that there are many shades of “green” policies today. Cutting emissions is welcome. But reducing waste while also improving the carbon footprint is even better. All eyes, then, on the “circularity” gap in that IRA.
Email Gillian at gillian.tett@ft.com
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