By: Daniel Silverberg, Capstone Managing Director

February 19, 2023 – I traveled to Oslo this past week to speak on a panel with three European energy ministers on the regulatory steps necessary to advance the green transition.  There was serious interest among participants in how the US would implement the Inflation Reduction Act (IRA), whether the IRA would survive Republican scrutiny or political change, and how the administration would approach Buy America restrictions in the bill.  What struck me was the degree of unanimity regarding Ukraine and the conviction that Europe should pursue its own IRA.  Predictably, disagreement manifested itself regarding the need for a “balanced” energy approach with the continued production of fossil fuels. 

Below are key takeaways derived from Oslo and the Munich Security Conference (MSC) several days later. 

Growing Agreement on Ukraine, China 

The most telling moment of the Oslo event was Sweden’s Minister of Climate and Environment Romina Pourmokhtari’s exclamation that ‘there are two problems with Russian gas:  First, it’s Russian.  Second, it’s gas.’ The degree of unanimity among European leaders on Ukraine was striking, coupled with a sense of self-chastisement regarding dependence on Russian gas.  This dynamic was on steroids at the Munich Security Conference several days later, where leaders exhorted each other – none more so than Ukraine’s president – not to lose steam in support for Ukraine and to provide munitions for her defense. 

European countries likewise expressed uncommon unity regarding concerns on China, particularly vulnerability to Chinese surveillance.  Just this past week, the EU approved a 3 billion Euro satellite program that would detect balloons and other overflights.  Amidst heartburn expressed regarding US protectionism in the IRA, Europeans seem to be embracing a more hawkish, defensive view of China after years of US diplomatic efforts.   

White House’s China View Moderates   

The balloon incident “awakened” Americans to China’s multifaceted economic and military threat, and calls for restrictions on outbound investment have intensified, particularly regarding sensitive technologies.     

Despite bipartisan support for a more hawkish stance, the White House appears to be embracing a moderate tone, one that rejects “Cold War” analogies embraced by GOP leaders.  First, the White House has yet to announce further restrictions on US technology exports or an outbound CFIUS process, as advocated by Congress.  When the administration announces those restrictions, they will likely be highly targeted.   

Second, we tracked key White House economic advisors’ statements, and a common theme appears to be advocacy for a highly selective economic strategy, not an outright ‘Cold War’ approach.  For example, Amos Hochstein, the President’s envoy for the Global Partnership for Infrastructure and Investment, essentially advocated in recent appearances for the US to identify its most vulnerable supply chains in the green transition and throw all resources at those challenges – particularly in critical minerals mining and processing.  His appearance at an Africa mining conference earlier this month, long attended by China and ignored by the US, underscores this approach. Implicit in Hochstein’s comments is that the US should marshal its diplomatic and economic resources in targeted ways, not wherever China appears.  Practically, this could mean bringing economic and fiscal might to prevent Chinese access to specific mines in the Democratic Republic of Congo, not necessarily in contexts where China does not directly threaten US supply chain interests.  Hochstein is creating doctrine through action, not through a formal White House process. Where he travels is where the US will likely deploy resources.   

The IRA will Endure 

There is much concern among European partners that a future president could unwind the IRA or negate the ‘pot of money’ available for subsidies.  I reiterated Capstone’s viewpoint in Oslo, expressed here in December, that the IRA is not going anywhere.  Legally, reversing the IRA would require an act of Congress, not merely the stroke of a pen by the head of the IRS, and any unilateral Executive Branch efforts to impede its implementation would be checked by the Courts.  Politically, Republicans, despite generally abhorring large spending measures, actually support key aspects of the IRA.  Major energy companies – a traditional constituency for Republicans – favor carbon capture and hydrogen subsidies – which has shifted the politics on clean energy spending and likely resulted in sustained support for the IRA.  Practically, the IRA is mostly a conglomeration of tax subsidies. There is no ‘pot of money’ that can be clawed back or canceled, and the tax credits will already have been defined and project qualification determined before the 2024 election.  In short, US subsidies will remain.