Green industries are among the fastest growing and make a significant contribution to GDP. The International Labour Organisation expects the global shift to a green economy to create 60 million new jobs by 2032. This is even more exciting at a time when massive layoffs have grabbed headlines over the past six months. Meanwhile, Oxford Economics research suggests that industries contributing to the accomplishment of Net-Zero could add $10 trillion, or 5% of the projected GDP, to the global economy by 2050.
These numbers are not unbelievable. In the US alone, green industries already generate around $1.2 trillion in annual sales and employ around 9.5 million full-time employees.
Green Supply Chain
China has been way ahead in its green initiatives, becoming the world’s largest supplier of wind and solar technology as early as in the 2010s, and dominates the supply chain. Beijing controls a large portion of the world’s supply of materials required to build green technology, including lithium, cobalt, and rare-earths. The country hosts 75% of all battery cell manufacturing capacity and 90% of all anode and electrolyte production. While green is a growing trend, China has collected much of the benefits so far.
The pandemic brought the world’s dependence on supply chains that run through China into sharp focus. In addition to highlighting corporate and sovereign distrust of Beijing’s readiness to interfere in free market processes, the supply chain disruptions also created a vicious cycle of inflation that threatens to persist long after the pandemic. The Biden administration is nervous and focusing on more “friendly” supply chains, to prevent this from being used as a political tool.
Carrot and Stick
As part of the Inflation Reduction Act (IRA), passed by the US Congress in 2022, lawmakers identified green industries as crucial to alleviating current and future inflationary pressures. Earlier policymakers tended to lean towards punishing emitters. In contrast, the IRA offers a carrot rather than a stick, with $370 billion allocated for subsidies and tax breaks to boost green industries and lower US emissions. While the execution of the act is still under process, there are some early signals of whether these tax cuts will bring much success.
The EV Industry
Electric vehicles can be considered the flagship of an economy’s transition to lower emissions. EV sales could then become a measure of the IRA’s success. The IRA includes tax credits for manufacturers to spur domestic EV component manufacturing and tax credits for consumers who buy EVs with battery raw materials that have been extracted from the US or countries with which it has Free Trade Agreements.
Moving battery raw material to North America (aka away from China) would spell a major victory for the Biden administration. Companies announced over $73 billion in US battery plants in 2022, which is 3X of the planned investments recorded in 2021. While focusing subsidies on production in the US and FTA partners has drawn the ire of many foreign-based EV makers, some like Volkswagen look forward to the lower costs of a domestic supply chain. This is reflected in the overly positive sentiment for Volkswagen, as can be seen on Acuity’s AssetIQ widget.
Producers are keen on jumping onto both the cost savings and tax credit bandwagons, which the Congressional Budget Office estimates to add as much as $30.6 billion in 10 years. Already-entrenched US manufacturers, like General Motors and Ford, are already ramping up their domestic battery productions.
Tesla made substantial profits with China’s tax credit regime and now expects $1 billion in battery tax credits from the US over the year. One “side effect” of EV tax credits is the instigation of a price war. To qualify for the headline consumer tax credit, Tesla had to slash prices by 20%. Ford was forced to trim its vehicle prices to compete with Tesla. While highly funded automakers have the wherewithal to enter a price war, smaller competitors are at a significant disadvantage. Rivian Automotive, for example, was forced to lay off 6% of its workforce and scrap a major European van project to withstand the impact of falling competitor prices. Their share prices tell the same story. Tesla’s stock has added over 30% in the past six months, Rivian’s share price has lost more than 46%. Investors should be aware not only of the entrenched EV makers, but also of those that can muscle out the competition.
Where Do We Go from Here?
The IRA has not won many fans on either side of the Atlantic and the Pacific. America’s large trade partners include the EU, Japan and South Korea, which consider the IRA discriminatory and against free market principles. On the other hand, the EU still depends on China for 98% of rare earth metal imports, and any disruption could cause a major setback in battery production growth in Europe. The IRA could also strike a sour note in trade talks with Germany.
The effects of Biden’s green tax credits are still in their nascency. Longer lasting impacts are likely to be the product of continued deliberations, political wrangling, and availability of capital. However, the planned investments in EVs and components are an indication of a market priming itself for growth.