[Global Focus] US Electric Vehicles and Renewables Slowdown... Biden's Climate Policy on the Test Bench

US Treasury Specifies Overseas Concerned Companies under IRA
If Chinese Stake Exceeds 25%, No Subsidies
Biden's Climate Policy Burden amid China Containment
Solar and Wind Power Projects Halted, Funding Shortages and Bankruptcies
Bloomberg: US Likely to Fail 2050 Net-Zero Goal

The eco-friendly policies of U.S. President Joe Biden, who calls himself the 'Climate President,' have come under scrutiny. Although he set goals to accelerate the adoption of electric vehicles and expand renewable energy to achieve carbon neutrality by 2050, the implementation process has hit a major roadblock. The U.S. Treasury Department has detailed the 'Foreign Entity of Concern (FEOC)' regulations under the Inflation Reduction Act (IRA) to reduce dependence on China, which dominates the battery supply chain. This move is expected to add pressure to the already sluggish electric vehicle market. Amid rising interest rates and inflation causing bankruptcies among renewable energy companies, the Biden administration's 'China squeeze' could further burden its green policies. Particularly, with the Republican front-runner and former President Donald Trump promising a major overhaul including the "abolition of IRA subsidies" in next year's presidential election, and his rising approval ratings, Biden's path to re-election is expected to become even more complicated. Bloomberg News assessed that "America's path toward net zero is narrowing."

U.S. Announces 'China Exclusion' FEOC Guidelines...Will Electric Vehicle Adoption Slow?

According to industry sources on the 5th, the U.S. Treasury Department decided to exclude joint ventures with over 25% Chinese capital ownership from eligibility for electric vehicle subsidies under the IRA. Last year, the U.S. passed the IRA, which provides up to $7,500 in tax credits per vehicle, including FEOC provisions to reduce dependence on Chinese supply chains. On the 1st (local time), detailed guidelines related to this were announced. This measure aims to completely block Chinese companies from exploiting loopholes by establishing joint ventures with foreign companies outside China, such as in the U.S. or third countries, to receive IRA subsidies. Companies owned, controlled, or directed by the governments of China, Russia, North Korea, or Iran with over 25% ownership are also ineligible for IRA subsidies. To receive U.S. government subsidies, parts produced by FEOC entities must not be used starting next year, and minerals from 2025 onward.

However, the market views the new FEOC regulations as within expected boundaries. They are similar to the U.S. CHIPS and Science Act (CSA) provisions that deny subsidies to joint ventures with over 25% Chinese government ownership, aligning with expectations. Critics point out that the Biden administration faces a dilemma trying to catch two rabbits?'climate action' and 'China containment'?with the FEOC guidelines. There is also criticism that the administration may have left some room for U.S. companies to cooperate with Chinese firms dominating the battery market. Senator Joe Manchin, a Democrat, criticized the administration after the FEOC announcement, saying it is seeking a "workaround" regarding sanctions on Chinese battery parts and called for stricter regulations.

Meanwhile, U.S. automakers are struggling with declining electric vehicle demand due to high interest rates, and the reduction in subsidy eligibility could become an obstacle to EV expansion. Ford, a major U.S. automaker, announced that its electric vehicle Mustang Mach-E will no longer qualify for subsidies under the new FEOC rules. Bloomberg News analyzed, "Once the regulations fully take effect, the number of vehicle models eligible for subsidies may further decrease," noting that models previously deemed eligible in the initial regulatory phase could lose eligibility once new parts and mineral rules are enforced. Ellie Hinkley, a partner at global law firm Baker Botts, pointed out, "If companies try to source all EV parts from places other than China, they will face greater logistical challenges and likely produce more expensive products. Next year is not a rehearsal; it’s the real deal. Building supply chains will take years."

Solar and Wind Power Projects Halted One After Another... "Failure to Achieve Net Zero by 2050"

Beyond electric vehicle adoption, there are signs of turbulence across the Biden administration's renewable energy expansion policies, including solar and wind power. Wind power, a representative renewable energy sector, has faced various crises since the IRA took effect. High interest rates and inflation have hit the wind power industry hard, causing procurement costs to soar, and raw material and labor costs to spike, worsening profitability. For example, the U.S. benchmark interest rate has risen from 2.5% in August last year when the IRA was enacted to 5.5% currently, a 3 percentage point increase. Within a year of IRA implementation, enthusiasm for renewable energy projects like wind power has vanished, and the industry has shrunk significantly. Additionally, fundamental limitations of the renewable energy sector?such as government permits, weather-dependent intermittency making stable power supply difficult, and grid integration challenges?have compounded industry difficulties.

Bankruptcies among renewable energy and electric vehicle companies unable to withstand financial strain are increasing. Solar finance company Sunlight Financial Holdings filed for Chapter 11 bankruptcy in October, and electric bus manufacturer Proterra did so two months earlier in August. Renewable energy development projects have also been halted. Avangrid canceled wind power construction plans in Connecticut and Massachusetts due to deteriorating profitability, paying penalties of $48 million and $16 million to each state, respectively.

Amid growing difficulties in the renewable energy industry, the Biden administration has also expanded fossil fuel production. To stabilize soaring international oil prices following Russia's invasion of Ukraine in February last year, the U.S. increased domestic oil production, becoming the world's largest producer of oil and gas for two consecutive years. President Biden appeared to be conscious of international criticism, as he did not attend COP28 held in Dubai, United Arab Emirates, on the 30th of last month.

The contrasting trends between renewable energy and fossil fuels are clearly reflected in stock prices. The S&P Global Clean Energy Index has fallen 29.1% year-to-date (as of the 20th of last month), while the S&P Oil & Gas Exploration & Production Index rose 8.8% over the same period.

[Image source=Yonhap News]

The Biden administration’s overarching goal of achieving carbon neutrality remains unchanged. However, due to the IRA and various challenges such as high interest rates and inflation, a slowdown is inevitable, putting climate policies to the test. According to BloombergNEF, an energy research firm under Bloomberg, U.S. annual carbon emissions are projected to decrease from the current 5.3 gigatons (Gt) to only 2.3 Gt by 2050?about half of the U.S.’s stated net-zero target for 2050.

Meanwhile, the Republican Party is intensifying its attacks on Biden’s climate policies. Former President Trump, expected to face Biden in a 'rematch' in the November presidential election next year, has promised a major overhaul of the IRA, aiming to maximize fossil fuel production and abolish electric vehicle subsidies.

Gavin Zabusky, Chief Investment Officer (CIO) of U.S. investment firm Green Alpha Advisors, stated, "All new investments in oil and gas exploration, discovery, drilling, power generation, internal combustion engines, and fossil fuel power plants are pushing us further away from our climate goals," adding, "The timetable to reach net zero is too short." Jerome Dutton, founder of Parnassus Investments, emphasized, "Green energy investments must be based on economic realities."

This content was produced with the assistance of AI translation services.