The Green Transition: Bidenomics without Biden?
Weekly analysis of the shift towards a new economy.
Dear Readers,
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This week, we’ve got on excellent guest-authored piece from Juliet Flamank, associate director at the Green Finance Institute (GFI). The GFI is a major player in the National Wealth Fund (NWF) taskforce, advising the government on how to structure and implement the Chancellor’s vehicle for crowding in private capital for net zero-linked investments.
Below, Juliet sets out the case for building resilient local and domestic supply chains for the battery industry, which is key to Labour’s clean power mission. This is essential reading for anyone interested in exactly how the government intends the NWF to work in practice.
But first, we had huge news from the US this week – so let’s get right into it.
Biden his time
President Biden has withdrawn his bid for re-election. Kamala Harris is to lead the Democrats against Donald Trump in November. This is the first time a sitting president has chosen not to seek re-election since Lyndon Johnson in 1968. Green Transition subscribers will know that Biden has something else in common with Johnson: his domestic record will be defined by a radical and interventionist agenda that aimed at a paradigm shift in how the US economy functions; but, like Johnson, those efforts have nevertheless failed to win him favour with the electorate. For Johnson, it was the Great Society, derailed by Vietnam and civil unrest at home. But over the last four years, Biden’s name has become synonymous with green industrial policy and a programme intended to reindustrialise the US through large-scale public investment in the energy transition, aka Bidenomics.
That is quite a legacy. But it is under threat should the Democrats fail to retain the presidency. Biden soldiering on as the Democratic nominee, despite his faltering health, was making a Republican victory more and more likely. You’d think voters would reward an incumbent party that has delivered high levels of economic growth, as well as the beginnings of an infrastructure and green manufacturing boom. But many have struggled with high levels of inflation, and the Bidenomics project has not been adequately sold to voters. Most Americans believe the US is in recession – even though Washington policymakers are presiding over the highest growth in the G7 by implementing eye-watering fiscal stimulus programmes.
Should we see a second Trump presidency, support for renewables would likely decline in inverse proportion to fossil fuel extraction. Trump’s running mate, JD Vance, was once a clean tech investor. But he has loudly renounced his former green credentials (along with his early comments about Trump being a potential “American Hitler”), and has described the Inflation Reduction Act as “dumb” for supposedly reducing US energy independence. He has forcefully called for the protection of coal and steel industries against pro-climate policy, attempting to open up the wedge between the imperatives of net zero and the interests of ordinary workers. Trump and his vice president may find it hard to unpick subsidies that would halt re-shoring and see well-paid jobs disappear in Rust Belt states, but they would “drill, baby, drill”, and would certainly try and remove government grants for solar and electric vehicles (EVs). Vance even proposed replacing EV tax credits with a like-for-like subsidy for American-made petrol cars and trucks in his Drive American Act. Existing tariffs on Chinese imports, not least on EVs, photovoltaic cells and batteries, will be ramped up, making it even more expensive for consumers to make greener choices.
But JD Vance’s selection as Trump’s running mate indicates that under a Republican presidency, state largesse in support of jobs and muscular industrial policy could survive even if its green complexion fades. Vance has come to represent a deeply conservative, but supposedly pro-worker, blue-collar tendency within the American new right – one that is less enthused by free-market libertarianism than the old Reaganite party. Small-state, globalisation-friendly economics is unlikely to enjoy a restoration whoever wins the election. But there is a lot at stake: if Harris fails to win over voters, we could see the Democrats’ offer of growth and reindustrialisation via net-zero projects giving way to a new, Trumpian government compact with older, dirtier industries. The race for the White House is on.
The power of batteries
By Juliet Flamank, associate director at the Green Finance Institute (GFI)
The last few years have seen significant investment into the UK’s automotive industry from both the public and private sectors. Car manufacturers including Nissan, Jaguar Land Rover, Tata and BMW have made inward investments, while the government has focused on subsidising gigafactories.
However, a gigafactory doesn’t exist without a supply chain. Given the government’s ambitions to attract private sector investment and make gigafactories a cornerstone of the UK economy (one of the key sectors for investment through the National Wealth Fund), it is clear that we need to build a resilient, home-grown supply chain to underpin this sector.
Globally, there is a growing demand for batteries and intense competition for market share. In this race, the key players are already established: China holds 85 per cent of the current market for battery production, and the Inflation Reduction Act has put the US ahead of the UK. That’s why we need urgent action.
The current situation
The UK has the most varied specialist vehicle sector in the world, with a £4bn annual turnover and 15,000 high-skilled employees. Our world-class universities and research centres make the UK an innovation hub for new technologies.
To date, government grants have played an essential role in the start-up phase of a company’s growth, providing much-needed capital to university spin-outs and start-ups. However, as businesses grow, they teeter on the “valley of death” between start-up and scale-up. When grants end, battery companies struggle to access the right kind of finance before they are seen as sufficiently de-risked. This is driving companies to markets where greater support is available, meaning the UK doesn’t see the benefits of the innovation that has been cultivated here and the potential jobs that come with scale.
Businesses that are developing the early, innovative, specialist tech that will contribute to a high-growth economy by decarbonising transport are at risk of leaving our shores. There is now the possibility that the UK could miss out on the wider automotive supply chain opportunity for electrified vehicle technologies – a £24bn industry.
The solution
The battery supply chain problem suggests we need to leverage public finance better to attract private investment and keep these businesses here in the UK, rather than leaving them strapped for cash at a critical point in their growth. The National Wealth Fund offers an opportunity to reshape the way public sector capital can be used to do this – by moving away from grants and subsidies to sharing risk and catalysing private investment.
One example of how catalytic public finance could work in practice, generating investment in a battery supply chain and supporting developments of gigafactories, is a Battery Investment Facility (BIF). These are part of the focus of the National Wealth Fund – a facility that would de-risk investments across the value chain by blending public and private capital to give investors confidence in supporting a growing industry. This in turn helps organisations at a critical point in their growth to bridge the gap to mainstream funding, avoiding the so-called “valley of death”, when newer businesses are most likely to fail.
The BIF has potential to support companies at different stages in the scale-up journey: at an earlier stage where companies move from grant funding to mainstream finance, and at a later stage to unlock the larger scale that capex companies need to start building out their operations.
Intelligent risk sharing is critical to make investment opportunities appealing for investors and giving them the confidence to enter a sector. Well-designed guarantee funds – which deploy public capital with a focus on risks that the market cannot address alone – ensures that public money goes further and enables the government to step away faster as companies scale-up.
Now what?
With a new government comes new momentum. Commitments made to the industry through the National Wealth Fund and other policies are promising, and delivering them to crowd in private sector investment could be transformational. The battery industry has to ramp up to support these ambitions, offering an opportunity to reach our climate targets, improve our national resilience, and create jobs across the country.
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