Build Back Better Act energy tax credits go against the World Trade Organization


Summary

  • As part of Build Back Better (BBB), the Biden administration has made reducing carbon emissions, while focusing on “Buy American” provisions, a major objective.
  • To achieve this, the Build Back Better Act (BBBA) contains numerous climate-related tax credits that increase in value if the products they cover are made in the United States.
  • These types of provisions are de facto protectionist domestic content subsidies that are prohibited by existing World Trade Organization rules.
  • The BBBA’s climate-related tax credits would hurt relations between the United States and its strategic trading partners and hurt U.S. clean energy producers.

introduction

One of President Biden’s main goals in his Build Back Better (BBB) ​​framework is to reduce carbon emissions while respecting the “Buy American” provisions. The administration’s desire is to increase domestic demand for clean energy goods and products and to prioritize US manufacturers and companies to meet this demand. The White House says the BBB framework “guarantees clean energy technology. . . will be built in the United States with steel and other materials made in the United States, creating hundreds of thousands of good jobs here at home.[1]

To achieve these goals, the House passed a budget reconciliation bill, the Build Back Better Act (BBBA), which is the legislative vehicle of the BBB framework. It includes numerous tax credits for the consumption and production of clean energy. Tax credits increase in value for goods produced in the United States and for those produced in unionized facilities. These types of tax credits, based on “Buy American” incentives, are de facto domestic content subsidies that are prohibited under existing World Trade Organization (WTO) rules. The BBBA would harm trade relations between the United States and its strategic partners and, in turn, harm U.S. clean energy producers and manufacturers.

Climate-related tax credits and national content

The BBBA includes tax credits to encourage the purchase of electric vehicles (EVs). Buyers of new or used electric vehicles would be eligible for a tax credit of $ 7,500. Electric vehicles with battery cells made in the United States would be eligible for an additional $ 500 in tax credits. Electric vehicles assembled at US factories with workers represented by unions would qualify for an additional $ 4,500 in tax credits. If all conditions are met, consumers could receive a tax credit of up to $ 12,500, provided the credit does not exceed 50 percent of the value of the vehicle. For more information, see Ewelina Czapla and Isabel Soto’s analyzes here and here.

The BBBA would also add and modify many investment and production tax credits on energy projects. Power producers who operate renewable energy facilities, including solar and wind power, would be eligible for these credits. The value of these credits increases if the facilities use steel products made in the United States. There is also a provision for production tax credits for many solar and wind products. As with other credits, the value of these credits increases if final component assembly is completed at a facility in the United States.

Protectionism and violation of World Trade Organization rules

Because the tax credits increase in value based on the “Buy American” incentives, they promote the use of domestic products. This is contrary to Article 3.1 (b) of the WTO Agreement on Subsidies and Countervailing Measures which states that “subsidies contingent, either solely or as one of several other conditions, on the use of domestic products compared to imported products ”are prohibited.[2] Likewise, tax credits violate Article III of the General Agreement on Tariffs and Trade (GATT), a central part of the WTO, which states “internal taxes and other internal charges … affecting the internal sale, offering for sale, buying… distribution or use of products, and internal quantitative regulations requiring… the processing or use of products in specified quantities or proportions, should not be applied to… domestic products so as to protect domestic production.[3]

It is particularly damning that the BBB framework states that it “will boost the competitiveness of existing industries, such as steel, cement and aluminum, through grants, loans, tax credits and purchases for stimulate investment in decarbonization and revitalization of American manufacturing. “The Biden administration engages in trade protectionism, as does the Trump administration, and the only difference is the focus on reducing carbon emissions.

Hurting Strategic Trade and Manufacturing in the United States

The numerous climate-related tax credits based on ‘Buy American’ incentives would harm trade relations between the United States and its strategic allies. Canada has already sounded the alarm on electric vehicle tax credits, pointing out that they do not only violate WTO rules, but also the rules of the United States Free Trade Agreement. Mexico Canada (USMCA).[4] The European Union, Germany, Japan, France, South Korea, Italy and other important strategic allies wrote a joint letter to the United States stressing their concerns about “limiting the vehicle credit eligibility based on their US national assembly and local content. is inconsistent with the United States’ commitments under the WTO multilateral agreements.[5] These countries are likely to retaliate, as the WTO allows countries to impose countervailing tariffs on goods deemed to receive illegal subsidies. Foreign countervailing tariffs would reduce demand for U.S. clean energy and hurt U.S. producers and manufacturers of these climate-friendly products. Canada has also announced that it will seek to impose retaliatory tariffs on other goods unrelated to this dispute.[6] The economic damage would not be confined to the trade in energy products.

Conclusion

With the BBBA, the Biden administration has focused on energy-related tax credits operating under the “Buy American” incentives. Ideally, these types of tax credits could kill two birds with one stone: reduce carbon emissions while increasing the competitiveness of US manufacturing industries. In the current form of BBBA, energy-related tax credits are unlikely to succeed in increasing demand for U.S. clean energy products. The tax credits would create a form of protectionism that would violate WTO laws and harm trade relations between the United States and its strategic allies and, in turn, harm American manufacturers and producers of related products. clean energy. Rather, policymakers should allow U.S. clean energy producers and suppliers to focus on their own strengths while avoiding the costs that flow from economic protectionism.

[1] https://www.whitehouse.gov/build-back-better/

[2] https://www.wto.org/english/docs_e/legal_e/24-scm.pdf

[3] https://www.wto.org/english/docs_e/legal_e/gatt47_01_e.htm

[4] One of the main provisions of the USMCA is to follow Article III of GATT

[5] https://www.reuters.com/business/autos-transportation/international-opposition-mounts-proposed-us-ev-tax-credit-2021-10-30/

[6] https://www.cbc.ca/news/business/electric-car-retaliation-column-don-pittis-1.6255204

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