A Cleaner Australia-U.S. Alliance
Ensuring That Post-IRA Cooperation Outranks Competition

The Inflation Reduction Act (IRA) has sparked an economic transformation in the United States. It is also overhauling Washington’s international relations in often complex ways. Although the IRA has created opportunities for cross-border cooperation, it has enhanced concerns around competition as well. The United States’ post-IRA relationship with Australia, its staunch Indo-Pacific ally, is illustrative of this.

IRA commitments could help advance the key Australia-U.S. priority of improved climate and clean energy action, particularly in relations with the wider Indo-Pacific. It could also inadvertently help defense cooperation, primarily via servicing the vast critical minerals needs of the AUKUS pact between Australia, the United Kingdom, and the United States. The Australian government and industry, however, have grown increasingly concerned that the IRA threatens their own ambitions to make their country a clean energy superpower. A new Australia-U.S. partnership announced at the May 2023 meeting of the G-7 in Japan could ensure mutually beneficial outcomes. While the IRA has the potential to produce significant benefits, its implementation must be carefully calibrated to ensure that it aligns with, rather than alienates, key U.S. partners and allies.

Australia-U.S. Climate and Clean Energy Leadership

The IRA represents the largest ever commitment to U.S. clean energy development. It includes an estimated $386 billion in new spending and tax credits to help decarbonize sectors, including power generation, transportation, and industry.[1] This incorporates commitments that could dramatically increase U.S. production of clean technologies such as electric vehicles (EVs), fuels such as hydrogen, commodities such as green steel, and raw materials such as critical minerals.

The IRA’s impact on climate change will take some time to assess. Although there are more efficient ways to reduce emissions than through massive subsidization, the IRA’s net effect on the United States’ considerable emissions will certainly improve on the status quo ante. Other governments have also increased their rival clean energy commitments in response to the legislation. These measures could help further lower costs and increase clean energy deployment on a global scale. The IRA, and responses to it, could also reduce specific vulnerabilities arising from overconcentration of supply chains within China.

Australia has as much baseline interest in mitigating climate change as any country. It has additional strategic rationale to act due to the great emphasis that its partners in the Pacific place on reducing emissions. The current government of Anthony Albanese has raised Australia’s 2030 target for emissions reductions to 43%, up from the preceding government’s goal of 26%–28%. It has also implemented some commitments to greening Australia’s industrial base, though it has no master plan.[2]

The IRA provides a mix of direct and indirect opportunities for Australia to advance climate action. The country’s domestic decarbonization could benefit from greater access to lower-cost inputs arising from the legislation and the clean energy “race to the top” it appears to have sparked. The IRA and recent Australian commitments also enhance the credibility, technical ability, and economic motivation for Australia and the United States to work together with third-party countries on decarbonization, particularly in the Indo-Pacific.

Canberra and Washington have pledged to make climate and clean energy a “new pillar” of their alliance.[3] They have initiated mechanisms to leverage outputs of the IRA and Australia’s clean energy commitments. The Australia-U.S. Net Zero Technology Acceleration Partnership, for example, aims to accelerate “development and deployment of zero-emissions technology, including long-duration energy storage, digital electricity grids, and technology to integrate variable renewable energy, hydrogen, and direct air capture.”[4] Groupings such as the Quad (comprising Australia, India, Japan, and the United States) and the Indo-Pacific Economic Framework also have clean energy workstreams that Canberra and Washington could utilize.

Australia shares the United States’ concerns around Chinese clean energy market concentration. In a 2022 speech in Washington, Australian climate change and energy minister Chris Bowen noted the risk to future energy security from a single country producing more than 80% of global solar photovoltaics, as well as many other clean energy components.[5] The IRA provides direct channels for the United States and Australia to help diversify supply chains. The most obvious of these is in the critical minerals space. The IRA’s clean vehicle credit, most notably, provides up to $7,500 to consumers purchasing EVs with batteries that contain a certain percentage of critical minerals mined or processed in U.S. free trade agreement (FTA) partner countries, if these minerals are not available in the United States.

Australia could be a trusted and timely provider of the minerals the United States desperately needs in order to realize its IRA goals, given that the two countries signed an FTA in 2005. Australia is also one of the world’s premier mining jurisdictions, with high production or prospects for key minerals required for the energy transition. It produces more than half of the world’s lithium for EV and grid batteries, for example.[6]

Australia also maintains higher environmental, social, and governance standards than many rival mining countries. In 2022, it became a founding member of the Canada-led Sustainable Critical Minerals Alliance, which promotes the strong regulatory commitments of member countries in areas such as biodiversity protection, labor rights, and consultation with Indigenous communities. Importantly from the U.S. partnership perspective, Australian commitments have not led to excessive permitting times. In fact, greenlighting a new mine in Australia reportedly takes only a few years, compared with more than a decade in the United States.[7]

AUKUS and Indo-Pacific Security

IRA-enabled critical minerals cooperation could also advance the Australia-U.S. alliance in areas other than clean energy. The AUKUS military pact is foremost among these. This unprecedented commitment to Indo-Pacific deterrence will see Australia acquire up to five Virginia-class nuclear-powered submarines (SSNs) from the United States, starting in the early 2030s. Australia and the UK will complete the first dedicated AUKUS SSNs later that decade. A second AUKUS pillar will develop “advanced capabilities” focused on the undersea, quantum, artificial intelligence and autonomy, advanced cyber, hypersonic and counter-hypersonic, and electronic warfare realms.

Advancing both AUKUS pillars will require a reliable supply of critical minerals. This is particularly so for rare earths, which are used in weapons guidance, propulsion, and location systems. Building a Virginia-class SSN, for example, is estimated to require around 9,200 pounds of rare earths.[8] Details of the specific outcomes of pillar two of AUKUS are yet to be released, but they will invariably intensify the demand for rare earths and other critical minerals.

Chinese control of value chains is particularly problematic in the military space, especially for rare earths. Chinese firms have a strong upstream position for rare earths, accounting for around 60% of mining. They also undertake 85% of processing and 90% of manufacturing of high-strength rare earth magnets.[9] Beijing, moreover, strongly opposes AUKUS and broader Indo-Pacific militarization involving the United States and Australia. China has weaponized rare earths in response to grievances in the past, such as when it cut off exports to Japan following a territorial dispute in 2010. Earlier this year, it threatened to ban global exports of technologies for rare earth magnet production and processing.

The IRA does not have a focus on the defense sector, yet its attention on diversifying critical minerals supply chains could have co-benefits in this space. Australia and the United States—as well as other partners such as Japan—already have an established record of cooperating in this endeavor. The U.S. Department of Defense, for example, has financially supported the Australian company Lynas Rare Earths to process Australian rare earths in Texas.[10]

Economic Competition

The Australia-U.S. relationship gets more complicated when accounting for the IRA’s focus on economic competitiveness. The promise of renewed manufacturing and blue-collar jobs was key to passing the legislation domestically. Signs of progress on this front are promising. One analysis found that at least $64 billion of investment in clean energy projects was announced in the six months after the IRA passed, creating 53,000 new jobs.[11] Although Australians would not begrudge the United States these benefits, the Australian government and industry are concerned that the IRA will affect their own economic designs.

Similar to Washington, Canberra envisages decarbonization as a tool of economic growth and job creation. Convincing Australians that they will reap more benefits than costs from transitioning to a carbon-conscious economic model has been historically difficult. Yet the election of the Albanese government, partially on a promise to make Australia a “renewable energy superpower,” suggests that the tide is turning.[12] The Australian government and industry are now focused on accelerated domestic decarbonization and exports to supplant the country’s coal, gas, and emission-intensive metals.

The Australian government and industry have targeted many of the same sectors that the United States has through the IRA. EVs, hydrogen, green metals, and critical minerals are key. The great post-IRA fear has been that Australia will miss out on growth opportunities as investment gravitates to the United States.

Australia has already increased some fiscal commitments in the wake of the IRA. Yet these continue to significantly trail those that Washington has provided. Canberra’s federal budget of May 2023 contained A$2 billion (US$1.3 billion) for new hydrogen production subsidies, for example. The specific cost effects of this on individual projects are still being determined, but they are unlikely to help lower costs below the $2 per kilogram now estimated to be possible in the United States.[13]

The U.S.-Australia critical minerals partnership is also not without controversy. Australia would welcome increased U.S. investment in its mining sector and diversification of supply chains. Yet government and industry also want more value to be added within Australian borders. Australian industry and science minister Ed Husic has argued that “if we mine it here, we should make it here.”[14] To this end, Australia revised its Critical Minerals Strategy to prioritize investments in minerals processing. It is also developing a first-ever National Battery Strategy to ensure progress even further downstream from mining. The new A$15 billion (US$10 billion) National Reconstruction Fund seeks to crowd in private investment in these sectors.[15]

Striking a Balance between the Opportunities and Challenges of the IRA

The IRA ultimately offers more opportunities for cooperation than conflict between Australia and the United States. But Canberra and Washington will need to ensure that results fulfill this promise. The United States should work to ensure that the IRA continues to deliver on its climate and economic competitiveness goals. Australia should also raise its climate ambitions, ideally through an economy-wide green industrial policy that as best as possible mirrors the scope and financing of the IRA.

Formidable commitments from both countries could deliver a more equitable division of trade and investment opportunities from a larger pie. These could also incentivize broader Indo-Pacific cooperation. Australia and the United States could improve their capacity and motivation to provide technologies and infrastructure and establish rules and standards to grow the clean energy markets in which they could play a larger role. Canberra and Washington should also recognize the particular cross-cutting appeal of critical minerals to the defense sector, particularly with the evolving AUKUS deal. Moreover, they should work to channel investment into projects that service both clean energy and defense outcomes. The United States should provide Australia with IRA concessions that will help the country achieve its economic ambitions. These could echo the allowances for Mexican and Canadian components within EVs eligible for the IRA’s clean vehicle credit.

The outlines of a successful partnership of this nature were announced on the sidelines of the recent G-7 meeting. The new “Climate, Critical Minerals and Clean Energy Transformation Compact” aims to “coordinate polices and investment to support the expansion and diversification of responsible clean energy and critical minerals supply chains, accelerate the development of markets for established and emerging technologies, meet the growing energy and adaptation needs of the Indo-Pacific, and enhance the region’s role as a driver of resilient and sustainable global prosperity.”[16]

Full details of the new partnership are yet to be finalized, and some commitments will depend on U.S. congressional approval. There are, however, strong statements of intent contained within the compact. Washington has pledged to reform the Defense Production Act to allow investments in critical minerals projects on Australian soil. Australia and the United States have also committed to task their export credit agencies with greater investment in clean energy developments at home and abroad. Australian leaders spoke of gaining further benefits for sectors such as hydrogen and suggested that the new compact would addresses the IRA’s capital imbalance, creating “an enormous opportunity for Australia.”[17]

The IRA is, in aggregate, a positive commitment by the United States to global leadership and should be welcomed by partners and allies, Australia included. Washington and Canberra have also recognized that the legislation creates some challenges and have responded accordingly. The two governments should work to ensure that their new compact is implemented quickly and effectively. This would help Australia and the United States both take a big leap forward on climate and clean energy leadership.

James Bowen is a Policy Fellow at the Perth USAsia Centre, specializing in Indo-Pacific energy and climate policy.

Endnotes

[1] “What’s in the Inflation Reduction Act?” Committee for a Responsible Federal Budget, July 28, 2022, https://www.crfb.org/blogs/whats-inflation-reduction-act.

[2] Jacob Greber, “After a year of Climate Wins, Labor’s To-Do List Now Gets Longer,” Australian Financial Review, March 18, 2023, https://www.afr.com/politics/federal/labor-risks-making-australia-a-stranded-asset-country-on-climate-20230517-p5d8za.

[3] “Joint Statement on Australia-U.S. Ministerial Consultations (AUSMIN) 2022,” Department of Foreign Affairs and Trade (Australia), 2022, https://www.dfat.gov.au/international-relations/joint-statement-australia-us-ministerial-consultations-ausmin-2022.

[4] “Toward a Clean and Secure Energy Future in the Indo-Pacific: A Conversation with Australian Minister for Climate Change and Energy Chris Bowen,” Center for Strategic and International Studies, September 23, 2002, https://www.csis.org/analysis/toward-clean-and-secure-energy-future-indo-pacific-conversation-australian-minister.

[5] Ibid.

[6] “Australia’s Lithium Powering the Energy Transition,” Minister for Resources and Minister for Northern Australia, March 6, 2023, https://www.minister.industry.gov.au/ministers/king/media-releases/australias-lithium-powering-global-energy-transition.

[7] “Pressure Mounts to Cut Permitting Time for New Mines,” Mining Engineering, September 6, 2022.

[8] Peter Grier, “Rare-Earth Uncertainty,” Air & Space Forces Magazine, December 21, 2017, https://www.airandspaceforces.com/article/rare-earth-uncertainty.

[9] David Uren, “Breaking China’s Near Monopoly on Rare Earths Will Be Easier Said Than Done,” Australian Strategic Policy Institute, Strategist, November 8, 2022, https://www.aspistrategist.org.au/breaking-chinas-near-monopoly-on-rare-earths-will-be-easier-said-than-done.

[10] “Pentagon Awards $30 Million in Rare Earths Funding to Australia’s Lynas,” Reuters, February 2, 2021, https://www.reuters.com/article/us-usa-rareearths-idUSKBN2A135Y.

[11] Bob Keefe, “Six Months in, the Inflation Reduction Act Is Already Unleashing Clean Energy’s Potential,” Hill, March 21, 2023, https://thehill.com/opinion/energy-environment/3910481-six-months-in-the-inflation-reduction-act-is-already-unleashing-clean-energys-potential.

[12] “Read Incoming Prime Minister Anthony Albanese’s Full Speech after Labor Wins Federal Election,” ABC (Australia), May 21, 2022, https://www.abc.net.au/news/2022-05-22/anthony-albanese-acceptance-speech-full-transcript/101088736.

[13] Rachel Williamson, ‘“It’s a Start’: Forrest Welcomes Australia’s $2 billion Hydrogen Response to U.S. plan,” RenewEconomy, May 10, 2023, https://reneweconomy.com.au/its-a-start-forrest-welcomes-australias-2-billion-hydrogen-response-to-us-plan.

[14] James Riley, “Battery Strategy: ‘If We Mine It Here, We Should Make It Here,’” InnovationAus.com, February 2, 2023, https://www.innovationaus.com/battery-strategy-if-we-mine-it-here-we-should-make-it-here.

[15] “National Reconstruction Fund: Diversifying and Transforming Australia’s Industry and Economy,” Department of Industry, Science and Resources (Australia), October 17, 2022, https://www.industry.gov.au/news/national-reconstruction-fund-diversifying-and-transforming-australias-industry-and-economy.

[16] “Australia–United States Climate, Critical Minerals and Clean Energy Transformation Compact,” Joint Statement, May 20, 2023, https://www.pm.gov.au/media/australia-united-states-climate-critical-minerals-and-clean-energy-transformation-compact.

[17] Michael Smith and Tom McIlroy, “Australia to Get a Bigger Slice of IRA billions,” Australian Financial Review, May 21, 2023, https://www.afr.com/world/asia/g7-condemns-economic-coercion-in-veiled-dig-at-china-20230521-p5d9zw.