Climate and energy policies: Executing the Inflation Reduction Act

The headlines

On his first day in office, President Trump signed a series of Executive Orders that provided clear guidance on his administration’s approach to climate and energy. Indeed, the titles alone paint a picture: “Unleashing American Energy,” “Declaring a National Energy Emergency,” Putting Americans First in International Environmental Agreements,” “Delivering Emergency Price Relief for American Families,” and most recently, “Protecting American Energy from State Overreach.” These Orders withdraw the United States from the Paris Climate Agreement, institute a 90-day pause on funds appropriated under significant climate investment programs such as the Inflation Reduction Act (IRA) and the Infrastructure Investment and Jobs Act (IIJA), and expedite fossil-fuel and infrastructure permitting processes while explicitly excluding renewables like solar and wind.

President Trump's policy announcements and executive orders highlight drastic rollbacks and pauses in climate-focused initiatives, or what he colourfully calls the “Green New Scam.” In other words, the second Trump administration is prioritising US industry and energy security over climate cooperation and decarbonisation. Not that any of this is a particular surprise, after the first Trump administration, but as with most aspects of this administration, President Trump and his allies are moving faster and more aggressively this time around.

What is happening behind the headlines?

The administration’s actions align closely with the president’s rhetoric. A massive deregulation effort, spearheaded by Environmental Protection Agency Administrator Lee Zeldin, has targeted key Obama and Biden-era climate policies such as the Clean Power Plan 2.0, greenhouse gas (GHG) reporting requirements, and vehicle emissions regulations. Notably, the EPA is also closing its Environmental Justice Offices and halting significant grant programs aimed at fostering clean community investments.

Internationally, Trump has escalated trade tensions, which is expected to have broad and deep impacts on the US energy sector. In particular, China, the world’s dominant manufacturer of clean energy technologies and their supply chain components, was slapped with tariffs over 100%, which have threatened to disrupt the energy transition in unpredictable ways. While the president’s decision to pull back from the retaliatory tariffs of “Liberation Day” is encouraging for the sector – particularly reducing tariffs on the southeast Asian countries from where the US imports most of its solar panels – the uncertainty will undoubtedly delay investment decisions and increase prices on critical technologies.

Republicans are divided on clean energy tax credits from the IRA, with multiple Republican House members and Senators coming out in support of the credits.

Arguably the most consequential challenge for the future of US climate and energy policies is in Congress, where tensions persist between factions of the Republican party over the future of the IRA, the Biden administration’s signature ~US$1 trillion climate legislation. Republicans are divided on clean energy tax credits from the IRA, with multiple Republican House members and Senators coming out in support of the credits. The version of the “Big Beautiful Bill” that passed the House Budget Committee in late May retains many of the tax credits, but includes such aggressive phase-out and ‘Foreign Entity of Concern’ requirements that many believe they would essentially be rendered inoperable. While negotiations are still in very early stages and the Senate is likely to make considerable changes to the legislative text, consumer-facing credits - such as electric vehicle (EV) sales and green buildings - are predicted to disappear. Credits supporting clean electricity production, advanced manufacturing, hydrogen, sustainable aviation fuel (SAF), and carbon capture might be saved by supportive members, but the likelihood of saving the majority of these credits diminishes by the day. Repealing these tax credits entirely could save about US$850 billion, partially offsetting massive proposed tax cuts, and with the conservative caucus digging in on reducing the budget deficit, credits could be an easy target.

Key debates around the issue

Debates are unfolding across several fronts:

Cabinet and Agencies: Within the administration, there's tension between economic nationalism, techno-futurism, commercial pragmatism, and geopolitical isolationism. Department of Education Secretary Wright, for example, supports technologies like nuclear, geothermal, carbon capture, and hydrogen but is notably less ideological about liquefied natural gas (LNG). Meanwhile, the EPA under Zeldin aggressively rolls back regulations, clearly prioritising deregulation and fossil fuels. The relative influence of these factions over the president changes week to week, creating an ongoing environment of structural uncertainty.

Congress: Congressional Republicans are sharply divided on budget priorities and the future of clean energy initiatives. The House Republicans’ radical fiscal stance, demanding substantial spending cuts to finance significant tax cuts, starkly contrasts with the Senate’s narrower focus on increased military spending and selective energy policy shifts. This congressional impasse creates substantial uncertainty for long-term clean energy investments.

Public Opinion and Markets: Despite the administration’s climate-sceptical stance, market forces and public opinion remain powerful drivers of clean energy growth. Manufacturing in the EV and battery sectors continues to surge in early 2025, spurred by IRA incentives and global competitiveness pressures. States led by Republican administrations ("red states") have seen substantial clean energy investments (US$216 billion), reflecting bipartisan economic interest despite ideological divides. Meanwhile, the administration’s “Drill Baby Drill” agenda is under threat from low oil prices as OPEC increases production, while the push for greater LNG exports faces overcapacity concerns.

The implications

Several scenarios arise from Trump 2.0’s approach:

Extensive Rollback: A broad rollback of climate and energy policies could significantly increase US emissions, potentially by around one gigaton—equivalent to twice Australia's annual emissions. While some observers see benefits for Australia from an extensive rollback scenario as investors look to other markets, such as Australia, the broader uncertainty implications are likely to overwhelm these benefits. It is possible that some projects could shift to Australia as US support retreats, however broader uncertainty across these markets and, likely, higher trade tensions would undermine these same projects.

Selective Continuation: A mixed scenario where selective IRA tax credits are preserved (particularly around manufacturing and hydrogen) could still present economic opportunities for Australia, especially given its substantial critical minerals reserves. Australia could position itself as a strategic partner in diversifying away from Chinese supply chain dependencies. The climate implications are less clear under this scenario, with US emissions likely to rise from slower clean electricity deployment, in particular, even as continued growth in emerging clean technologies spurs additional policy action and momentum in more and more countries.

Trade Escalation: Intensified trade conflicts and tariffs would profoundly impact the global supply chains that underpin the clean energy transition. Australia could either benefit from increased demand for alternative sourcing of critical minerals or suffer due to disrupted trade and higher costs. Australia's ability to expand refining and processing capacities would become crucial in this scenario.

What to watch moving ahead

Several key events and developments should be monitored closely:

• Budget Reconciliation Process (mid-2025): Congressional negotiations will determine the fate of IRA tax credits and funding for clean energy. Outcomes here will heavily influence the trajectory of the US energy transition.
• Tariff Deadlines (Ongoing): The Trump administration has said it will now be individually negotiating reciprocal tariffs with countries, although it is unclear what the timeline for this process will look like.
• EPA Regulatory Reviews (ongoing through 2025): The aggressive rollback and review of EPA regulations will have substantial implications for the US regulatory landscape, environmental standards, and the global perception of US climate commitments.
• Regional Cooperation Frameworks: Monitoring developments within the Quad and the Australia-US Climate Compact will be crucial. While the Trump administration may abandon the Indo-Pacific Economic Framework (IPEF), other minilateral initiatives focusing on critical minerals and hydrogen could persist, shaping regional energy cooperation strategies.

What should allies like Australia do about it?

Overall, the second Trump administration’s climate and energy policies will significantly influence US domestic economic dynamics, global climate cooperation and international trade. Australia, as a critical strategic partner, must carefully navigate these developments, balancing economic opportunities in critical minerals and manufacturing with the geopolitical and environmental challenges posed by Trump 2.0’s policy directions.

While the Trump administration largely fails to see the economic opportunity in building out globally competitive cleantech manufacturing and clean electricity sectors, this should not stop Australia’s efforts to become the “renewable energy superpower” its abundant natural resources make possible.

In terms of the bilateral relationship, Australia should seek to save what it can from the “US-Australia Climate and Clean Energy Compact” by reframing it to focus on issues of energy security and economic competitiveness. LNG and critical minerals would likely form the foundation of such an agreement.

Domestically, Australia should continue to pursue its ‘Future Made in Australia Agenda,’ (FMiA) which could very well have an even greater economic impact at home as the United States pulls back its support for these sectors. While the Trump administration largely fails to see the economic opportunity in building out globally competitive cleantech manufacturing and clean electricity sectors, this should not stop Australia’s efforts to become the “renewable energy superpower” its abundant natural resources make possible.

Finally, Australia should use the opportunity of hosting COP31 in 2026 to show the world that fossil fuel producers can be both climate champions and energy security hawks by promoting exactly the sort of green industrial strategies that underpin its FMiA agenda and were at the heart of the US’ Inflation Reduction Act. By hosting the world’s first ‘Pacific COP’, Australia could genuinely break new ground on the climate adaptation front, while suggesting a new pathway or framework for future COPs, built around green industrial strategy, that could unstick a global climate negotiation process that has been struggling to remain relevant.