Can Half a Trillion Dollars Help the US Catch China? Ep181: Ethan Zindler

Transcript

How does the Treasury, in particular, view this problem that we have now of escalating climate risk?

What we are finding is that a number of homeowners are increasingly finding that they are unable to pay for homeowners insurance, or in some cases, literally can't get it. Without question, the IRA is the single most important piece of climate and I would argue also energy legislation that the United States has ever adopted, and I would argue nothing really even comes close.

People will want to know how reversible are all of these measures right?

Yeah, to do something to change the supports for these programs after literally steel has gone on the ground and plants have been built, would just be madness.

Hello, I'm Bryony Worthington, and this is Cleaning Up. My guest this week is Ethan Zindler, Climate Counselor to the US Treasury Secretary, Janet Yellen. Ethan's been tracking the clean energy transition from a US perspective for over two decades, most recently as head of Americas for Bloomberg New Energy Finance. The Biden administration's passage of the monumental Inflation Reduction Act drew Ethan into the government to work on its implementation. He now sits at the heart of the new climate hub within the Treasury itself, a novel intervention to raise the profile of climate within the department. There's no doubt the IRA represents a huge step forward in terms of the US' commitment to catalysing and scaling climate solutions, and the whole world will benefit if and when the US succeeds in this task. But the US is also experiencing a period of great turmoil, weeks away from another highly polarised presidential election, and being battered by literal mega storms. So on my recent visit to Washington, DC, I was delighted to visit Ethan in the Treasury to ask him about the IRA, how it is going, how durable it really is, and what it says about the new economics and geopolitics of climate change. Please join me in welcoming Ethan Zindler to Cleaning Up.

Ethan, thank you so much for coming on to Cleaning Up, and it's very exciting to be here in the Treasury building in Washington. Would you start things off by introducing yourself in your own words and telling us what you do?

Well, first, thanks for coming and joining me here in my office. It's great to have you here and do this in person. I'm a longtime fan of the podcast, I think this is my first time on the podcast, so great to be on. So my name is Ethan Zindler. I am the Climate Counselor to Secretary Yellen, here at the Treasury Department. I've been in the job since the end of July of 2023 and the role involves a lot of things which I'm happy to get into. But this is my first time in government in about 30 years. As a very young person, I worked very briefly in the Clinton White House, but since then it's all been in the private sector.

So what happened? Was there a call? Did someone say, we need Ethan? Call Ethan! How did you get to be in this position?

I wish. No. I certainly had an interest in what was going on in the administration. I would say that the IRA, the Inflation Reduction Act passage, was a critical moment for me in the sense that it was indicative of just how much enormous change and impact that that we, I think, here at treasury and elsewhere in the federal government, had an opportunity to make in a relatively short period of time. I don't know that that's always the case. And I think you've worked in government as well, so I'm curious for your take, but my sense is that you can work for a very long time in government on things with an uncertain outcome. And this one was like, okay, we're going to have an enormous, I think, potential impact quite quickly, given the sheer scale of what we've been undertaking here. So that was very appealing, for sure. And of course, the other thing was the opportunity to work with the Secretary who is somebody who's so thoughtful and committed on these issues, and really takes a very hard headed and economically minded approach to thinking about climate change, which I find very appealing.

Excellent and so you're within a Climate Hub, within the Treasury, so describe what that is, is it new?

So to bacl up, at the beginning of the administration, under an executive order, this office was created. It had not existed before, and this office is called the Climate Hub, and I'm the Climate Councilor, and our hub consists of these three rooms and five people, basically. But Treasury itself, and I think people in Washington know this, but may not know it as much outside of Washington, plays an incredibly important role in addressing climate change through a variety of different things that we do here. And so there are plenty of folks, existing folks in multiple departments, that either have climate in their title, or work on projects that are directly or indirectly related to climate. But what our job is, here in the hub, is to try and coordinate those activities so that everybody knows what each other's doing. And we do a fair amount of helping to bring parties together so one side of the building knows what the other is doing. The second is to try and communicate externally, and that's part of what we're doing here. The third is to collaborate, so on key issues where we feel like we bring some particular expertise in certain areas, we weigh in on particular key issues and get involved in doing some of the heavy lifting. And then the fourth, and probably the most important of the four Cs, as I'll call it, is that we counsel the Secretary and try to advise her on key issues overall. So we work within the building and across the building, and there are multiple departments here, on domestic stuff, on international stuff, and we try to get involved and be helpful as much as we can with everybody.

And do you also perform a function within different departments, like can you connect? Because obviously Treasury controls a lot of the money in the spending and the taxation, but obviously there are other massive departments, including DoE (Department of Energy). So can you act as a gateway?

So I do, but others do too. I would say, literally every day we have a conversation with at least one other agency or the White House related to something, in particular related to writing these tax regulations. We are very frequently on the phone with the US Department of Energy, the Department of Agriculture, the Environmental Protection Agency and the White House, but also on other things related to trade. We talk to the White House all the time on things. So certainly my office does that, but everybody does. And it's interesting, as a relatively new person to government, that's been eye opening, just how much of that between building collaboration is required on all of these things.

Yeah, and so the IRA was such a huge breakthrough. Because, you know, I think everyone has understood that US politics has become very partisan, it's very rare that you can get bills through. But this one did receive support, bipartisan support, and obviously it unlocks a huge amount of money in potential tax credits. So do you want to give our listeners a quick potted summary of how big this piece of legislation is?

I mean, without question, the IRA is the single most important piece of climate and I would argue also energy legislation that the United States has ever adopted. And I would argue nothing really even comes close in terms of the dollar commitment, the public dollar commitment, but also the scope. If you look at the fact that it touches on transportation, it touches on power, it touches on manufacturing, it touches the upstream level, again, with manufacturing or extraction of materials, and then it goes all the way down to the bottom, maybe not the bottom — maybe not the bottom, maybe at the top — however you want to look at it, but it gets to consumers, and provides serious support for consumers to do things like install solar or heat pumps or batteries or buy an electric vehicle. So it is truly comprehensive in scope, and as you suggested, it represented, and does represent, I think, the absolute maximum that was achievable given the political circumstances in the United States. I mean literally, it was passed by a single vote, and that's how it got done. So it is a monumental achievement. It is also, for those of us who are now in the administration, an enormous challenge, but also an honour to work on, because it sets up all kinds of programs that need to be implemented and need to be implemented effectively and quickly. And so that's a big part of what we do. The most notable part the Treasury is across involves the tax system, because our Office of Tax Policy essentially writes the regulations that implement the IRA.

Yeah, and as a new resident of the US, I have to say your tax system is incredibly Byzantine and very hard to understand. So I mean, that must be a challenge in itself, right? This is another layer of complexity. And as you said, one of your challenges is to communicate. How is that going? Because my interactions with the IRS have not been most straightforward.

So first of all, one thing that is important is we did receive additional funding for the IRS, and this is one of the below the radar things that I think is really important. And the IRS, in terms of thinking about climate, are not the first ones to necessarily come top of mind, but the work that they do on this stuff is critical. The second thing is, I would notice, as part of that, sorry to go slightly off topic, but we have now created a direct file system for certain people to be able to file their taxes directly with the US government if you're in certain states, and frankly, if your tax situation is relatively simple. So I don't know if that's you.

Mine isn't, I suspect.

Right, but nonetheless, it's really important that we've tried to try and bring some greater simplicity to it. But point taken, it's not simple by any means. The third thing, though, is we've also tried to make it so that, when possible, your tax return doesn't have to be involved. So the simplest example for that is electric vehicles. There's long been a $7,500 tax credit for the purchase of an electric vehicle, but the way it had worked is that you buy the car, you pay the sticker price, then you go and you file your taxes, and then on your return, you say, I bought a $7,500 EV and then it gets discounted off of whatever you would have owed the IRS. Now you can essentially receive the benefit of the tax credit right at the point of sale. So the dealer essentially gets the $7,500 and they just discount the price of the car, and off you go.

Or they increase the price of the car and pocket the difference? The simplicity of it is what matters.

Well, and there's a certain time value of money, if you had to wait 12-15, whatever, months to get your $7,500 bucks back. But yes, you're right. It's contingent on cooperation with the auto dealers. But it's worked extremely well. The IRS has coordinated with them. So this is nuts and bolts, tax nerdy stuff, but it really can make a difference. And we've seen over $2 billion now worth of tax credits issued to buyers of EVs through this direct system. So clearly, it's something that people appreciate overall, and we do spend a good deal of time trying to focus on that. One last thing, sorry to go on and on. But the other challenge, as I think you note, is people need to know about this stuff. And I'm not sure that everybody knows that. You can get a tax credit for adding insulation to your home, or for putting a battery in there, or getting a heat pump. So getting the word out is a big challenge. And, you know, frankly, it's a work in progress, but we have an entire IRA implementation office, and their job is to get out and try and get the word out. We have identified 150 particular communities where we've tried to go and get the word out, specifically to local public policy leaders. But there's a lot more work to be done. The good news is there's some time, like most of the tax supports in the IRA have some kind of 10-year time frame on them, so there's time for this to get socialised among a lot more people.

And in that context, there's been quite a lot of analysis done that shows that for people who are driving high mileage, like people who are really reliant on their car for work or for long commutes, the payback periods are now so clearly in favour of an EV that if you can find ways of reaching those high users, that kind of investment of public money is going to go further in terms of CO2 reductions, right? Because it's the miles travelled that matters more than the car. I'm sure there are a lot of people with a Tesla parked on their front drive that don't use it very often, and that's probably not the best use of those resources. So has that implementation team done some number crunching to find those people?

Yeah, I mean, we want people to understand that on a total cost of ownership basis, a lot of times owning an EV can be the better deal, for sure. And you know, I think people are very used to thinking about dollars per gallon. They don't fully understand, necessarily, cents per kilowatt hour. That's not something... like you ask someone what their residential electricity bill is on a kilowatt hour basis, very few people would be able to tell you. But most can tell you what the price of gas is today in the United States. So I don't know that consumers are fully there in terms of doing that price comparison, but we certainly want them to be. Overall, we think the $7,500 definitely helps. And by the way, I would also mention there's also a used EV tax credit, which I think is increasingly important as well, of $3,750, given that the market's growing and people are reselling their cars onto others as well.

Absolutely, but taking a step back, the title of the bill is the Inflation Reduction Act. But kind of ironically, in the short term, at least, there's quite a lot of onshoring provisions and local supply restrictions, which certainly when it was first passed, there's quite a lot of people saying, 'oh gosh, that's going to actually increase the unit cost of some of these solutions because there's going to be a lag, we're going to invest.' And it's kind of against neoliberal economic theory, right? It's basically saying, 'don't let the market decide.' You have to source it from US components.

There are, you know... there're certainly some high profile aspects of the IRA, like the so-called FEOC rule related to electric vehicles that have fairly specific requirements about materials being made in the US, or coming from a country with whom we have a critical mineral agreement or a free trade agreement. There are other aspects of it that provide bonuses and so they proactively give you extra if the content of the equipment you made is here in the United States. There's a lot of other parts of it that are a good deal more agnostic on this particular question. But your point still, nonetheless, is well taken, which is, this is an effort on the United States part, to try and vault ourselves further into a leadership position on these key technologies which we think will define the 21st century. We think this is really one of the greatest, if not the greatest, economic opportunity of this century. And we would like to be right there, on the cutting edge of many of these technologies. And so I think that puts us in that position. And look, if it means that other countries want to get competitive with us on this and do their own versions of something like this, that's okay.

That's an interesting way of phrasing it. I'd actually say perhaps it's the US trying to catch up, because other countries and other regions have been moving, and quite substantially. If you go back to one of the episodes we did with Dr Ma Jun, he talks about how China was tilting monetary policy, even decades ago, to push capital into sustainable investments, away from the dirty stuff. And in Europe, we've had a track record of regulating and passing comprehensive carbon pricing and all these standards. So in a way, is it about the US catching up rather than leading?

I would say, in the prior administration, we probably could have done a lot more in these areas. And so I think we are probably, in some cases, really looking to make up for some lost time. I think that's a fair point, no question about it. But I do think on some technologies, you know, I think the US has the potential to be a world leader around battery technologies and EVs and other things, as well as some of the newer technologies that are coming along related to new nuclear and hydrogen and others, potentially. There's a lot more to play for, for sure, given the size of the challenge overall.

Yeah, and I guess also some of the provisions in there are around creating high quality jobs as well, right? Because there's a tax credit for people paying above minimum wage. And I'm guessing the whole thing is about winning the politics, right? Because the way we view the US, it seems very partisan, and there's a feeling that there's a class of people who've been left behind because everything's been offshored — manufacturing and supply chains — we've stopped building stuff, infrastructure's old. So this bill was not just about the clean energy transition, it was also a kind of political statement about the US building things again and having high quality jobs, right?

Yeah. And look overall, in terms of the economic impact, I think we've been very, very pleased by the amount of money that has been moving over on a macrobasis since the IRA passed. Half a trillion dollars has gone into, or almost half a trillion has gone into these technologies. Across the board, we've seen somewhere around $15-18 billion every quarter being invested in new manufacturing related to clean energy around the country. The rate of job growth within clean energy last year was about double the broader economy's rate of job growth. So yeah, I mean, those benefits are being distributed. And then the other thing that's, I think notable, and I think we'll probably come on to this in terms of the political longevity of the IRA, is that if you look at the counties where the money is going, they are disproportionately counties where the average or median income in the county is below the national average, where the education levels are below the national average. So we are really helping a broader swath of the US. This is not a coastal phenomenon by any means. If you look at the maps where some of the capital is being deployed for the EV value chain, a lot of it is in the southeast or in the Midwest. And of course, wind and solar all over the country, but with a heavy emphasis, often in the Southwest for solar, and in Texas as well. So this is being felt quite broad based. And I think we're very pleased by that.

And you touched on the really key question I think everyone's asking, which is, we are a month away from a significant election.

From what? <laughing>

Yeah, you might have noticed this little question of the federal elections and presidential election, and obviously people will want to know how reversible are all of these measures, right? And it is possible for people to both benefit from it, but still also decide to do something illogical and unpick all of this work. So, yeah, is it durable?

So let me start by stating the obvious, which is that it would be really bad, in the sense that we are making serious investments, long-term investments in our future, including spending quite a lot of time and a lot of money now building new manufacturing plants. To do something to change the support for these programs after, literally, steel has gone in the ground and plants have been built, would just be madness. But I realise that, I feel like I'm staying the obvious here, but that is clearly a bad idea. And that point has not been lost, I think, on all Republicans. I mean, certainly by any means, if you look at the fact that there was a letter sent by a dozen and a half House Republicans to their leadership the other day saying that they were supportive of key aspects of the IRA, I think that bodes particularly well. Certainly, like I said, there are others who've done analyses around the political composition of where the dollars have gone. That's not something that we at Treasury have done, but if you take a look at those, I think you'll find it's very interesting, sort of the broad base and the way the money has been dispersed. So I think the volume of the capital, where the capital has gone, the fact that we literally have manufacturing plants right on the verge of opening makes us feel like making a change would be challenging for whoever would want to make that decision in the future, given the potential political consequences that they might face. So I think that's the broader dynamic here that's at play. For our part at Treasury, you know, we have a certain job here, which is to try and write the rules around the IRA, and we are just doing our darndest to get every last thing that we can get done. Done in the most effective way that is truly consistent with the way Congress intended. And so the market gets the signals that it needs to make the investment that it needs.

And talk to me a little bit then about the other provisions. Because it was such a huge, comprehensive bill, it had provisions in it which were about facilitating fossil fuel expansion as well. And so the US, I think, is now the largest exporter of fossil fuels in the world. So we've got this tension, haven't we, about US energy security, US wanting to basically exploit the resources that you have, some of which are clean. You mentioned nuclear, you've got expertise in that area. You've got fantastic solar and wind resources, but you've also got a huge amount of natural gas and oil production. So is there a danger that the lens just tilts towards 'it's all energy, and it's only about security, and we don't care about the emissions anymore.'

It's a fair question. I would, first of all, think it's worth noting that we've seen, obviously, a surge in natural gas production in the United States, and we have some of the lowest price natural gas in the world. It, along with renewables, is what has been pushing coal very rapidly out of the US power sector. And so I think through the first four or five months of this year, we were down to about 15% of our power generation from coal. We were at 40% I think, as recently as 10 or 12 years ago. So it's been a number of factors that are changing the energy system overall. In terms of the IRA specifically. I mean there were certain trade offs that were required to get that legislation passed, there's no question about it. But the IRA also includes a fee on methane emissions for the first time, which we think is important overall. So look, the IRA represents the art of what was politically possible, and I think we feel very good about the net benefit of it overall, in terms of climate.

Yeah, I guess I'm just slightly concerned that there's not a lot of backstop, right? And even the EPA's ability to regulate has been recently challenged by the Supreme Court decisions and so a new administration, in theory, could just decide the emissions no longer matter. And actually, the things that we've spent the time talking about, which is electrification of transport, I could see that one falling because there's this concern that that's become a hot topic in terms of, you know, real patriots drive SUVs, that could undermine this need to communicate clearly to the consumer that they can benefit.

I guess there's a couple things in that. I'm not sure I see EV politics quite so black and white. And certainly, let's just say that there's some very high profile individuals who are supporting a Republican candidate for president. So I don't know that it's quite that simple. I think in general, with EVs, as prices come down, the opportunities for a much broader swath of the American public to buy them is going to exist, and I think we are going to start to see that, because battery prices have been coming down, the sort of bottlenecks that were part of the post-Covid era, I think are unclogging, and I think we feel pretty good about that going forward.

But on that point about affordable EVs, obviously, there's also been the tariffs being put on imports from China, where, arguably, China now has such a broad range of vehicles that span all class cost and price points. So by putting these barriers, tariffs in place, you are keeping the US public from being able to enjoy those cheaper vehicles.

Us, and to be clear, Europe as well.

Absolutely, it's not just you.

I would say that first, we are seeing lower cost EVs being produced on US soil. We are seeing an unprecedented scale up in the battery supply chain on US soil. But it's not completely all online, and so we haven't enjoyed all the benefits of lower costs here yet in the United States. But more broadly, and this is maybe going back to your question around China, we can talk about China a little bit more. Something that our secretary has expressed, and others the administration have expressed, is real concern about China essentially oversubsidizing its industry in a way that we don't think represents fair practices in the global economy. And we think that this does represent the single greatest economic opportunity of the 21st century, but it's a game that should be played with some rules and be played fairly. And so we want to make sure that the companies that we're supporting have a chance to compete in the broader context. And I guess I feel pretty comfortable that we are seeing lower priced EVs, and will continue to see even lower priced EVs going forward that will come out of places like Georgia and Kentucky and Tennessee and Michigan to serve that purpose, and frankly, not always by companies that are the big three, because there's certainly other automakers as well that are manufacturing here in the United States, or are going to, like Hyundai and Toyota and others.,

Yeah exactly. And also, I think I've certainly picked up this exciting sense that there are still big segments of the economy where it hasn't quite worked out that there's a dominant Chinese presence. You know, the prices haven't come down through Chinese manufacturing yet. And I just met a small company who were building electric outboard motors as an example. Based in Rhode Island, Flux Marine, and they are an example of a segment — it's not the biggest segment — but, you know, the Japanese producers of outboards haven't moved, and China hasn't moved either. So the US's ability to innovate, bring exciting products to market, and scale is definitely, you know, you've got a track record of that. That's where you get the best out of, I think, the US is innovation, and often it's about deregulating to allow competition into markets. I think the US has shown that that's been an exciting aspect of what's driven growth here, right?

Yeah. I mean, look, that is the bedrock of a capitalist society, and we're highly supportive of that. We just think that we need to make sure that everyone plays more or less by the same set of rules, and insofar as we're making a high level of investment in our sector and our industry, we want to make sure that our producers have the opportunity to thrive and achieve. But we're going to make sure that they are able to do so in a situation where everyone is treated basically fairly.

Can we touch a little bit on the kind of US's overseas investments? Because that's the other part of this equation. The US hopefully is now speeding up in terms of its own transition. But still, we know that the largest portion of emissions are elsewhere, and that creates a political tension where, if you're asking the citizens of the US to make changes, they'll want to see other countries do the same. How does the Treasury specifically engage in those broader international conversations?

So we're across a bunch of different initiatives that the administration is supportive of. And to be clear, just to go back to what I was saying, this is the world's great economic opportunity. It must be shared with other countries as well. I mean, it's just simply, this great next industrial revolution, we should try and really make a point of making sure that it's different, and it's inclusive, to the best that we can. It's not easy by any means. And so I think, we're across a bunch of different things at Treasury to try and help that along, including efforts through the World Bank, the Just Energy Transition Partnerships that we've been involved in, and our involvement with the Green Climate Fund as well. So those are specific areas of Treasury. Most directly there's obviously the State Department, and others are doing other things as well, but our view is that this really must be inclusive. But to go back to the trade side of things. The IRA, as you know, has many so-called place-based tax credits, where you get them for doing stuff in the United States. But we have this, and the Secretary herself has been very active about talking about friend-shoring and this idea that we want to be able to trade with other countries. I was lucky enough earlier this year to go with her to Chile, which is a country with whom we have, obviously, a very good trading arrangement. And there is a lithium hydroxide processing plant that we visited up in the north of the country that is supplying the US, ultimately, and actually, next month, I'll be a COP, and we're going to have an event to talk about this. We do think this is providing economic opportunities and pull. I mean, obviously this is an enormous demand market, we can't provide everything that we need domestically to meet all that demand. So we do think this creates other opportunities as well.

We'll be back with more from Ethan Zindler after the break.

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So Ethan, just changing topics slightly, here we are in Washington and the US, certainly Florida, is imminently about to be hit by a really serious hurricane. And this just comes straight after, three weeks ago, another hurricane hitting. How does the Treasury, in particular, view this problem that we have now of escalating climate risk. Is that something that's part of your job now?

Well, it is on multiple levels. There's something called FSOC, the Financial Stability Oversight Council, which the Secretary chairs, and it's a group of federal regulatory agencies. And they've made very specific efforts to look at the threat that climate change poses to macroeconomic systems on a sort of macro basis. In addition, though, Treasury has something called the Federal Insurance Office, or FIO, as we call it, and what they are in the process of doing right now is doing an unprecedented collection of data about how insurance companies are pricing policies, about places where perhaps they are not selling policies because they view certain areas of higher risk. And this has been ongoing for some number of months, in partnership with the National Association of Insurance Commissioners, which is the states. Here in the US, states actually regulate the insurance industry, each individual state does. This sounds really boring, technical, but it's really important, because what we are finding is that a number of homeowners are increasingly finding that they are unable to pay for homeowners insurance, or in some cases, literally can't get it. Or in cases where they've not been able to get it, they've gone on to essentially state run insurance plans, meaning that the risks that are associated with their homes are now socialised across the broader public in that particular state. And this is worrisome, to be honest with you, because the sheer scale and the magnitude of the storms that we're seeing is enormous. But it's not even just the super, mega storms — really, we're quite worried about with Milton, literally, as we speak now about to make landfall — it's the series of billion dollar random derechos and things like that in the Midwest that you don't even necessarily read about overseas, but which cause, like I said, a billion dollars worth of damage. So these things are very disconcerting, and so it's something that we... The first point here is we just need to have a better understanding of the market nationally, and we're working really hard to get that, and then where things go from there, we're going to have to see into next year with the new Congress and obviously new administration as well.

And what about getting better at the predictions and the risk assessments? Because in times when fiscally there's constraint on public spending, you know, seemingly unimportant, boring bits of scientific research can be axed or cut. And we need to be getting better at our Earth observations, our understanding of how the risks are showing up, is that something that's being talked about investing more in?

Yeah well, I think certainly that's something we've long been supportive of, and obviously, through the science agencies within the administration, been supportive of. And I guess the only other thing I would just add on that is that I think the models are getting better at understanding things. But then the problem is, there's always, for lack of a better way to describe it, the kind of unknown unknowns. With the last hurricane, Hurricane Helene, obviously, there was a great deal of focus on the shore areas, and there should be, and there will continue to be with this next one, Milton. But then, you know, a community like Asheville, North Carolina, 2000 feet above sea level, was absolutely decimated, and so it's very hard to even know. Even the sort of conventional wisdom about places that are lower risk is not always necessarily correct.

Yeah, it makes me remember a period when... the UK government actually has a requirement to produce a climate risk assessment, and I believe there's a unit within government somewhere that does it. But the economists involved at the time were like, 'oh, let's do a good cost benefit analysis.' And it came out as a kind of like, 'on the one hand, we may have sea level rise, and we might need to put in some flood defences. On the other hand, we'll sell more ice cream.' And honestly, it was at that level of craziness. So like, fast forward 15 years, and they're getting much more sophisticated. And thankfully, you know,

Yeah, you're selling a lot more ice cream... <laughing>

Exactly. But there is a danger, isn't there, that we don't take this... you know, that the sheer breadth and range of impacts is just hard to comprehend and maybe classic economic tools of cost benefit analysis just don't cut it anymore?

I don't have a good answer to that question. They may or they may not. Regardless, we should be doing something.

Yeah, it does feel like we're in the era of consequences. It's no longer when, it's now happening today.

Absolutely, absolutely. And people, you know, it's hard. It's hard to watch these stories and people are really suffering. And so I think trying to find ways to address this is a real challenge. And the issues are obviously that some people have historically lived in places that are very high risk now and we want to constantly be able to balance equity issues and make sure that people are treated fairly, but also making sure that we're thinking about these risks and taking the steps that are necessary to address them in the future.

And then that brings us into the multilateral talks, right? And the fact that, as you say, you'll be attending COP. And is there an element in which we perhaps need finance ministers and treasury secretaries convening, in addition to the environment ministers, who classically come together under the UNFCCC, and where's that global discussion?

Yeah, it's a good question. First I would say that in fairness, while I don't know about the other ministries and whether their ministers are coming, we have a healthy contingent of the Treasury Department going including, we have an entire international affairs office here who are deeply involved in the conversations around the qualified collective goal and other topics like that going forward. So I think our department/ministry is quite engaged. But I think your point is well taken, and it has been brought to my attention that my job is somewhat unique in that I don't think there are too many other finance ministries around the world that have someone who's just thinking about climate full time within them. And so there may be more opportunities for that.

Well, it would be great if the US were to lean in on that, because historically, when UN multilateral processes get frustrating, the US usually does lean in and create things like the Clean Energy Ministerial or something else that is a bolstering diplomatic effort that perhaps can be a bit more fleet of foot. And maybe this question of climate risk and how it affects the macro and the micro economy is something you can lean into.

And in fairness, there are other forums where this is happening, through the G20 and elsewhere. We have finance ministers that are getting together to talk about climate related stuff. And frankly, there might be something more happening at COP that I should be knowing about but overall, yeah, I think your point is well taken.

Well, this is the thing, right, when the UK, the tiny little UK, when we were discussing moving forward with binding legislation on climate, it was the Treasury who were most sceptical. But we made the case that it's about moral leadership and the fact that we were the home of the Industrial Revolution. There's a point at which you have to say 'someone's got to start this race to the top' and not be held back by competitive distortion concerns or cost benefit analysis, it's something at a higher level. And thankfully we won out that argument, and we do have that kind of whole economy regulatory approach.

I think I have the good fortunate of doing this now compared to when you were doing it, maybe a short time ago. There is a bit more, I think, conclusive evidence that this is the right thing economically, right? And these technologies, in many cases, as I know you and Michael have talked about, are the lowest cost in a number of cases. So just socialise... So in some ways, my job is easier. I don't have to say, 'well, we should make a sacrifice.' You know, my argument is, 'we want to win.' We want this. This represents an opportunity we want to take advantage of. And that, maybe not surprisingly, is not as hard to sell.

That's right. I think back in the 2000s it was a much more theoretical discussion in terms of hoping the cost curves would come down, hoping that... Well, we knew the impacts were coming, but we didn't think they'd be coming quite as fast as they are. But I do think I want to come back to this tension, where there's, you know, on our show, we talk a lot about electrification and the role of the power sector in driving forward decarbonization. But at the same time, you've still got this fossil industry narrative around fuels, and that can add to costs, right? Carbon capture and storage, you may well want to do it for energy security reasons. You wouldn't do it for pure economic reasons. And similarly, gray hydrogen or blue hydrogen have very hard to make the economics of that stack up compared to what we've seen happen in electrification.

Yeah well, I think our view is, we would like to see if they can stack up. And we feel like we're providing some support to provide some scale. And the IRA was clear about its intention to want to do that. And as I've said a couple times before, the IRA did represent the sort of maximum of what was politically possible in terms of those who had brought on board to support the bill, ultimately. So I think that's part of the ultimate question and solution. But you know, some of these technologies, you're right. They have not been proven at scale and cost yet. And I think one of the things about the IRA is it creates an incentive structure to go out and do things. And if those things work, and they eventually get cheap enough, they'll be fine on their own. But if they're not, they won't be. And I think that's not our... we're not picking technologies here through the tax code, we're essentially just implementing the law as it was given to us. And we think that it will spur a lot of innovation, but not everything's going to work. That's okay.

I fear some of the innovation is in how to maximise the very generous credits in order to stack up a case for an investment today, which wouldn't make sense, unless you were able to layer on. I think Michael uses this kind of mountain of carrots analogy of like, where basically particularly say for hydrogen, if you're clever and you know how to play the game, you can get the credits in the US for the production credits, and the credits in the Europe for the use, and you stack up all these subsidies which are really then distorting in favour of an investment which ultimately isn't best use of public money.

So first of all, on the hydrogen stuff. We are still writing the rules. I won't get into any great detail, other than to say, we've sought to write the rules completely consistent with the statute. And the statutes made it very clear that we need to keep a close eye on thinking about so-called induced CO2 emissions, and we laid out what was clearly a draft of the rules, which really kept that very much in mind. As for as how it interfaces with supports in other parts of the world. Well, I don't know what to say about that. That's not within my jurisdiction overall. The last thing I'll say, though, is when our tax policy folks write these rules, we really do try and make an effort to make sure that as little waste, fraud and abuse can possibly take place. And this is really critical for us. And when we try to write the rules in a way so that the IRS can administer them in an effective way overall, and that's sort of our consistent goal. What producers do after that with interfacing with other jurisdictions is not something in my job description.

No, but actually, when you're out in COP with all your fellow finance ministries from Europe, you could probably sit down and say, 'Hang on a sec. How does all this stack up?' And maybe there is a need to just calm things down a little while we work out what's going to be the best value for dollars spent.

Yeah, indeed.

Yeah, excellent. Well, Ethan, it's been such a pleasure to chat to you, but I wanted to end by asking, is there anything you know we've not covered that you wanted to particularly talk about?

Let me just very broadly, because we don't want to get into too much. But I would say that one other thing that I think we've tried very hard at Treasury to do, is to be encouraging to the financial sector. That when they make big commitments, big public commitments related to achieving certain climate goals, that they follow through with real plans that have real metrics for measurement and real transparency. Overall, we're not a regulator, so we can't mandate this, but insofar as we think it's best practice, that if you're going to make a promise and it's going to be headline grabbing, then you really have a responsibility to everybody to be clear about how you're going to get there, and then report along the way on how you're actually doing it, so that we can all understand that.

For me, I'm interpreting what you're saying here as there was a period in which very big financial institutions — not naming... — well, let's name BlackRock, for example, where it appears that suddenly they've got climate This is a big deal. And then suddenly, actually, the winds change a little, and maybe ESG is not the most favourite thing. And so it's all rolled back. And I guess that's a frustration of relying on essentially voluntary statements, right? So other things that you can do as a government that brings some...

I think we feel like we're doing, you know, we've done a lot. And we issued what are called our net-zero transition principles about a year ago, and have continued to have conversations and dialogs with lots of players within the industry for more potential ideas. But we think that a big part of what Treasury can do is the signaling. There are other agencies within the federal government that do the regulating. And in cases where we've seen more regulation, we have been supportive of those in our public statements overall.

And you named a good example of that, which was the methane regulations, which essentially now require much more scrutiny on a particular aspect which hasn't really come to the fore through any kind of market measures. It's very hard to put a kind of a market value on clean gas. So it has come through regulatory means.

There's some and then we've also put out supportive statements around what the Commodity Futures Trading Commission has done around the voluntary carbon markets as well, and the SEC has issued rules around disclosure as well. So we've been supportive, you know, but we're conscious of the role that we can play and the influence that hopefully we can bring is to send messages to the market overall about what we think is what best practices look like.

Which brings us back to that experiment that we're doing globally between the US's incentive, carrot based innovation, supporting perhaps some elements of deregulation to allow innovation through, compared to China's command and control and Europe's sort of hybrid version, where we do pass rules and laws and hope that that's going to drive capital. And I guess is there strength in that diversity?

I think there's strength in a geopolitical competition to see who can be the one who is the home of the best technologies that drive us down the cost and the curve and reduce emissions the fastest. I think that's the ultimate win. I think different countries have different political situations that allow them to pursue things in different ways. Obviously the EU has a carbon price, and this is something that's been there for some time. That's not the route that the US went down and I think the... we're very good with, with incentives and sticks, sorry, and carrots in the form of tax credits. And I think that that's what the IRA represents, sort of the best under the current circumstance. But the best was pretty darn good. We really put a serious, serious commitment to these technologies on the table.

And this is possibly a bit unfair, but I think you have described the US's approach, as a bit of a hodgepodge of pluses and minuses, which didn't... It was hard to see how it all added up. Has the IRA changed your view on that?

I don't know when I said that. I may have said that out of government.

Yeah you certainly weren't in this current role.

But I think net-net, this is enormously positive, I think. And I think it's not just positive in terms of, obviously the dollars, which I've talked about multiple times now, but I think it's positive in terms of sending a message to the rest of the world that the United States prioritises this and cares about it and wants to be involved in it. And it's a massive demand market that some other countries can help supply. So I think it sends a very positive message internationally. I think that different countries have received that message in different ways, candidly, but it's interesting to see that a number of them have also begun to respond by putting in place, I wouldn't say, a version of our IRA themselves, but they've thought about how they wanted to support their own domestic manufacturing industries, and that's okay. That's a good thing.

That's exactly right, and that does come back down to this political reality that all politics is local, and in the way that we manage this transition, we've got to be mindful of our geographic unique circumstances, but also that politics of bringing people with you and ensuring that this is seen as a benefit overall. Because the risks are understood, but also the way that a transition has been managed is done in a mindful way that takes people along.

Yeah, I think we've really tried to do that. I haven't quoted every chapter and verse of the IRA, but there's some very specific, as you pointed out earlier, some specific requirements about making sure that people paid a good wage if they're working on a project that receives the full tax credit. We also have specific carve outs and programs designed to make sure that lower-income communities are benefiting, and we have some pretty clear evidence that that's begun to occur. Overall, we need to make sure that the distributed energy phenomenon becomes much more economically broad based. And you look at a country like Australia, I think something like 20-25% — I should get my numbers right — of roofs now have solar on it. These are not all necessarily wealthy folks, and we need to make sure that the benefits of this stuff get spread out in a much more broad based way.

Yeah and I think that touches on a really interesting point, which is often these investments are capital intensive, right? So once you've made the shift to an electric system, you are going to benefit in terms of reduced bills, but you need access to capital, and I think that's going to be the big challenge now. How do we make sure capital markets are not charging people disproportionately for access to that?

Well, there's a whole separate... just to digress, not a digress, but just to build on that for one second. There are other aspects of the IRA that are just focused on that. There's the Greenhouse Gas Reduction Fund, which is administered by the EPA. It's got $27 billion in it, and it is overwhelmingly focused on finding ways to fund solar and other efforts for lower income folks. Again, there was our low income bonus communities credit, which already has funded 1.5 gigawatts worth of systems, mostly solar systems in the United States. So there was a very important and maybe slightly less heralded aspect of the IRA that was focused on trying to think about equity overall. But I think maybe the broadest thing that we can do, obviously, to make these technologies more available, is to drive the cost down. And then the last thing, there's also been efforts with community development finance institutions in the United States to try to make loans more available to lower income folks, and I think that's something we need to continue to make progress on overall. And you know, tax credits are great, but if you don't pay taxes, it's hard to take advantage of them, and that's why some of these other programs that involve grants are really, really important.

Yeah, exactly, grants or zero-interest loans that revolve. These are all the ways that we think about this need, at a household level, for this change to be adopted and experienced. It's not going to all just be about manufacturing and large investments from industry. There's got to be an element, as you've explained with regard to EVs, it's got to touch people in their real lives, the point of purchase, where they can see a route for them being part of this transition.

Yeah. I mean, like I said, we feel pretty good about what we've seen so far. I didn't even talk about, you know, the energy efficiency and the residential solar credits. I think we've seen about $45 billion worth of value between all those and heat pumps and things that people have been claiming for on their tax returns in the first year. So there's a lot of uptake going on. There's a lot more socialisation that needs to go on about this as well, though.

Thank you so much. It sounds like you have a very, very busy day job at the moment and are enjoying learning how governments work, and we'll let you get back to that now.

Thanks so much. Thanks for coming, appreciate it.

So that was Ethan Zindler, Climate Counselor to the US Treasury Secretary. Whether the US government can successfully drive capital into a new era of building climate solutions, creating quality jobs and bringing the US public with it, is a big question that affects us all, and I left Washington feeling somewhat reassured that there's now sufficient momentum and many compelling reasons for them to stay the course. But time will tell. As ever, we'll put links in the show notes to any previous episodes we discussed, including the excellent interview with Ma Jun — highly recommended. And my thanks go to our producer Oscar Boyd, videographer Andre Banks, Jamie Oliver, our video editor and our researcher Genie Harrison, and to all the other people who helped make this episode possible. Join us next week for another episode of Cleaning Up.

Cleaning Up is brought to you by members of our new Leadership Circle: Actis, EcoPragma Capital, EDP of Portugal, Eurelectric, Gilardini Foundation, KKR, National Grid, Octopus Energy, Quadrature Climate Foundation and Wärtsilä. For more information on the Leadership Circle and to find out how to become a member, please visit cleaningup.live, that’s cleaningup.live If you’re enjoying Cleaning Up, please make sure you subscribe on YoutuBe or your favourite podcast platform, and leave us a review, that really helps other people to find us. Please recommend Cleaning Up to your friends and colleagues and sign up for our free newsletter at cleaninguppod.susbtack.com. That’s cleaninguppod.susbtack.com.

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