A huge, uncharted experiment on the U.S. economy is about to begin

If you want to understand the immense windfall the Biden administration is about to bestow on green industries, take a look at hydrogen. Engineers still aren’t exactly sure what role the gas will play in a climate-friendly economy, but they’re pretty sure that (contra the ridicule in “Glass Onion“) it will be useful for something. We might burn it to generate heat in factories, for instance, or use it to make high-tech chemicals.

And thanks to three laws Congress passed over the past two years – the Bipartisan Infrastructure Law, the CHIPS and Science Act and the climate-focused Inflation Reduction Act – the industry will be very well taken care of. Over the next decade, the government is going to invest $8 billion on hydrogen “hubs” across the country, special zones where companies, universities and local governments can build the machinery and expertise that the new industry needs. Other hydrogen projects will qualify for a $10 billion pot of money in the I.R.A. or $1.5 billion in the infrastructure bill. Still others could draw from a new $6.3 billion program that will help industrial firms develop financially risky demonstration projects.

So that’s up to $25.8 billion before you get to the bazooka: an uncapped tax credit for hydrogen that could pay out perhaps $100 billion or more over the next decades.

Few Americans realize it yet, but the trifecta of the Biden-era laws amounts to one of the biggest experiments in how the American government oversees the economy in a generation. If this experiment is successful, it will change how politicians think about managing the market for years to come. If it fails or misfires, then it will greatly limit the number of tools to fight climate change or a recession. The story of the 21st-century American economy is being shaped now.

I say “experiment,” but, really, there are two. The first concerns the economy. Mr. Biden’s team believes that it can move the United States toward a more robust, high-capacity and even re-industrialized economy. Can it? And can it use policy moreover to make sure that innovative ideas don’t get lost in the research lab or patent office, but instead make their way to the factory floor and corporate showroom, generating jobs and economic value along the way?

The second experiment: Can that same economy – which has, virtually since the abolition of slavery, derived a good deal of its industrial energy from extracting carbon from the ground and setting it on fire – find a new primary energy source? Even today, America generates 79 percent of its energy from fossil fuels. The administration is, in a sense, trying to conduct a high-stakes transplant on the heart of the economy while the patient remains alive and voluble on the table.

Don’t get me wrong: Some kind of climate boom is now all but assured. The investment bank Credit Suisse predicted last year that the I.R.A. would put more than $800 billion into the economy by the end of the decade, galvanizing more than $1.7 trillion in climate-friendly public and private spending overall. The law will transform the United States into the “world’s leading energy provider,” the bank said. The American renewable industry alone could attract 78 percent more investment per year by 2031, according to the energy-research firm Wood Mackenzie. But I worry that the federal government has started its experiments too haphazardly. The I.R.A. did not emerge from careful study and bipartisan consensus building, but from intraparty haggling and a harried legislative process. Even the bipartisan CHIPS Act was more of a crisis measure than a strategic intervention. These shortcomings are forgivable; in the I.R.A.’s case, it’s not like Republicans were ever going to help pass a climate bill. But these constraints have deprived the government of the strong institutions, internal expertise and administrative capacity that have made similar experiments successful in other countries.

For practical purposes, that means, first, that the government won’t be able to spend all this money in the right place. The U.S. financial system persistently struggles to fund projects that take a long time to turn a profit and that can expect to have only modest returns. Unfortunately, the biggest and most important physical infrastructure – factories, transmission lines – often fall under that category. In other countries, industrial policy has entailed creating an agile, entrepreneurial agency that can get money to the right companies in the right ways – as a loan, as equity, as a purchase guarantee.

Congress took some steps in that direction last year. The I.R.A. beefed up the Loan Programs Office, the Department of Energy’s in-house bank, and it established a new green lending office within the Environmental Protection Agency. But Congress has put these institutions on a short leash with a limited mandate. This means that the government can’t support as many risky investments as it should.

Second, the government may lack the ability to coordinate its own actions. Late last year, the Biden administration declined to help reopen a “green” aluminum factory in Ferndale, Wash., that was exactly the kind of low-carbon industry it wants to champion. The local union, electric vehicle makers and the state’s Democratic leadership all wanted to revive the factory. The project even has national-security relevance, since the United States currently imports aluminum from Russia. But Mr. Biden chose not to intercede with the local electricity provider, the Bonneville Power Administration, to supply the plant with enough cheap power to operate even though it is a federal agency ostensibly under the president’s control. Never mind the right hand not knowing what the left hand is doing: The right hand couldn’t get the left hand to plug the cord in.

Finally, the government may not understand enough about the companies it’s trying to help. In Taiwan and South Korea, industrial-policy agencies don’t only hand out money; they constantly gather information from the private sector and use it to adjust goals and policies over time. The I.R.A. contains very few mechanisms for this kind of in-flight course adjustment. Its main incentives are tax credits, which are hard to repeal once they’re in place and hard to fix if they’re not working. They are an unusually mindless way to incentivize companies to change their behavior.

And this points to a related concern: that we have underestimated just how hard decarbonization will be. One of the most cherished and widely held ideas in climate activism is that we could have solved climate change by now if only we’d had the “political will.”

This idea, once true enough, may soon outlive its utility. Mr. Biden and his successors will discover that decarbonization is an inherently difficult and complex societal challenge that cannot be solved with money alone. Some important activities will be legitimately hard to do without emitting carbon pollution; there will be some trade-offs that flummox even the most committed progressives.

Which is to say: Even if the U.S. had an agency that could finance or approve any industrial project in the exact right way at the precise right time, it would still be legitimately unclear which projects it should support. Will a new lithium mine create jobs and build political support for decarbonization, or will its local pollution effects provoke backlash? If a new hydrogen hub opens in your hometown, will you love the growth or hate the higher housing costs?

The Biden experiments bear the mark of a particular set of lawmakers and White House staff members who needed to meet a particular set of goals. They sought to stimulate the pandemic-depleted economy, reduce carbon pollution in a durable way, respond to what they saw as the Chinese manufacturing juggernaut and – perhaps above all – revitalize the American working class to prevent the next Trumpian crisis. They stumbled on a germ of an idea, a climate-friendly “industrial strategy,” and after 18 months of excruciating legislative wrangling, they have somehow made it the law of the land.

But the lawmakers who wrote that policy are not charged with carrying it out, and many of the officials who championed it most – like Brian Deese, the director of the National Economic Council – are now leaving the White House. Will the next crew understand what they’ve inherited? In order for Mr. Biden’s two experiments to have a chance of success, the officials must not go on autopilot or disarm the parts of the I.R.A. meant to build domestic political support. And they cannot assume that everything about the coming climate boom will work out in the end. More than just the country’s fate depends on it.