Climate tech competitiveness: Can the United States raise its game?

The United States has an opportunity to turn its innovation advantage in climate technologies into the basis for a thriving manufacturing and export sector.

For decades, economies have grown at the expense of the planet. But a sea change is now under way. In pursuit of net-zero targets, countries around the globe are embedding support for climate technologies in their economic plans to reduce emissions, capture value for local industry, and improve energy security. How well those decarbonization efforts unfold over the next 30 years will be crucial. But the window to act is far shorter for countries hoping to establish a competitive foothold in the climate technologies that will drive this kind of change.

That is particularly true for the United States: technologies incubated there have not historically created a thriving clean-tech manufacturing and export sector. Those companies have typically migrated to Europe, where government investments and policy signals have nurtured domestic demand. And in China, government support and local markets have driven the scaled production of technologies that emerged in the United States, such as solar and electric-vehicle (EV) batteries. 1

The drive to decarbonize—along with increased volatility in global energy markets spawned by pandemic disruptions and deepening geopolitical fault lines—could allow the United States to break this cycle and convert its early climate tech innovation advantage into a durable competitive position. Our research suggests that accelerating the domestic deployment of mature climate technologies could help the United States capture more value during this decade and lay the foundation for longer-term leadership in promising nascent technologies from 2030 and beyond. Indeed, the recent Inflation Reduction Act (IRA) could build meaningful momentum toward domestic deployment and production of key climate technologies.

Combined, the IRA and the Bipartisan Infrastructure Law are estimated to direct more than $800 billion in federal support to clean energy and sustainability technologies over the next ten years through a mix of grants, tax credits, loans, and direct federal program spending. 2 The total magnitude of investment will be much larger when factoring in aggregate private capital investment to meet matching requirements for federal funds and tax credit provisions. While the infrastructure law focuses on providing capital expenditure for viable projects and R&D, the IRA has the potential for more dramatic impact on climate technology.

The IRA, signed into law by President Biden on August 16, 2022, contains $270 billion in tax investment credits that constitute significant levers on both the supply and demand side. While the final details of the policy changes are still being written into requirements, the likely impacts on climate tech are sizeable. The measure has the potential to reshape value chains, create new opportunities across the US energy sector, and accelerate the convergence of clean technologies that are critical for economy-wide decarbonization. The law could bolster existing value chains in areas including renewables, storage, and nuclear energy. It could also stimulate a step change in other clean energy markets such as hydrogen, carbon capture, and renewable fuels. At the same time, it could contribute to unforeseen pressures on the viability of dispatchable generating resources and renewable interconnection queues, and it could test the adequacy of renewable supply chains.

The IRA expands production and tax incentives for renewable and storage technologies and introduces new incentives for downstream production of hydrogen. It also includes incentives for electric vehicles manufactured in the United States. These incentives may be a tipping point that will accelerate the deployment of climate technologies in the United States.

Sidebar

Embracing a holistic strategy could unlock a host of benefits, from boosting economic growth to strengthening supply chains, advancing energy independence—and crucially—moving the planet toward a greener future (see sidebar, “Climate technologies: Direct and indirect economic benefits”).


Accelerating the deployment of mature climate tech

Unlocking value from mature climate technologies during this decade will depend on how quickly they are deployed, because that is what drives the majority of capital expenditures required for scaling up. These expenditures include project development, installation and retrofits, and the domestic manufacturing of technologies that must be made close to the places where they are used, given their weight and therefore shipping costs.

For the United States, that means speeding up the domestic deployment of EV batteries and solar and wind power (Exhibit 1). McKinsey projections suggest that these mature technologies could generate $800 billion to $1.1 trillion in annual global capital-expenditure spending by the end of the decade. 3

Of the forecasted annual capital expenditures that will be needed in 2030, about 80 percent are related to renewables and electric vehicles.
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Accelerating the deployment of primary technologies can also give countries a leg up for secondary products and fuels: as the use of renewable energy rises, the cost of green fuels should fall. That could also reduce the emissions intensity of end products, making them more attractive to companies trying to hit their reduction targets. For example, the emissions intensity of electric vehicles could fall if they were built with green steel.

The potential near-term at-scale options include the following:

  • EV batteries. Most of the value in EV batteries springs from domestic manufacturing, including the production of core materials, such as cathode active materials, automotive cell production, and the assembly of cells and modules. EV battery production is usually located in EV-manufacturing centers because of the weight, cost, and shipping challenges. Demand, meanwhile, is likely to increase thanks to ongoing innovation that could drive down costs, a supportive policy environment, and the expansion of enabling infrastructure (such as EV charging stations). This suggests that domestic demand and automotive manufacturing are essential to capture the EV battery value chain. Sustainable access to minerals used in production (including nickel, cobalt, and lithium) is also an important consideration for establishing US competitiveness.
  • Solar: utility scale and distributed. The value of solar stems from manufacturing, installation, and operation. The biggest share for utility-scale solar—40 to 45 percent of the value chain—comes from manufacturing system components, including modules and inverters, which are exportable but have low margins. 4 Competing in manufacturing depends on scaling up component manufacturing to drive down costs and establishing robust supply chains for intermediate materials, such as polysilicon. However, expanding the domestic use of solar technology could create a meaningful opportunity with less global competition. Operations and maintenance (O&M) account for 25 to 30 percent of the value chain over the expected life of equipment. 5 With policy support, domestic manufacturing and solar development could expand rapidly—given the relative abundance of sunshine and land–but will need to overcome constraints on siting, permitting, and transmission.
  • Wind: onshore and offshore. O&M is responsible for 40 to 45 percent of the capital spending on onshore wind and has the highest potential margins. Forty percent stems from manufacturing components. 6 Except for the tower, onshore wind components can be exported globally. For offshore wind, value is concentrated in deployment and operations: 30 to 40 percent of the investment opportunity comes from engineering, procurement, and construction (EPC) and 40 percent from O&M. 7 The siting and permitting of large offshore wind developments is a key factor for competitiveness in infrastructure, servicing, and manufacturing, which are highly localized, given the size of the turbines and the relative geographic concentration of wind farms. The United States has many choices for offshore wind sites, as well as existing capabilities and infrastructure that can be tailored to the needs of wind technology. In addition to the direct economic benefits, the accelerated domestic deployment of wind tech could generate indirect ones, such as creating more O&M jobs.

Another potential benefit of accelerating the domestic deployment of these mature technologies is that doing so will likely enable the production of new exportable downstream products (Exhibit 2). The production of climate technologies is expected to ramp up to support infrastructure transitions and then reduce to a steady state to support equipment needed to maintain and renew infrastructure. But the production of new energy commodities, such as hydrogen and sustainable fuels, is expected to continue to grow with ongoing global annual consumption. Thus, it represents a potentially larger opportunity for the United States.

Accelerated domestic deployment of mature climate technologies could enable the production of new exportable downstream products.
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The cost-efficient scaling of green hydrogen depends equally on electrolyzer supplies and the availability of cheap renewable electricity, since 1 kilogram of H2 requires 55 kilowatts of electricity to produce. Scaling up blue hydrogen hinges on the proliferation of carbon capture and sequestration or of utilization technologies. Hydrogen is a potential solution for decarbonizing hard-to-abate sectors, such as iron and steel production, chemicals and refining, long-haul trucking, and cargo ships. It is also on track to become globally tradable, with an estimated market value of $500 billion to $1.23 trillion a year by 2050. 8 The United States could capture a fair portion of that through H2 production for domestic use and exports to countries with limited access to renewable electricity.

As for sustainable fuels, despite widespread electrification and fuel cell use, certain sectors (such as aviation and marine) still rely on synthetic fuels as a result of high energy density and safety requirements. Securing access to feedstocks on advantageous terms could help the United States secure a leading position across all types of sustainable fuels. These include power-to-liquids (PtL), which requires low-cost clean hydrogen, captured carbon dioxide, and renewable electricity to produce; hydroprocessed esters and fatty acids (HEFA); and alcohol to jet (AtJ).

The opportunity beyond 2030

The United States is well positioned to be globally competitive in next-generation climate technologies, since ongoing innovation is still an important differentiator. Carbon-capture-and-removal credits, next-generation EV batteries, long-duration energy storage (LDES), and alternative proteins all hold significant promise. However, efforts to unlock the full potential value of these emerging climate technologies will probably require more than the pure ability to innovate. The other requirements may include a complementary policy environment, intellectual-property (IP) protections, infrastructure, secure access to critical raw materials, and sufficient financial capital and pools of skilled labor.

Carbon capture and removal is poised to become a critical technology for decarbonizing the economy’s hardest-to-abate sectors. Although demand will be propelled by a combination of regulation and voluntary commitments, the technology itself must be scaled up. The United States is well positioned to lead in point source carbon capture because the country has a high concentration of industrial emissions with access to sequestration sites. It could also serve as a sink for more dispersed emissions, giving it resource advantages in direct air capture (DAC) as well. The United States has vast resources for sequestration sites with close access to very low-cost renewable energy. The deployment of carbon capture and removal could eliminate 230 metric tons of US CO2 (MtCO2) emissions by 2030 and some 700 by 2050, our analysis shows. Point source carbon capture could also boost US companies by reducing the carbon intensity of their products. DAC could capture a portion of the global carbon removal market by exploiting US access to high-quality renewable resources and sequestration potential, as well as specialized geology and engineering expertise to ensure the fidelity of emissions storage.

Demand for EV batteries is expected to increase as the world decarbonizes: McKinsey estimates that annual global spending will reach $400 billion to $500 billion by 2050. In the United States alone, demand could more than double by the end of the decade, given sufficient manufacturing commitments and a favorable regulatory landscape. Although the technology is maturing and growing, further innovation will probably be required to drive down costs and to improve energy density, range, and charging speeds. Advances in battery chemistries, anode and cathode materials, and solid-state battery development could significantly support EV battery production and downstream EV performance. This suggests that the United States could capture more of the EV value chain by taking the lead in raw- and compound-input materials, accelerating the domestic production and adoption of EVs, and enhancing the attractiveness of US-manufactured EVs for export.

Another area in which the United States could gain an advantage is LDES. Currently, there is no global leader. Thanks to expected growth in solar and wind energy, which drive demand for LDES, the United States could capture a sizable portion of the potential global installed capacity by 2040. 9 In addition to a strong track record of innovation, the United States has plenty of potential industrial partners for LDES and early adopters in the mining, industry, and power sectors. If the country can create incentives for the large-scale, cost-effective deployment of LDES, it could give domestic companies a meaningful first-mover advantage in establishing technological readiness and a commercial track record.

One area in which the United States is already out in front is alternative proteins: as countries around the world work to reduce methane emissions, alternative proteins could become a critical enabler. Plant-based, fermented, and cultivated meats are likely to benefit from significant innovation. The United States already leads in this market: since 2015, some 200 alternative-protein companies have been founded there—65 percent of global start-ups in this space, according to McKinsey’s analysis. To create a durable advantage, the United States could specialize in primary processing to ensure a robust supply chain that creates value throughout the agricultural sector. Ongoing innovation could also expand the choice of products and improve taste and texture, further cementing US leadership.

Maintaining the innovation edge

The United States is currently a leader in incubating nascent technologies, including the four highlighted above. But maintaining its innovation edge and improving its position as these and other technologies mature could hinge on the ability to strengthen operational performance. The five elements below could prove crucial.

  1. Constant innovation to improve performance, reduce costs, or both may be necessary, even in mature technologies, especially if IP protections prove difficult to enforce. For example, ongoing improvements in the engineering and design of offshore wind turbines help European OEMs maintain a strong global position, even though the technology is mature.
  2. Manufacturing scale is important for not only capturing market share but also achieving cost competitiveness. However, this requires sufficient demand to allay concerns about oversupply and to support multiple competing producers at scale. Accelerating and aggregating domestic demand commitments can help drive manufacturing scale. The more production scales up, the harder it becomes for competitors to emulate the benefits of learning by doing, such as developing highly efficient processes and know-how and establishing a track record.
  3. Access to critical resources (or gaining access on better terms than competitors) is also key to creating a durable US advantage because it has a strong influence on production costs and the potential to scale. The United States has abundant natural resources, ranging from land to renewables to basic materials. Rapidly deploying these resources—for instance, through installations and the grid infrastructure for renewables, as well as extraction and refining operations for critical materials like lithium—could help ensure that a sufficient supply chain is in place.
  4. Defensible IP can help protect technologies that have differentiated and nonreplicable “recipes.” Those for alternative proteins, for example, could become as enduring as the Coca-Cola recipe. The same goes for compound anode and cathode materials.
  5. Clustering infrastructure to support industries that supply US climate tech may also be important for securing a long-term advantage. Infrastructure networks in cross-technology hubs, as well as the development of specialized labor, could prove as important as pure technology innovations for the country’s longer-term competitiveness. The United States, considering its variety of natural resources, infrastructure, and industrial centers, is a promising location for climate technology hubs, which could be thoughtfully sited together to aggregate resources and demand and to promote regional equity and private-sector engagement. DAC, for example, may be a strong potential anchor technology for climate tech hubs in places, like Wyoming and west Texas, that have abundant land, high-quality renewables, and carbon sequestration capacity, but limited transmission, industry, or transport infrastructure. Alternative proteins or sustainable fuels could be promising anchor technologies for US regions with a significant agricultural presence as well as an industry and transportation footprint. In Texas, for example, the production and transport of green or blue hydrogen, enabled by a wealth of renewables and existing gas infrastructure in the western part of the state, could support hydrogen supply to industries on the coasts and sustainable fuel production for both transportation and export (Exhibit 3).
Integrated cluster strategies can significantly boost competitiveness from a given technology, due to technology interdependence.
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Although the United States has historically been ahead of the curve on climate tech innovation, more could be done to convert that lead into a lasting advantage. Growing momentum to both decarbonize the global economy and to ramp up domestic production and deployment of climate technologies could change that.

An integrated climate tech strategy that addresses the whole value chain of each technology, and the interactions and dependencies among them, could help the United States capture more value in this decade and beyond, improve energy security, and lead in global climate tech markets. Bold, decisive action and accelerated investment from public and private players will probably be needed to get there.

This article was originally published on August 15, 2022 and has been updated.

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