Are The Climate Provisions In The Inflation Reduction Act Worth Their Cost?

US debt ceiling discussions are tense and seem to be at an impasse. Climate provisions in the Inflation Reduction Act (IRA) have been targeted, although the likelihood of their loss seems less likely as negotiations continue. What exactly are the climate provisions in the IRA? What are they accomplishing and costing — both in the near term and in years to come?

Ezra Klein of the New York Times calls the debt ceiling “the single dumbest feature of American law. Congress decides to spend money and later schedules a separate vote on whether the government will pay its bills. If the government doesn’t pay its bills, calamity ensues.” Instead of raising the borrowing cap and diffusing global economic havoc as Congress repeatedly did under former President Donald Trump, Republicans have been balking. In theory, the debt ceiling fight could have had big implications for US climate policy.

House Republicans passed legislation in late April to repeal provisions of the IRA, the landmark climate law, as a condition of raising the debt ceiling. As counterpoint, last week the White House issued a statement noting that nearly $11 billion in grants and loan opportunities as part of the administration’s Investing in America agenda to help rural energy and utility providers bring affordable, reliable clean energy to their communities across the country. “This USDA program represents the single largest investment in rural electrification since President Franklin D. Roosevelt signed the Rural Electrification Act into law in 1936,” according to the statement.

What Do the Republicans Want for Climate Provisions?

Even though President Joe Biden threatened to veto it if it ever came to his desk, the final Republican-led legislation to repeal sections of the IRA demonstrates the tension between two parties, according to Time: rank-and-file Republicans who wanted to eliminate IRA tax incentives entirely and a group of Republicans from the Midwest who refused to support cuts to ethanol tax credits.

Some Republicans who ultimately supported the bill made clear their concern about repealing the clean energy provisions. As more clean energy investment occurs in red districts and more new jobs are created there, the allure of shattering the IRA continues to fade.

Gutting the law would have wiped out tens of thousands of jobs that the law is creating in Republican-held states. The White House stands its ground, assuring constituents that the IRA is fueling a boom in clean energy, battery, and EV jobs across the country — chiefly in the congressional districts of Republicans who voted against the law. Clean energy companies have announced 142,016 new jobs in 31 states since Biden signed the IRA last August, according to an analysis by Climate Power, which advocates for clean energy. That includes 191 clean energy projects totaling $242.81 billion in new investments. Companies have announced 65 new battery manufacturing sites, 40 new or expanded electric vehicle manufacturing facilities, and 34 wind and solar energy projects.

IRA incentives will affect the entire energy sector, from producers of raw materials to end-use consumers. In a new Brookings Paper on Economic Activity (BPEA) paper, John Bistline, Neil R. Mehrotra, and Catherine Wolfram sought to quantify the economic impacts of these provisions. What were their findings?

They determined that, yes, the IRA provisions would, indeed, reduce carbon emissions significantly. But that’s not all. These provisions would also cost more than the current government projections that are floating around.

They find that the IRA climate provisions spur emission reductions in a cost beneficial way. Why is that? It’s because the marginal greater costs of reductions are far less than the social cost of carbon.

Like the US Energy Information Administration, the BPEA group estimates that the IRA will reduce CO2 emissions relative to 2005 by about 7 percentage points to somewhere around a 40% reduction. Here is an overview of the climate provisions in the IRA and their goals.

• Tax incentives for businesses to move towards clean energy such the investment in solar, wind, and other non-carbon sources of power generation;
• Tax incentives for households to buy electric vehicles; to invest in other residential improvements that are clean energy like heat pumps and rooftop solar panels; and,
• Climate provisions in the law that are trying to incentivize the use of newer technologies and emerging technologies — carbon capture and utilization and clean fuels, for example.

The BPEA paper finds that the IRA will have large effects on energy markets.

• There will be a 50% increase in the amount of new investment in renewable and zero carbon power generation.
• There will be somewhere between a 6 to 10 percentage point reduction in CO2 emissions over the next decade.
• Wholesale electricity prices, which are the prices paid by businesses and industries, could fall quite substantially.
• There’ll be some further reduction in electricity prices that are passed through to consumers.

On the macroeconomic side, the climate provisions in the IRA are a type of supply side policy. By lowering the price of electricity, they’re boosting economic potential, they’re boosting wages and labor productivity in the long term. But in the short term, they’re also boosting demand because there’s more interest in  investing in clean energy capital. Such demand can raise interest rates in the short run and crowd out other sources of demand in the short run.

One of the important findings in the BPEA paper is that the fiscal expenditures associated with the IRA are likely to be somewhat larger than were originally projected by the Congressional Budget Office and the Joint Committee on Taxation. Their findings are that the 10-year cost would be closer to around $900 billion instead of the $400 billion that was projected by the CBO and JCT.  The reason that the legislation will cost more is that there’s more uptake and increased investment in clean energy capital.

In terms of its effect on the trajectory of emissions, the BPEA authors expect that at the end of 2030 US emissions will be something like 35% below their 2005 level, which is close to what the US commitment is under the Paris Agreement. As a result, the climate provisions in the IRA move the US  materially closer to attaining that emissions target.

Moreover, the way that the legislation is written is that these tax credits are uncapped. So, that means that there’s no overall budget assigned to those tax credits. If more firms go out and build solar power plants and wind farms, then they’ll be eligible for the tax credits and the fiscal expenditure will go up. The same applies to EVs. These tax credits, at least on the power generation side, don’t expire after 10 years. They only expire once a certain threshold of emissions reduction is reached. Tax credits for solar, wind, and other clean energy power generation will continue to taken up outside the 10-year budget window.

The main way that the climate provisions of IRA will affect inflation is through the price of electricity, as they have large effects on electricity investment, and they reduce the wholesale price of electricity. That reduction does eventually pass through to consumers, though. Over the first 10 years, a 2 to 3 percentage point decline in consumer electricity prices will likely occur. That does have a direct effect on inflation. Since households spend approximately 2 or 3% of their budget on electricity, lower electricity prices benefits them directly.

The BPEA authors spoke of the need to speed up the permitting associated with clean power generation and to find ways to increase the transmission capacity to move wind power generated in the Midwest to other parts of the country. Doing the same with solar power generated in the Southwest and move that to other parts of the country is needed, too. This will require different decisions by the federal, state, and local governments as well as by public utilities commissions. They will all play a role in determining, in the long run, how much investment takes place and the ultimate pace of emissions reductions.