The U.S. Inflation Reduction Act: Will the Dramatic Enactment Translate into Dramatic Results?

By Roman Sidortsov

If there is ever a Hollywood film to be made about climate and energy legislation, the enactment of the Inflation Reduction Act (IRA) will provide as good of a script as there will ever be. Typically mundane, the passing of the largest climate bill in U.S. history featured many twists and turns, ups and downs, and grand finale speeches about saving the world. The process features the transformation of a climate villain, Senator Joe Manchin, who infamously shot the text of a cap-and-trade bill in a political ad in 2010, into an unlikely climate hero who resurrected the legislation that he killed just a few weeks ago. The bill’s authors employed clever branding – the Inflation Reduction Act – to make the bill more palatable to not only climate activists but also fiscal hawks and the public concerned with rising prices. The drama had been omnipresent until the very end – just when all the hope of the Democratic Party to deliver on a President Biden’s signature campaign promise was lost; a compromise struck between the villain-turned-hero and the Senate Majority Leader, Chuck Schumer saved the day.

In a Hollywood film, the story would probably end there –Biden’s speech celebrating the legislation, the footage of the president at the COP27 emboldened by the act’s promise, and the narrator partially attributing the Democrats’ success in the 2022 midterm elections to this legislative victory. Yet the true value of legislation is not assessed by the dramatics and heroics behind its enactment but by the impact that it brings. 

The IRA in a Nutshell

Despite not containing ‘climate’ or ‘energy’ in its title, the IRA is a piece of legislation aimed at combating climate change. Although it does contain measures aimed at softening the wrath of inflation and reducing the budget deficit,largely through reducing future energy costs, the bulk of its provisions is related to supporting the decarbonization effort in the United States. These provisions that are largely ‘carrots’ are plentiful and diverse in their approach, size, and scope. Some are controversial to the point of drawing the ire of environmental NGOs as pro-fossil fuel, like the requirement for the government to offer additional areas for oil and gas development to allow the same for wind and solar projects.

Yet at the IRA’s core is $369 billion to be invested in a systemic effort to decarbonise the U.S. economy. Many measures are logical policy options supported by favourable cost data and equitable distributional impact, like a 10-year extension of the 30% residential solar tax credit and energy efficiency subsidies. A few can only be explained by the irrational political economy of the energy transition. For example, even one monumental failure after another was not enough for federal and state lawmakers to stop showering carbon capture and sequestration (CCS) developers with billions of dollars in financial subsidies. 

Yet, the questionable abbreviation and a handful of economically and environmentally puzzling but politically necessary provisions aside, the largest climate bill in U.S. history is projected to produce significant greenhouse gas (GHG) emission reductions. According to the federal Office of Management and Budget, investments under the IRA are likely to result in a 40% reduction of GHG emissions by 2030 compared to 2005. Independent experts agree, putting the estimated impact on par with that of the federal government. 

How the IRA Compares to Other Climate Bills

Judging by the title alone, the IRA is as far from the ambitious Green New Deal proposal as it can be. It is a fraction of Senator Bernie Sanders’ $16.3 trillion plan to combat climate change and the Democrats’ initial $3.5 trillion budget aspiration. However, under the politically savvy bonnet is a lean and mean collection of Green New Deal-esque policies that, according to the aforementioned modeling, is set to deliver. The IRA builds on the successes and failures of the American Reinvestment and Recovery Act (ARRA), a signature legislative energy achievement of President Obama. It is fundamentally different than the failed 2009 Waxman-Markey cap-and-trade bill that relied mostly on “sticks.” 

The IRA is the largest climate legislation by a developed country. It might not have the whole system approach of the French Transition Law, the multi-stage approach of Germany’s Energiewende, or the ambition of the European Green Deal. However, it has $369 billion of federal funding aiming to capitalise on what America does best – create conditions for the private sector to reorient its economy. 

Why It Will Succeed

Projecting the impact of legislation aimed at bringing dramatic changes to the world’s largest economy during a global energy crisis is a difficult task. Will politicians and voters have second thoughts about staying the course? Will the industry embrace systemic changes and respond to IRA incentives? These types of questions need to be taken very seriously by the agencies charged with IRA’s implementation, but there is plenty of empirical evidence and structural reasons why the legislation will become a success.

Firstly, as noted above, the IRA builds on the ARRA’s financial “carrots,” which has been shown to have rescued the budding renewable energy industry in the United States in the midst of the global financial crisis. Some of the highlights include nearly quadrupling ARRA’s financial support whilst remedying several problems with using tax credits, such as the limited scope of eligible entities and transactional costs. Both production and investment tax credits for wind and solar are reinstated and expanded to other technologies. Perhaps the most important change is the longevity of the tax incentives, ten years. This means a consistent and predictable policy signal for private actors. Ladies and gentlemen, the United States has a lasting federal energy policy, perhaps for the first time ever!

Secondly, there are plenty of incentives for buy-in for consumers and households of all levels of income. Tax credits and rebates for heat pumps, credits for new and used electric vehicles (EVs), reinstated and extended residential solar PV credits, and many other reasons for Americans to make the energy transition part of their everyday lives. 

Thirdly, the explicit environmental and somewhat hidden energy justice provisions. These provisions not only acknowledge the harm done by the existing energy system but also allocate funds for remedying them. This is not just a matter of restorative justice – including low-income and/or non-white communities that bore the brunt of the harm into a broad and diverse energy transition coalition.

Fourthly, the IRA is as much of an industrial policy bill as it is a climate one. It incentivises investments in a wide array of domestic research and development activities and clean energy manufacturing capacities. It creates several procurement mandates placing school districts and the Postal Service as early adopters and demonstrators of energy transition technologies. It does not leave rural communities behind by expanding climate change-driven innovations into agriculture. And before one yells “Protectionism!” the COVID-19 pandemic showed us the importance of diversification of global supply chains. It is true that some EVs will lose the benefit of the U.S. tax credit; however, in the middle and long term, the new U.S. manufacturing capacity will increase diversity and, therefore, the security of global supply chains.

Fifthly, the bill’s authors were strategic in selecting occasional “sticks.” Perhaps the most significant of them is a fee imposed on fugitive methane emissions. Methane is a potent GHG that accounted for 10% of U.S. GHG emissions in 2019. Generally, large producers have been willing to curb fugitive emissions, with the bulk of the resistance coming from smaller companies. Having the support of large natural gas producers mitigates the resistance that the smaller ones put up in implementing this important measure.

Sixthly, it is important to remember that the IRA is not the lone climate warrior in the United States. This became particularly apparent during the previous presidential administration, whose rejection of the Paris Agreement led multiple states and cities to adopt ambitious climate goals. For example, since 2018, 15 U.S. states, the District of Columbia, and two territories have legislatively increased their renewable portfolio standards that require a certain percentage of electricity to come from renewable sources. Joining forces is rarely a bad idea, especially if doing so helps address the climate crisis.

I am certain that there will be bumps in the road of implementing the IRA. As many researchers know well, energy communication and education are not easy. The ways in which energy systems operate are often counterintuitive and nuanced. Thus, designing communications and outreach campaigns will require determination, innovation, and persistence. Yet, the IRA’s authors wrote the bill with a wide coalition and multiple win-win scenarios in mind. There is a great deal of hard work ahead, but the adventure of making the legislation a reality promises to be both exciting and transformative. For both America and the world. 

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Posted in All Posts, Energy and Society, Energy Governance and Policy, Political economy of energy, Politics of energy and energy institutions

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