With the Inflation Reduction Act, the Clean Energy Revolution Will be Subsidized

This is the first in a two-part series on the implications of the historic climate and health spending package, which President Biden signed into law earlier this week. Read the second post here.

With the signature of President Joe Biden, the Inflation Reduction Act (IRA) now marks the most significant climate policy action the United States has ever taken. The defining feature of this law is that it seeks to wring carbon dioxide emissions out of the U.S. economy by relying heavily on policy "carrots," like subsidies, instead of policy "sticks," such as regulating the fossil fuel industry or attempting to capture the external costs of greenhouse gas emissions through carbon pricing.

In this regard, the new law represents a significant departure from past unsuccessful legislative efforts to tackle the climate crisis and, as we argue in Part I of this series, is a groundbreaking and respectable effort to decarbonize. However, as we argue in Part II, its provisions could potentially place an unacceptably heavy burden on marginalized communities and thus may fall short of fulfilling the administration's commitment to climate justice.

Setting the Path to a Clean Energy Future

The IRA directs $369 billion toward a comprehensive set of clean energy subsidy programs, covering nearly every major contributor to the U.S. carbon footprint. It includes substantial tax credits for qualifying individuals to purchase new or used electrical vehicles. It establishes a $9 billion rebate program to help low-income families replace natural gas appliances with electric ones and make their homes more energy efficient. And it creates a $6 billion program that seeks to reduce carbon emissions from energy-intensive industries, such as cement and steel manufacturing. Other grants and tax credits are targeted at reducing methane emissions from oil and gas development, promoting "climate-smart" agriculture, and supporting domestic manufacturing of clean energy technologies.

To be sure, the effects of such subsidy programs are harder for policymakers to control than more direct measures like regulation. Nevertheless, various emissions models project that implementing most (but not all) of these measures will reduce our nation's greenhouse gas emissions by 40 percent by 2030 (relative to 2005 levels).

That would be a major achievement — and bring the United States within striking distance of achieving the Biden administration's ambitious target of a 50 percent reduction in carbon dioxide emissions by decade's end. According to other estimates, the law would cut about 1 billion tons of emissions per year by 2030. (Currently, total global emissions of carbon dioxide are around 36 billion tons per year.) Achieving emissions reductions at this scale and on this timeline is essential if we are to avoid the worst consequences of climate change.

While the "carrots" approach to pursuing our climate goals may not be ideal (by comparison, direct regulation or pricing mechanisms would provide greater certainty over the amount of emissions reductions that could be achieved), it is an entirely legitimate one under the circumstances.

For one thing, the United States, has a long history of subsidizing energy sources, having lavished various forms of public support on the fossil fuel industry for over a century. According to some estimates, annual U.S. subsidies for fossil fuels amount to anywhere between $10 and $52 billion. On the other hand, technology to develop clean sources of energy, such as wind and solar power, does not receiving any special or unprecedented favors through the IRA.

Subsidies Will Positively Impact Climate-Driven Economics

For another thing, mainstream economics recognizes subsidies as a legitimate policy tool for promoting so-called public goods that the marketplace on its own would not sufficiently supply. Virtually every climate scientist agrees that the marketplace is not developing and deploying renewable energy sources at the scale and speed necessary for averting the worst consequences of climate change.

Not only is the IRA's use of subsidies to promote clean energy a legitimate policy response, it also offers several distinct advantages. First, and most obviously, it worked. Past legislative efforts at carbon pricing and direct regulation never made it through Congress.

A major reason for this, of course, is that clean energy subsidies benefited from an easier legislative pathway. Because they could be readily packaged in a budget reconciliation bill that enjoys privileged legislative procedures, these measures were thus able to bypass the 60-vote filibuster, which has doomed past climate measures. (Of course, a carbon tax could theoretically be enacted through budget reconciliation, but such an approach is unlikely to meet even this less onerous 50-vote requirement, given how politically toxic the policy is.)

Second, we know from experience that clean energy tax credits are a powerful policy tool for achieving significant greenhouse gas emissions reductions. For instance, the Obama-era American Recovery and Reinvestment Act (a stimulus package enacted in the wake of the Great Recession) invested $90 billion in clean energy technologies. The decade after the law's passage saw wind and solar power capacity grow to become significant parts of the country's energy portfolio.

Third, the IRA's grants and tax credits have the potential to put U.S. climate policy on a more durable foundation by building a broader and stronger constituency for it, particularly among rural and other conservative communities that are now largely hostile to climate action.

Indeed, many of the law's provisions would significantly increase the number of people employed in clean energy industries, as well as increase those industries' contributions to local tax bases. As such, more individuals and elected officials will have a stake in seeing those industries thrive and will thus be more likely to support policies that are favorable to their growth and long-term stability.

Finally, deploying policy "carrots" first eases the path for later use of policy "sticks" like regulations. Part of this dynamic is the result of newly established political constituencies for clean energy technology, which, as noted, would be more inclined to support regulations that mandate the use of those technologies.

Another big part: The IRA's provisions will likely lead to wider deployment of these technologies and, in so doing, make them significantly less costly. These developments would be critical from a regulatory standpoint because many environmental statutes direct agencies to consider the costs and availability of technologies when designing regulations. As such, agencies such as the U.S. Environmental Protection Agency (EPA) will have an easier time justifying regulations that would mandate their use.

Even industries that would have to comply with new regulations might welcome them thanks to the IRA's subsidies. The overarching purpose of these provisions is to induce businesses to make productive investments in decarbonizing their activities over the course of several years. But businesses may not fully commit to making these investments if they face potential instability in the marketplace or if they fear being undercut by competitors.

Well-designed regulations, however, mitigate these concerns by establishing universally applicable market rules that provide a clear pathway for investments to evolve over time. As businesses move along this investment pathway, they will likely begin to take a more vested interest in the continued success of future climate action, further broadening the political constituency behind it.

The law is not perfect, though. To learn about the IRA's harmful implications for vulnerable communities, please read the second part of this series.