Wait, how much will the Inflation Reduction Act’s climate provisions cost?
Wait, how much will the Inflation Reduction Act’s climate provisions cost?
After the Inflation Reduction Act was signed into law in 2022, initial estimates forecast that the bill’s climate provisions would cost around $390 billion over 10 years. However, external forecasts put that number closer to $1 trillion, and the Congressional Budget Office recently revised its forecasts for the cost of some tax credits upward. Much of this spending variability comes from the bill’s use of tax credits, which target electric vehicles, clean energy production and more.
“Marketplace” host Kai Ryssdal spoke with John Bistline, a program manager in the energy systems and climate analysis group at the Electric Power Research Institute, an independent, nonprofit research and development institute, about the role of tax credits in the Inflation Reduction Act. Many of the bill’s tax credits are not capped and last for at least 10 years, creating variability in their total projected cost over time. Bistline has written about the IRA’s climate and economic impacts. The following is an edited transcript of Ryssdal and Bistline’s conversation.
Kai Ryssdal: Help me set the scene here. Congress and the White House are writing this law, they want to incentivize a certain set of climate-favorable behaviors as much as possible. They come up with these tax credits, and they say, “Hey, let’s make them uncapped.” What does that mean?
John Bistline: Yeah, so IRA was described, I think, initially in terms of not just its investments for lowering emissions, but also for growing jobs, enhancing energy security. And so those tax credits across several areas really aim to contribute toward those different goals, right, making the clean energy transition not just more affordable but also more equitable. So in the sort of detail of IRA — and of course, it’s very complex, about 300 pages, with hundreds of additional pages on guidance — is intended, I think, to address those many simultaneous objectives.
Ryssdal: So let’s say I’m building, I don’t know, a wind farm. And I hit all the targets that the Inflation Reduction Act wants me to hit. I could keep getting tax credit upon tax credit upon tax credit for hiring X number of workers, or, I mean, pick your parameter, right?
Bistline: Yes, so the the power sector tax credits in particular have quite a bit of flexibility. And they’re stacked, meaning that you could have these additional bonuses that may start at a base rate of 6% for the investment tax credits. Those can be about five times larger, or 30% off, for meeting these labor requirements. There’s also 10 percentage points for siting in a so-called energy community, and then another 10 on top of that for using domestic content. So that could mean that a wind project or a solar project gets 50% tax credit in total.
Ryssdal: So as you read the headlines a number of weeks ago saying the Inflation Reduction Act is going to be much more expensive than we thought — and you had to read to the 17th paragraph to figure out that it was about the tax credits in part — were you surprised that that’s the way it’s getting billed in the reporting on it?
Bistline: The debate about how much the Inflation Reduction Act could cost I view is really a debate about how effective it might be in accelerating clean energy adoption. But I would say, you know, it wasn’t a surprise to hear of those changes, given how much has also changed in the market environment since IRA was passed.
Ryssdal: Say more about that market environment, actually. Because the law is only a couple of years old, but these changes in the marketplace are actually happening already.
Bistline: That’s right, yeah. In the year and a half since IRA was passed, we can sort of take stock of progress, even though it’s still early to unpack which trends are due to the Inflation Reduction Act versus other factors. But last year, we had a record number of clean electricity capacity installed, about 32 gigawatts nationally, but IRA projections tend to suggest something like two to three times that on average over the next decade. And likewise, electric vehicles, I think that analysis suggests that those are on track and are actually trending a little bit higher relative to the projections. So all of those contribute toward sort of refining our understanding of what IRA could do.
Ryssdal: One hates to inject politics into what has been a data-driven conversation, your data and your analysis specifically, but I’m obliged to point out here that this is an election year, and the Biden administration’s efforts in green technology and all of these bills, it has not been universally popular. What happens if there’s a new Congress and a new president and some of this all gets reversed?
Bistline: I would say that I can’t speculate on the political future of IRA. But there are a range of policy developments at both the federal level and state levels that could shape IRA’s impacts. And it’s possible that energy costs for households might be higher without IRA even if the fiscal costs are lower. But I think more broadly, one of the things that we see with IRA is that it can help to narrow this decarbonization gap but won’t likely meet the U.S. climate targets by itself. That of course, you know, raises these questions about what additional actions might contribute toward that in the future and how that’s sort of shaped by the market environment.
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