The estimated price tag of President Biden’s climate and clean energy agenda has actually doubled since the Inflation Reduction Law was enacted a year and a half ago.
Almost all of the increase is attributable to forecasters’ belief that the law will be more popular than they originally expected, in part because of the way the Biden administration wrote certain regulations. That rising price may actually be good for reducing greenhouse gas emissions…and for the American economy.
The Inflation Reduction Act, which Democrats passed on a party-line vote in the summer of 2022, includes tax credits and other subsidies for low-emission energy technologies that are intended to help the nation transition away from fossil fuels.
Many of those credits are effectively unlimited, meaning the more people or businesses choose to claim them, the more they will add to the federal deficit. Uncapped credits include incentives for manufacturers to build solar panel or wind turbine factories, and for consumers to buy electric vehicles. Budget scorers have to estimate how popular those credits will be in order to predict how much they will cost.
When the law was passed, the nonpartisan Congressional Budget Office projected that energy components would add $391 billion to the deficit over a decade, from 2022 to 2031. revised those forecasts upwards last spring and again on Wednesday. The bureau now projects that the law’s energy incentives will cost about twice as much for the period from 2022 to 2031. For the next decade, through 2033, the budget office projects the provisions will cost more than $800 billion.
Here’s what’s changed and why it matters for emissions, the economy and the budget.
Clean energy manufacturing is booming.
The law has spurred investment in U.S. manufacturing facilities for some low-emissions technologies, led by solar panels, advanced batteries and the entire electric vehicle supply chain.
An investment tracker prepared by Rhodium Group, a consulting firm that tracks energy and climate spending, and the Massachusetts Institute of Technology shows that companies spent $44 billion on clean energy manufacturing in the United States over the past year, and plans much more in the years to come. Those companies will benefit from tax breaks from the climate law, whether directly or indirectly.
The popularity of those credits has surprised forecasters at the budget office and the nonpartisan Congressional Joint Committee on Taxation. Budget Office officials said Wednesday that they now expected the provisions to add about $205 billion more to deficits through 2031 than they had initially anticipated.
Electric vehicles could also increase.
Forecasters now expect the electric vehicle consumer credit, which amounts to $7,500 for an electric car or truck, to cost several times more than initially expected. That estimate isn’t actually based on electric vehicle sales, which hit a record last year even as annual sales growth slowed starting in 2022. It arises from a pair of Biden administration regulations that are intended to drive more sales of electric vehicles, and which the budget office hopes will be quite effective.
The first regulation is already in force and expands access to credit for electric vehicles. The IRA does not allow all electric vehicles sold in the United States to qualify for the credit. Restricts subsidies on cars and trucks that are largely sourced and assembled in the United States, in order to support domestic manufacturing. But there is a loophole, which was codified by a Treasury Department regulation: car buyers who lease, rather than buy, their electric vehicles. can actually receive full credit even if their vehicles do not meet sourcing and manufacturing requirements. It’s no coincidence that electric vehicle leases skyrocketed last year.
The second regulation is a Environmental Protection Agency proposal that would require two-thirds of new passenger cars sold in the United States to be fully electric by 2032. The budget office estimates that the regulation, once finalized, will encourage more Americans to buy electric vehicles and take advantage of the tax credit. They will also burn less gasoline, which will reduce federal gas tax revenue.
Concerted climate action could help the economy and the budget.
Rhodium modelers estimated last year. The IRA will result in a sharp cut in US emissions, although not enough to meet the country’s 2030 promises under the Paris Agreement on climate change. The law’s rising costs suggest it could push emissions cuts even deeper than those forecasts.
A more effective Biden climate agenda could potentially catalyze more ambitious global action to reduce emissions and avoid economically catastrophic levels of warming. Administration officials have warned that the risks of climate inaction are great for the economy and the budget. In 2022, The White House budget office estimated Unchecked climate change could reduce the size of the economy by up to a tenth by the end of this century.
They also estimated that climate damage could force the government to spend an additional $1 trillion or more in today’s dollars over the course of a decade on flood insurance, disaster relief, heat wave healthcare costs and more. .
But the climate law will now likely increase the deficit.
The IRA was more than a climate law. It also raised some corporate taxes, increased subsidies for some people who buy health coverage through the Affordable Care Act and cut federal spending on prescription drugs by allowing the government to negotiate prices with pharmaceutical companies. He also gave more money to the Internal Revenue Service to crack down on corporations and high earners who have been able to avoid paying the taxes they owe. The net result, the budget office initially estimated, was a law that slightly reduced deficits for a decade.
The rising cost of energy and climate incentives now changes that math. The law, according to budget office accounting, is on track to slightly increase deficits from 2022 to 2031.
Biden officials still maintain that the law will reduce deficits on a net basis. They estimated this week that IRS enforcement efforts will generate $432 billion from 2022 to 2031, which is $252 billion more than the budget office anticipated. Treasury officials say that’s more than enough, by their calculations, to offset losses from a more successful climate effort and ensure the law still reduces deficits.