The Inflation Reduction Act: One Year On
The Build Back Better (BBB) Plan was proposed by President Biden in 2020 and sought to make the largest public investments in social, infrastructural, and environmental programs since the Great Depression–era New Deal. It comprised three parts: (1) the American Rescue Plan, a COVID-19 relief bill, which was signed into law in March of 2021, (2) the American Jobs Plan, which was supposed to address infrastructure and climate change, and (3) the American Families Plan, which sought to fund social policies such as childcare and paid family and medical leave. The latter two parts of the BBB Plan were introduced through the Build Back Better (BBB) Act, which, combined with the Infrastructure Investment and Jobs Act, formed a $3.5 trillion package. The BBB Act passed the House in September of 2021 but was thereafter replaced by the Inflation Reduction Act of 2022 (IRA) – a significantly watered-down version of the BBB Act – in order to secure the votes necessary to pass the Senate. The IRA was signed into law a year ago to this date, on the 16th of August, 2022.
The final version of the Inflation Reduction Act, though much smaller than originally intended, is widely acknowledged as the biggest climate legislation in U.S. history ($392 billion), and it also contains crucial health policy and tax provisions. The Congressional Budget Office (CBO), using inputs from the Joint Committee on Taxation, estimates that over two-thirds of the fiscal costs of the climate related provisions ($271 billion) will be due to tax credits that target clean energy production and investment, new and used electric vehicle purchases, and investments in clean energy and energy efficiency. The remaining costs ($121 billion) will be due to direct expenditures on forests and agriculture, energy loans, and other costs listed below. Most tax credits are uncapped and therefore total expenses on them will depend on individual uptake. Studies suggest that initial estimates of fiscal costs may be understated and that central to higher-end estimates of tax credit expenditures may range from $780 to $1,070 billion over the 10-year budget window – three to four times higher than CBO estimates.
The IRA marks a significant departure from standard economic policy dictated by Washington Consensus orthodoxy in favor of a form of economic policymaking that has existed since the dawn of the Industrial Revolution, namely, industrial policy. Or as Secretary of the Treasury, Janet Yellen explains, supply-side investments to boost U.S. economic capacity in key sectors. The Act serves a dual purpose: to halve U.S. emissions by 2030 from 2005 levels, and to stimulate the economy and national competitiveness. To that end, it is designed to crowd in and accelerate private investment in clean energy and related technologies through subsidies, regulations, and local content requirements. There is strong evidence that these policies have borne fruit in the past year.
Emissions Outcomes: New analysis indicates that current policies as of June 2023 will drive emissions 29–42% below 2005 levels in 2030 and 32–51% below 2005 levels in 2035. The power and transportation sectors will see the largest declines in GHG emissions relative to today. The power sector in particular will look quite different in 2035 compared to today, with zero- and low-emitting power plants making up 63–87% of all generation that year, up from around 40% in 2022. Emissions will decline by 45–74% in 2035 from current levels in the power sector and by 15%–32% from current levels in the transport sector.
Source: Rhodium Group, 2023
Note: The high, mid, and low ranges reflect uncertainty around future fossil fuel prices, economic growth, and clean energy technology costs.
Source: Rhodium Group, 2023
Economic Outcomes: A year after its enactment, data indicates that the IRA is succeeding in rebuilding domestic manufacturing and creating new jobs. Manufacturing construction has nearly doubled in the past year and is forecasted to grow at a higher rate in the future. 272 new clean energy projects were announced in 44 states between August 2022 and July 2023, generating more than 170,000 jobs throughout the country. A new report from the American Clean Power Association states that companies have invested more than $270 billion in U.S.–based clean energy projects since the IRA became law. Much of the new investment comes from private rather than federal money; recent analysis suggests that $1.2 trillion in federal incentives may leverage approximately $3 trillion in private investment over the next ten years. It is notable that many of the new energy and battery investments are concentrated in areas in the Midwest and Southeast that were in economic decline, presenting an opportunity to revitalize communities that were dependent on fossil fuel and carbon intensive industries.
There is, however, plenty left to be done. A report found that reductions of 41–52% below 2005 levels in 2030 are still possible but will require ambitious state action in tandem with federal regulations and incentives. The IRA is laudable in its scale and ambition but was not designed to solve all the United States’ decarbonization challenges. Further, the successful implementation of the Act faces significant political and technical challenges that could impede its long term effectiveness if not addressed in the coming years. The IRA is an important step in the right direction but only one of many steps to be taken.
Siddharth Jain is an Assistant Researcher at the Climate Policy Lab at The Fletcher School.