One Year Later, Inflation Reduction Act Implementation Remains A Mess

August 16, 2023 Mariel Alumit Energy Policy, Finance, Political, Top News, US Energy News
Inflation

Today marks the one-year anniversary of President Biden signing the Inflation Reduction Act (IRA) into law. Despite the misleading name—the law was never about reducing inflation—the IRA is a quintessential example of Democrats’ vision for industrial policy, redistributing wealth away from disfavored parts of the energy sector, like oil and gas, toward favored sectors like solar, wind and electric vehicles.

“Industrial policy” is merely corporate welfare by another name. It’s about politicians picking winners and losers in the marketplace, assuring the politically connected and privileged maintain a leg up over those who play it straight. The IRA includes $391 billion in energy and climate spending over 10 years, with much of the “spending” coming in the form of tax credits, deductions, and rebates. That’s according to Congressional Budget Office (CBO) estimates, but the real cost could be be far higher. Credit Swiss says the climate and clean energy provisions will cost more than double what CBO estimates, around $800 billion, and an analysis from Goldman Sachs says the true cost is closer to $1.2 trillion.

Based on initial estimates, there is $260 billion in energy tax credits for renewables like wind, solar and hydropower, and $80 billion in consumer rebates for purchasing electric vehicles, installing rooftop solar panels, and adding more efficient home features. The IRA amended a tax credit of up to $7,500 for purchasing electric vehicles and extended another of up to 30 % off the cost of installing solar panels. Wind and solar developers also benefit from extended and expanded production tax credits.

These generous subsidies aim to scale up energy production from renewables and boost electric vehicle sales, all while promoting domestic manufacturing. However, this massive Green New Deal-style intervention was rammed through Congress on purely partisan lines. Not a single Republican in the House or Senate voted for it. The Competitive Enterprise Institute, my employer, has produced a letter urging members of Congress to put an end to these outrageous subsides. Forty groups have signed on.

Democrats spent decades piling on energy and environmental regulations, and now this has boxed them into a corner by making it nearly impossible to build new energy infrastructure. The Biden administration has set a goal of a 100 % carbon-free electricity sector by 2030. But according to the Energy Information Administration, wind energy contributed 10.1 % of the total electricity generated in the U.S. in 2022, while solar produced another 4.7 %, for a combined total of 14.8 %. While the percentages are rising, so is U.S. demand for power, and bringing new electricity producers online is proving harder than anticipated.

Grid connection is one huge bottleneck, especially since many of the premier wind and solar locations are in Republican-led states and districts. This infuriates Democrats, who want more federal control over infrastructure decisions traditionally left to the states. They are pushing for policies to expand powers of federal agencies like the Federal Energy Regulatory Commission, so they can limit state sovereignty over transmission lines.

While the subsidies in the IRA are sizable, there is one modest silver lining—they are temporary. Most are set to expire after 10 years. Given it can take fives years for renewable energy projects to become operational after entering the interconnection queue, it remains possible a sizeable portion of the IRA will never be implemented. Nevertheless, 10 years is more than enough time to do a lot of damage. As a result, Republicans should not compromise on transmission line policy until the IRA’s harmful subsidies are fully repealed first.

Already parts of the IRA are backfiring, which could further erode its support. Countries like South Korea have found loopholes in the IRA’s “buy American” provisions, ensuring their electric vehicles remain top sellers in America. This is leading to unintended consequences, such as more frequent leasing of vehicles, which could perversely lead to greater turnover of cars, and potentially greater production of vehicles and more emissions as well.

The IRA is massive industrial-policy cronyism masquerading as climate and inflation policy. The anniversary of its passage is nothing to celebrate. Yet, Republicans can build on the law’s early failures by pushing to repeal its green corporate welfare provisions. While 10 years of subsidies remains excessive, the looming expiration deadline gives Republicans useful leverage to force an earlier end to the tax credits. Both common sense and fairness are on their side.

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