Why the cost of Biden’s climate law keeps going up
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The estimated price tag for President Joe Biden's climate agenda has doubled since the Inflation Reduction Act was signed into law.
PHOTO: AFP
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WASHINGTON – The estimated price tag for US President Joe Biden’s clean energy and climate agenda has effectively doubled since the Inflation Reduction Act (IRA) was signed into law in 2022.
Nearly all of the increase is attributable to forecasters’ belief that the law will be more popular than they had originally expected, in part because of the way the Biden administration wrote certain regulations. That rising price tag may actually be good for reducing greenhouse gas emissions – and for the US economy.
The Inflation Reduction Act, which Democrats passed on a party-line vote in summer 2022,
Many of those credits are effectively unlimited, meaning the more people or companies choose to claim them, the more they will add to federal deficits. The uncapped credits include incentives for manufacturers to build solar-panel or wind-turbine factories and for consumers to buy electric vehicles. Budget scorekeepers have to estimate how popular those credits will be to forecast how much they will cost.
When the law passed, the non-partisan Congressional Budget Office projected the energy components would add US$391 billion (S$526 billion) to deficits over a decade, from 2022 to 2031. It revised those forecasts upward last spring and again on Feb 7. The office now projects the energy incentives in the law will cost about twice that much for that 2022 to 2031 period. For the next decade, through 2033, the budget office projects the provisions will cost more than US$800 billion.
Here is what has changed, and why it matters for emissions, the economy and the budget.
Clean energy manufacturing is booming
The law has supercharged investment in American manufacturing facilities of some low-emission technologies, led by solar panels, advanced batteries and the full supply chain for electric vehicles.
An investment tracker by the Rhodium Group, a consultancy that follows energy and climate spending, and the Massachusetts Institute of Technology shows companies spent US$44 billion on clean energy manufacturing in America over the past year, with significantly more planned in the years ahead. Those companies will benefit from the tax breaks in the climate law, either directly or indirectly.
The popularity of those credits has surprised forecasters at the budget office and the non-partisan congressional Joint Committee on Taxation. Budget office officials said on Feb 7 that they now expected the provisions to add about US$205 billion more to deficits through 2031 than they had initially anticipated.
Electric vehicles could also surge
Forecasters now expect the consumer credit for electric vehicles (EVs), which is as much as US$7,500 for an electric car or truck, to cost several times as much as initially expected. That calculation is not really based on sales of EVs, which hit a record in 2023, even though annual sales growth slowed from 2022. It stems from a pair of Biden administration regulations that are meant to fuel more EV sales – and which the budget office expects to be quite effective.
The first regulation is in place and expanding access to the EV credit. The IRA does not allow every EV sold in America to qualify for the credit. It restricts the subsidies to 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 shoppers who lease, instead of buy, their EVs can effectively receive the full credit even if their vehicles do not otherwise meet sourcing and manufacturing requirements. Not coincidentally, EV leases shot up last year.
The second regulation is a proposal from the Environmental Protection Agency that would require two-thirds of new passenger cars sold in the United States to be all-electric by 2032. The budget office estimates that regulation, once finalised, will incentivise more Americans to buy EVs and cash in on the tax credit. They will also burn less petrol, which will reduce federal petrol tax revenues.
Concerted climate action could help the economy and the budget
Rhodium modellers estimated in 2023 the IRA will result in a steep cut to US emissions, though not quite enough to meet the nation’s pledges for 2030 under the Paris Agreement on climate change. The rising costs in the law suggest it could spur even deeper emissions cuts than those forecasts.
A more effective Biden climate agenda could potentially catalyse more ambitious global action to cut emissions and avert economically catastrophic warming levels. Administration officials have warned the risks of climate inaction are large 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 as much as one-tenth by the end of this century.
They also estimated climate damages could force the government to spend an extra US$1 trillion or more in today’s dollars over the course of a decade on flood insurance, disaster relief, healthcare costs from heat waves, and more.
But the climate law now probably adds to 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. It also gave more money to the IRS to crack down on corporations and high earners who have been able to avoid paying taxes they owe. The net result, the budget office initially estimated, was a law that slightly reduced deficits over a decade.
The rising cost of the energy and climate incentives now flips that maths. The law, by the budget office’s accounting, is on track to add slightly to deficits from 2022 to 2031.
Biden officials still contend the law will reduce deficits on net.
They estimated this week that the IRS enforcement efforts will bring in US$432 billion from 2022 to 2031, which is US$252 billion more than the budget office forecast. Treasury officials say that is more than enough, by their maths, to offset the losses from a more successful climate effort and ensure that the law still reduces deficits. NYTIMES
