What Skeptics of the Inflation Reduction Act Get Wrong

The United States’ passage of the Inflation Reduction Act has been hailed by some as the biggest climate victory in US history. But it has also garnered high-profile criticism. In an August 2022 Wall Street Journal op-ed, environmental author Bjorn Lomborg argues that the law will both do little to reduce climate change while also carrying an enormous price tag.

Specifically, he argues, in isolation, the law would reduce global warming by only a tiny fraction of a degree by the end of the century. That’s a tiny gain, he posits, for enormous pain— $369 billion in spending on energy and climate provisions in the next ten years.

His arguments don’t stand up to scrutiny.

At the outset, when thinking about the impact of any individual piece of legislation on global temperatures, it's critical to recall some big-picture context:

First, CO2 emissions represent a flow of CO2 into the atmosphere (usually expressed in GtCO2 per year).

Second, CO2 accumulates in the atmosphere over time.

Third, the level of global warming relative to the beginning of the industrial revolution is very closely related to the total amount of CO2 that has accumulated in the atmosphere since that time, where every 2,000 GtCO2 warms the world by about 1°C (below).

It’s also important to remember that CO2 emissions are broadly distributed across various sectors of the economy (electricity, industry, transportation, buildings, etc.), across countries, and across time.

The upshot is that carbon flows from a given location, over any given timeframe, will always represent a tiny fraction of the total CO₂ emissions that have accumulated from around the globe since the industrial revolution. In turn, any individual emissions-reducing policy will necessarily have only an incremental impact on global temperatures.

It is consistent, then, for Lomborg to both cite Rhodium Group analysis that shows that the Inflation Reduction Act will reduce US greenhouse gas emissions (mostly CO₂) from 30% below 2005 levels to 40% below 2005 levels by 2030—a significant reduction—and also find the overall decrease in eventual warming to be quite small.

Cumulatively, that reduction in emissions amounts to about 6 GtCO₂ less carbon in the atmosphere by 2030 (other modeling groups get similar numbers). From the relationship mentioned above (2,000 GtCO₂ per 1°C of warming), a reduction of 6 GtCO₂ works out to a decrease of 0.003°C of global warming. So yes, these emissions reductions are incremental in the grand context of all global emissions since the industrial revolution.

However, arguing against the law on these grounds is nonsensical. It would be akin to setting a goal of completing a marathon but deciding not to run the next mile because that would "only" get you 1/26th of the way to the finish.

No individual domestic policy can be expected to solve climate change on its own, but does the Inflation Reduction Act accomplish its emissions reductions at inordinate costs? Lomborg implies this to be the case but provides little evidence other than citing the rather scary sounding $369 billion price tag.

First, he gives the impression that the burden of the spending will be felt directly by the American energy consumer (suggesting that they might revolt, causing the law to be overturned). However, this is very unlikely to be the case because spending in the law is in the form of tax credits, rebates, grants, and loan programs. Meanwhile, the revenue is raised from restructuring the corporate minimum tax rate, allowing for Medicare negotiations of drug prices, increasing enforcement of existing taxes, and taxing corporate stock buybacks. Counter to the idea that the law would raise energy prices, the same Rhodium Group analysis that Lomborg cites in his article finds that the Inflation Reduction Act will reduce direct energy costs for consumers.

Thus economic costs of the law will only be felt indirectly from the aforementioned changes in the tax structure. From a societal perspective, the cost of reducing emissions is typically measured through a policy’s net impact on GDP. Some analyses, like those from the Energy Innovation group, calculate that the net effect of the law would be to raise GDP by around 0.85% in 2030. That growth would imply a negative cost (i.e., savings) related to reducing emissions. A bill that accomplished that feat would be economically desirable regardless of climate change concerns.

Other groups, like the Tax Foundation, have calculated that the law will reduce long-run GDP by 0.2%. Formal cost-of-abatement modeling will likely be forthcoming, but a back-of-the-envelope calculation indicates that even this reduction would work out to roughly $50 per ton of CO₂ of avoided emissions. That happens to be approximately in line with what an optimally-efficient carbon price should be in a cost-benefit framework that maximizes long-run GDP (something Lomborg is an advocate for).

Finally, Lomborg makes some statements that make little sense in the context of criticizing the Inflation Reduction Act:

"If green energy is going to work, it needs to be as reliable and cheap as fossil fuels. Otherwise, developing nations in particular, aren't going to switch to cleaner energy, preferring instead to focus on development and prosperity… Climate change can be meaningfully addressed only by investing in the research and development of all sorts of green energy—from solar, wind, and batteries to fourth-generation nuclear and carbon capture."

But this is precisely the intent of Industrial Policy like the Inflation Reduction Act. Specifically, it is not a law that bans, regulates, or taxes CO₂ emissions. Instead, it is a law that creates incentives for private investment and commerce in the aforementioned “green energy” sectors of the economy.

The investments in energy infrastructure that these incentives are projected to attract total over $4 trillion, or roughly ten times the $369 billion in nominal monetary costs of the law.

This is intended to further stimulate the virtuous cycle of the learning effect, where more deployment of technology causes falling prices and further deployment. This strategy has been very successful for wind and solar power, the costs of which have come down substantially over the past decade as subsidies have bolstered their deployment.

Low-cost wind turbines and solar panels can only reduce emissions to a point. To be integrated into a fully decarbonized economy, they need to be supported by, among other things, low-cost grid-scale energy storage and low-cost clean firm power generation from sources like advanced nuclear or natural gas with carbon capture. Subsidies for these technologies, as well as other more nascent technologies like clean hydrogen, geothermal energy, and sustainable aviation fuels, are also in the law.

Thus, the idea of the energy and climate subsidies in the Inflation Reduction Act is not to indefinitely prop up inferior energy technology but rather to facilitate innovation that can turn cost-prohibitive technologies into technologies that are as “reliable and cheap as fossil fuels,” as Lomborg puts it. Also, the cost-effectiveness gains from this process are unidirectional: they are not relinquished once a subsidy is phased out. These dynamics entail that the true CO₂ emissions reductions caused by the law are likely to be spread far beyond the borders of the United States and much past 2030. This means that the eventual impact on emissions reductions could be orders of magnitude more than the nominal reduction of 6 GtCO₂ in the United States between now and 2030.

Overall, those who appreciate the broader context will see that the CO₂ emissions reductions expected from the Inflation Reduction Act are large, and they will likely be much larger than those counted only within U.S. borders over the next decade. Further, there is no reason to think that these reductions are realized particularly inefficiently or with unreasonable cost. Instead, they are made in the way that can have the most far-reaching and lasting impact: by making clean energy cheap.