With the one year anniversary of the passage of the Inflation Reduction Act (IRA) fast approaching, all eyes have turned to its implementation. A half trillion dollars are on the table, more when the clean tech elements of the Infrastructure Innovation and Jobs Act (IIJA) are factored in and far more according to some analyses of the wide reach of tax credits in various provisions of the tax reconciliation package.
Last year’s passage of the IRA in many ways validated the Breakthrough Institute’s long standing advocacy of technology and investment-led climate innovation policy. Public investment in clean energy technology and infrastructure works and is largely responsible for the progress that the United States has made in recent decades toward decoupling its economy from fossil fuel emissions. It also remains popular. Unlike past midterm debacles, Democrats did not pay a significant price in elections last November for their climate policies largely because they never proposed to price or regulate fossil fuel consumption, as they did in the runup to the 1994 and 2010 elections.
But the passage of the IRA, with the benefit of hindsight, will likely be viewed as the easy part. Realizing the promise that generational investments in clean technology and infrastructure could bring may prove far more difficult.
While IRA supporters managed to avoid many of the mistakes that derailed past efforts in the legislative process, many now appear determined to repeat them via IRA implementation. Progressive technocratic hubris, driven by overreliance on energy system models, an uncritical fetishization of industrial policy, and an unwillingness to fully account for the implications of political polarization and divided government, risks undermining much of what the IRA could accomplish.
In the short term, legal and political challenges from the Supreme Court and Congress risk stopping the administration’s implementation strategy in its tracks. Beyond that, social, economic, and technological challenges, associated with supply chains, present limitations of key technologies, consumer expectations, and institutional capacities, threaten to undermine emissions reduction efforts, polarize what have been broadly popular public innovation policies, and discredit state-led economic and industrial policy.
Climate ambition, for these reasons, does not necessarily result in climate progress and may, in fact, undermine it. Against the triumphalism of many IRA supporters, a rapid march toward a deeply decarbonized economy over the next decade is hardly assured. To the extent that the IRA, its companion bills, and the Joe Biden administration’s proposed regulations do amount to a bold, new industrial policy, they also represent a policy experiment—an enormously complex and iterative effort to shepard multiple technologies across multiple sectors of the U.S. economy toward broad adoption, all while minimizing social and economic disruption associated with that transition.
Further, the determination to use executive action and regulatory powers to tether that experiment to the administration’s emissions reduction targets threatens to turn a bottom-up, technology-focused approach in which success at deploying technology begets growing ambition into a top-down regulatory framework in which climate ambition runs well ahead of technological capabilities, state capacity, and public acceptance. That would be a shame and a huge waste of the opportunity that the IRA affords.
That doesn’t mean that the administration should forego regulatory policies. Regulations can play an important role in pushing technologies toward higher environmental standards. Nor is substantial federal support for early-stage commercial green technologies unwarranted. But the administration will do well to avoid designing far-reaching industrial policies—predicated upon speculative modeling of technology deployment and cost declines and tied to heavy handed emissions regulations—that fail to account for serious real world obstacles to rapid adoption.
The good news is that much of the necessary policy and public investment for sustainable climate policy is now in place. But to succeed, the Biden administration would be wise to resist the siren song of regulatory certainty and focus on fundamentally reducing the cost and improving the performance of the myriad technologies necessary to deeply decarbonize the U.S. economy. Over the long term, better, cleaner technologies—with a helping hand from policy—will win the day. But it won’t necessarily happen in the ways that many technocratic progressives imagine or on the timetable that the environmental community demands.
IRA In ModelLand
By definition, technology-led climate mitigation cannot guarantee any specific emissions outcome. In a market economy, public investment does not assure that technology will be adopted at any particular rate, nor that it will fully displace emissions producing activities.
Nonetheless, within days of the final IRA package taking shape, climate advocates—in the academy, think tanks, and consultancies—rapidly produced modeling showing that IRA policies would result in deep reduction of U.S. emissions over the next decade. The models offered a sheen of precision to claims that the IRA would rapidly transform America’s energy economy. But they were also shot through with highly uncertain technological, economic, and political assumptions. Much of the emissions reductions projected in most models of IRA, for instance, were predicated upon expanding long-distance transmission capacity at a rate more than double the real rate of U.S. transmission network growth over recent decades.
IRA implementation is riddled with similar uncertainties and challenges. Rapid expansion of wind and solar power depends upon sustained declines in the cost of those electricity sources. In reality, though, the rate of cost improvements has halted in recent years, as supply chains, siting, value deflation, and other factors have negated continuing improvements in manufacturing efficiencies. Rapid adoption of electric vehicles will require overcoming a range of challenges, from charging infrastructure limitations to range anxiety to rising battery material costs that may cancel out continuing improvements in battery manufacturing and vehicle performance.
In the models, these challenges are resolved with technocratic efficiency. In the real world, the U.S. government has yet to demonstrate that it possesses either sufficient social license or the administrative capabilities to resolve most of those challenges on the time frames that the models project. All of which could be dismissed with a chuckle—“there go those eggheaded modelers go again”—were it not for the fact that models now serve not only to promote highly speculative claims associated with legislation that has yet to be implemented but also as administrative justification for new emissions regulations proposed by the EPA. The EPA has now integrated optimistic modeling of IRA’s impact on the U.S. energy system into its reference case scenarios, which provide the basis against which the technological feasibility and cost of new emissions regulations are evaluated.
In the reference case for new power plant emissions standards, for example, most coal-fired generation disappears by the mid-2030s, with wind and solar generation providing close to half of America’s electricity. By 2050, unmitigated fossil fuel generation falls from about 60% today to 14%, served by a vast natural gas infrastructure that sits idle most of the time, in order to back up an electrical system primarily powered by variable sources of renewable energy.
This “optimistic” reference case allows EPA to project that the regulations will require few power plants to be retrofitted with costly pollution control technology under its proposed emissions standards. The modeling and reference case also forecast precipitous declines in the cost of carbon capture and hydrogen co-firing technologies, which the new rule would designate as the best available pollution control technologies for coal and gas plants that continue to operate. In similar fashion, EPA’s new tailpipe emissions standards for new automobiles are only technically achievable if EVs account for well over 60% of new annual vehicle sales in the United States by the early 2030s. Last year, they accounted for 6% of new vehicle sales, predominantly in the luxury vehicle market.
These reference cases are not necessarily impossible or even improbable. Renewable energy generation has grown dramatically over the last decade, and plug-in hybrid and electric vehicle manufacturing and sales may be poised to see similar gains in this decade. But many challenges and uncertainties could also easily derail these forecasts.
Therein lies the rub. If the models and reference case are right, the result of the new regulations will be to cut emissions only marginally faster than they would otherwise fall, begging the question of why such a sweeping set of new regulations is necessary. If, on the other hand, the regulations are necessary to achieve deep emissions reductions, then the cost of the regulations will be far higher than proponents suggest.
Post-IRA modeling, in this way, performs a kind of political alchemy for climate advocates, transforming the techno-optimistic view that public policy can accelerate technological change into technocratic certainty that a “whole of government” commitment will transform the entire energy economy in the course of a decade.
Industrial Policy Fetish
The Biden administration’s whole-of-government marriage of large public technology investments with ambitious regulatory requirements has led many progressives to celebrate the return of industrial policy. But while slapping the label “industrial policy” on these efforts is no doubt thrilling, many seem to have forgotten why the label became problematic in the first place. The history of technocratic and centrally planned industrial policies has been decidedly mixed. There is much that can, and indeed has, gone wrong.
To be clear, we, along with our colleagues at the Breakthrough Institute, continue to believe that public investment in technology and infrastructure holds the key to US and global decarbonization. We have long defended those policies against skeptics on the right, who typically dismissed anything other than public funding for pure research as Soviet-style central planning, and have promoted the benefits of mission driven public innovation policies to the general welfare.
But what the Biden administration and its allies now propose goes well beyond the sorts of industrial policies that have historically succeeded in the United States. By combining money (prodigious subsidies for low carbon technology), models ( which tie subsidies to the administration’s climate targets), and mandates (emissions regulation based upon modeled projections), the administration is essentially attempting to establish top-down production targets by other means.
One need not be an acolyte of Hayek to see why this might not work out as planned. Consider electric vehicles. Generous subsidies for both consumers and producers are now on the table. Strict emissions regulations are looming. And automakers face heavy pressure to shift production to EVs from both Democratic policy-makers and ESG minded investors.
In the face of this, U.S. automakers are investing heavily in new EV production lines. But it is not yet clear what the market for these vehicles will actually be. Most EVs today sell to upper-income households that use them as second or third vehicles. EV prices have consistently risen for a decade despite falling battery costs. Battery costs have been rising over the last several years. And charging infrastructure remains, by all accounts, woefully inadequate.
It is possible that the industry will overcome these challenges. But if it doesn’t, U.S. automakers risk being saddled with production capacity they can’t fully utilize and vehicles they can’t sell profitably. In that event, the consequences for both the industry and U.S. taxpayers could be quite significant. In the worst case, it is not at all clear that either the nation’s climate objectives or its newfound openness to industrial policy will survive another major auto bailout, this time resulting from green subsidies and regulatory requirements.
To take another example, the IRA provides extraordinarily generous subsidies for new hydrogen production, which is presumed to be a critical tool for cutting emissions in difficult to decarbonize sectors of the U.S. economy like long distance and heavy-duty trucking, steel and fertilizer production, and refining. Already, there is a raging debate about what sort of clean hydrogen production should qualify. But the larger question, assuming substantial new hydrogen production materializes over the next decade, is whether there will be significant demand for all the new hydrogen production that the IRA will incentivize.
Today, most hydrogen is primarily used as an input for chemical refining and fertilizer production. If IRA-subsidized clean hydrogen is economically competitive, using it as a clean substitute for those processes can bring modest emissions benefits. But much IRA modeling projects an increase in U.S. hydrogen production of 50-100% by the end of this decade. Demand growth of that magnitude assumes new uses for hydrogen in industrial processes such as steel production or for sectors like heavy-duty trucking that today do not use hydrogen at all.
In these cases, clean hydrogen is not simply a substitute for hydrogen that is today produced by reforming methane. Rather, the switch to hydrogen in these sectors requires not only cost effective clean hydrogen but also the commercialization of entirely new industrial applications for clean hydrogen over the next decade that are not at present economically competitive using conventionally produced hydrogen.
Should those new uses fail to materialize, the other use case for hydrogen production appears to be specified in the EPA’s proposed power plant rule, which envisions the possibility of a future fleet of gas-fired power plants co-fired with hydrogen. In this future, the electrical grid counterproductively uses vast quantities of grid electricity to produce large amounts of hydrogen, which is then consumed to generate new clean electricity.
Except that nobody actually believes this scenario is likely. The EPA has designated hydrogen co-firing as a best available technology to mitigate carbon emissions from existing gas plants in order to evade the Supreme Court’s ruling that pollution control under the authority of the Federal Clean Air Act not reach “beyond the plant fence.” But virtually all involved in devising and promoting the new rule, including the EPA, expect that utilities will meet the new emissions standards through other means. To wit, under its proposed power plant rule, the EPA only expects hydrogen co-firing to account for 1.5% of overall power generation by 2040.
In both the EV and hydrogen cases, progressive climate advocates demanding maximalist IRA implementation strategies, with an eye toward remaking the political economy of energy and transportation as well as cutting emissions, should be careful what they wish for. A heavily subsidized green hydrogen industry might, for instance, lobby to further incentivize hydrogen co-firing in lieu of policies to accelerate renewable energy or nuclear deployment. An automobile industry saddled with unprofitable EV production capacity may support strong regulatory policies to require consumers to purchase its output. But it might also, as it did in an earlier era with SUVs, look to produce and market even larger and heavier electric vehicles that it might be able to sell profitably but bring little if any climate benefit.
The corn ethanol and biomass industries offer important cautionary tales in this regard. Both were once viewed as alternatives to fossil fuel dependence and counterweights to the power of the fossil fuel industry. Both have instead proven to be powerful rent-seeking interests that neither benefit the climate nor are easily displaced.
Policy As If Politics Mattered
Of course, it is questionable whether any of this will survive either the Supreme Court or a Republican administration. The current Court has not yet missed an opportunity to scale back the authority and discretion of federal environmental regulators, and it is difficult to see why it would stop now in the face of the ambitious climate regulations that Biden’s EPA proposes.
Even before the Court struck down the Barack Obama–era Clean Power Plan, moreover, the Donald Trump administration had summarily abandoned it, replacing it with its Affordable Clean Energy rule in 2018, which the Biden administration now proposes to scrap and replace with its new proposed power plant rules.
In Congress, meanwhile, Democratic Senator Joe Manchin has threatened to work with Senate Republicans to overturn new EPA regulations and even repeal provisions of the IRA that he personally authored if the administration fails to implement the law as he intended. In the House, the new Republican majority spent much of this year demanding the repeal of IRA clean energy investments as part of a deal to raise the federal debt ceiling, and is likely to follow up on that effort should Republicans seize control of Congress and the executive branch in 2024.
Given that IRA-related investment has flowed disproportionately into Republican regions of the country, it is possible that the economic opportunities associated with these policies will overcome culture-war antipathy toward them. But the wave of policies enacted by red states and municipalities in recent years to constrain renewable energy development—despite significant economic benefits associated with doing the opposite—suggests that economic self-interest may not win the day, particularly when the benefits are not necessarily shared broadly throughout the community and bring significant negative externalities (e.g. land use impacts) as well.
In the end, what executive action and budget reconciliation giveth, it just as easily takes away. Bidenomics may ultimately assure the president’s reelection. But significant majorities of Americans today hold a very pessimistic view of the U.S. economy, with Biden’s approval rating currently hovering around 40%. Much of the Democratic strategy for Biden’s reelection, rather, appears predicated on public revulsion at the prospect of a second Trump administration.
The president’s electoral challenges, of course, extend well beyond his climate agenda. But public misgivings about many aspects of that agenda are real, and if Republican political strategists are not already cutting ads about Biden’s “War on Gas” and his plans to ban pickup trucks, it constitutes something approaching political malpractice.
Progressive demands for far-reaching action to address climate change, in this way, continually run up against the reality that any significant policy action to address climate change must be sustained. The federal government has ping ponged repeatedly over the last three decades from climate action to reaction. With each round, the rhetoric and demands of both proponents and opponents has become more extreme; the case for action or resistance has gotten ever more entangled with the ideological commitments and electoral calculations of both parties; and policy and technology that once had some potential for sustained support across the partisan divide has become increasingly polarized. Bold executive action and massive reconciliation spending win cheers from progressives and environmentalists, but virtually assure that Republicans will attempt to dismantle them the first chance they get, deeply polarizing technologies and policies that were, until relatively recently, broadly popular across the political spectrum.
Moving Fast by Going Slow
It is not clear how proponents imagine any of this will work out. Progressive climate strategy, such as it is, depends on Biden winning a second term, EPA regulations surviving the Supreme Court, and dozens of further uncertainties resolving favorably over the course of a decade, including development of new critical mineral reserves, rapid scaling up of new supply chains, favorable geopolitical conditions, significant changes in consumer behavior, domestic siting and permitting reform at both the state and federal level, and major technological innovations and cost improvements across a range of technologies, many unproven commercially.
If this represents the last, best chance to address climate change, the chances are not good.
But it is, of course, not the last chance. If and when the latest manic progressive climate moment collapses of its own political, economic, and technological weight, there will still be opportunities to salvage important climate progress—a next best chance after the last best chance.
Making the most of it will require an honest appraisal of the ways in which maximalist climate ambition can undermine climate progress, and a concomitant determination to pursue climate policies that are robust to both the enormous uncertainties that attend long-term decarbonization of the U.S. economy and to the inevitable shifts in partisan control of the federal government that America’s two party system virtually assures.
Principles for Climate Policy
Five principles should guide climate policy moving forward.
1. Regulatory reform will accelerate U.S. decarbonization to a far greater degree than new emissions regulations.
One need only look carefully at the EPA’s analysis of its proposed new power plant emissions rules to see that changes to federal environmental regulatory statutes that are today major obstacles to the energy transition have far greater potential to drive U.S. decarbonization than new emissions requirements. The EPA estimates that proposed new power plant rules will cut U.S. emissions by about 36 million tons annually in 2035 and 19 million tons annually in 2045. By contrast, reform of federal permitting, siting, and transmission policies, consistent with adding new transmission capacity assumed in the EPA’s reference case, likely accounts for more than ten times as much emissions reduction annually by the early 2030s.
Nonetheless, EPA power plant and tailpipe regulations have clearly taken precedence for the Biden administration and the national environmental community, with the latter monolithically opposed to any meaningful reform of federal environmental regulatory policies beyond, perhaps, changes to FERC transmission rules.
2. Technology innovation should lead emissions regulation
If there has been one lesson repeatedly learned over 30 years of effort to figure out how to address climate change, it is that we are not going to regulate our way to a low-carbon future, in the United States or globally. Mitigating carbon emissions is not like regulating air pollutants. Fossil energy combustion is entangled with every facet of modern life, which means that economic, behavioral, and technological change ramifies through the emissions landscape in ways that are difficult to anticipate.
In the face of these complexities and uncertainties, regulatory humility will serve climate policy making well. Regulation will succeed when it focuses on accelerating technological readiness instead of merely assuming it. Well-designed performance and deployment standards can motivate R&D activity, coordinate industry-wide knowledge spillovers, and accelerate deployment of emerging technologies. Irrespective of the Supreme Court, taking seriously and not just literally the mandate to stay within the fence can keep emissions regulation tied to incremental improvements in commercial technologies rather than highly speculative assumptions about future technology development. Doing so can help clean up existing fossil based technology while establishing a modest economic incentive to shift to cleaner technologies when they are reasonably competitive economically.
That won’t do the heavy lifting necessary to transform the energy economy. But it doesn’t have to. That role must be played by public support for and investments in innovation—just as it has repeatedly over the last 70 years across multiple sectors of the U.S. economy.
3. Subsidies are for innovation, not emissions reduction
The purpose of public investment and subsidies should be to make clean energy cheap, in real, unsubsidized terms, not to serve as an inverted price on carbon.
Well-designed subsidies maximize dynamic, as opposed to allocative, efficiency and make themselves unnecessary in the long run. The $70 billion dollars in federal investments that led to the commercialization of nuclear power plants, or the $30–40 billion in investments in shale gas, would have appeared in contemporaneous economic analyses to be highly inefficient ways to cut emissions. Today, they represent historically cheap decarbonization investments, less than $5 per ton of emissions avoided based on our calculations from a few years ago.
But those subsidies came to an end over the course of a couple of decades, in the very early stages of commercializing nuclear and shale gas. Using subsidies instead as a brute force mechanism to broadly deploy relatively mature technologies can undermine both innovation and decarbonization.
Today, for instance, permitting and NRC reform, transmission infrastructure, and public investment in better energy storage, and clean generation technologies that can firm up variable renewable energy generation will be far more important to the continuing expansion of wind and solar energy generation than continuing subsidies. Renewable energy subsidies, in the absence of these enabling policies and technologies, can result in “cost-disease environmentalism,” incentivizing overbuilding of wind and solar generation and deflating its value while externalizing the cost of integrating wind and solar into the electrical grid onto utilities and ratepayers.
EV subsidies, similarly, might more aggressively target single vehicle households, public and commercial fleets, and high utilization drivers, with policy designed to incentivize automakers to develop electric vehicles at a price and range targeted at the broad middle of the American auto market, not the upper income households that dominate EV demand today.
Subsidies, in this way, are an important tool to drive innovation and early-stage commercialization of nascent clean energy technology when they are targeted at the nexus of technology cost and performance. But they are costly and highly inefficient when used to achieve emissions reduction by incentivizing a wholesale shift to new technologies.
4. Industrial policy and emissions policy are not the same thing
Following the IRA’s passage, it has quickly become clear that many of its provisions designed to scale up clean energy in order to rapidly cut emissions are undermined by other provisions designed to inshore supply chains and manufacturing, support high wage and union jobs, assure that marginalized communities benefit from public investments in clean technology, and reduce U.S. dependence on China’s currently dominant clean tech industrial capacity.
Foregoing Chinese supply chains and critical minerals will inevitably increase the cost of polysilicon solar panels, batteries, and electric vehicles in the short term. Requirements to use union labor and direct benefits to marginalized communities will increase the time and transaction cost associated with deploying critical low carbon infrastructure.
All of these objectives are legitimate goals for industrial policy. None of them appear consistent with the targets and timeframes the administration has set for emissions reduction and clean technology deployment. Maximalist commitments to short- and medium-term decarbonization, in these ways, undermine promises that clean energy investments will onshore jobs and manufacturing and expand decarbonization possibilities beyond the electricity sector, and vice versa.
5. Quiet climate policy will trump climate ambition
It is understandable why, in the face of the sheer scale of IRA investments, many have concluded that they mark a watershed—a qualitative shift in America’s commitment to address climate change based upon the large quantitative increase in public spending. But it is worth noting that the half a trillion dollars in estimated spending is prospective, based upon assumptions about how much clean technology, subsidized primarily through tax credits, will be deployed over the next decade.
The scale of public spending, in other words, is entirely dependent on whether the IRA tax credits survive subsequent administrations and Congresses, and whether the necessary technological developments, supply chains, infrastructure, and market demand actually materialize over the next decade such that firms are able to fully utilize the IRA tax credits.
Insofar as Biden administration climate investments survive a change in political leadership, it is likely to be those elements that were supported by members of both parties, namely the bipartisan IIJA, as well as some relevant policy in the CHIPS Act and energy investments enacted with strong bipartisan majorities in the dying hours of the 117th Congress in December of 2020. Insofar as much of the necessary enabling infrastructure is built over the coming decade, it will also likely require bipartisan coalitions to reform permitting and the NRC, address supply chain challenges, and deal with other obstacles to building the massive new infrastructure that major reductions in emissions will require.
Absent sustained Democratic control of Congress and the executive branch, the success of IRA implementation and emissions reduction over the next decade is likely to depend far more on the sort of quiet climate policy reflected in IIJA, the CHIPS Act, and Trump-era legislation supporting advanced nuclear energy and carbon removal than it is via loud, sweeping attempts to enact climate ambition through either regulatory fiat or partisan budget reconciliation.
The decision by Biden and Democrats to jam as much as it could into a partisan reconciliation package, for better or worse, cannot be undone. IRA is—with all its promise, imperfections, and contradictions—now the law of the land. But the administration still has choices to make, about how it is implemented and how it will use its executive and regulatory powers to augment those investments. In that endeavor, epistemic and political humility is likely to serve both the administration and the climate far better than technocratic hubris.