The Inflation Reduction Act passed into law in August 2022. In just the past year and a half, the law already has begun driving low-carbon investments—but additional policies could help the United States reach the overarching goal of decarbonizing by midcentury. To run through some of the progress to date and to come, Resources for the Future (RFF) Fellow Aaron Bergman sat with Catherine Wolfram, a university fellow and member of RFF’s board of directors, to get her thoughts.
The Inflation Reduction Act (IRA) has been in force for the past year and a half, and the law’s provisions for clean technologies have begun to bear results. In January 2023, a solar-panel manufacturer invested $2.5 billion in a pair of facilities in Georgia as a result of the IRA. The US Department of Energy has loaned more than $10 billion to firms for building facilities that will manufacture batteries for electric vehicles, and loan applications in the agency’s queue total over $100 billion. Despite a year of high interest rates, a clean energy economy is growing.
Yet, experts project that the United States will fall short of its near-term emissions-reduction goal to cut 2005 emissions levels in half by 2030, to the tune of about 10 percent below the goal. Hence, policies to complement the IRA are likely necessary.
Familiar ideas for reducing emissions remain in discussion, such as a tax on carbon emissions, which many economists endorse. The idea of a carbon border adjustment mechanism has attracted interest in the US Senate, and the federal government has proposed regulations to target emissions from specific sectors of the economy. Debates over permitting reform, which could accelerate the pace at which new energy projects are approved and built, have spilled from wonkier circles into the mainstream.
So, what is the future of US climate policy in an IRA world? Resources for the Future Fellow Aaron Bergman spoke with Catherine Wolfram—an RFF university fellow, member of the RFF Board of Directors, and professor at the Massachusetts Institute of Technology, who also served at the US Department of the Treasury as the Deputy Assistant Secretary for Climate and Energy Economics—to examine the law’s influence on future policymaking in the United States and abroad, sector- and state-level efforts at decarbonization, and how RFF can inform climate policy moving forward.
Aaron Bergman: When the IRA was introduced and passed, it was kind of a whirlwind. Nobody expected it, and the IRA was the most significant piece of climate policy that the United States has ever seen. When you first saw that the IRA passed, what had been your expectation, and what was your reaction?
Catherine Wolfram: I had written it off. When the IRA first passed at the end of July, I was in a hotel room in Brussels, talking to folks about the price cap on Russian oil. I got a text from my boss about it. It hadn’t even been on my mind that something actually might come through. The next day, in meetings with our European counterparts, it was obvious that they were extremely excited that the United States was back at the table and taking climate change seriously.
In the fall of that year, a lot of debate revolved around whether environmental economists may have delayed progress on climate policy by overemphasizing the need for carbon pricing in efforts to decarbonize and mitigate climate change. For obvious reasons, I defend the environmental economics profession. But I also feel like we ended up at the mercy of one person’s preferences. If Senator Joe Manchin (D-WV) had wanted a carbon price, we probably would have gotten a carbon price. Drawing sweeping conclusions about the direction of US politics from one person’s preferences seems misguided to me. But that’s what you get with such a close vote; one person’s preferences can dictate a lot of it.
We now have a goal of reaching net zero by midcentury. The IRA has made a lot of progress toward that goal, but we still have a lot to do. What’s next for climate policy after the IRA?
I think we could envision a couple next steps. One, I’ve heard people make this point—which I think is valid—that the IRA makes decarbonizing the electricity sector really cheap, for instance. You could imagine states adopting increasingly strict renewable portfolio standards in a kind of virtuous cycle where, because of the IRA subsidies, accelerating toward goals at the state level becomes politically more possible. I think that’s one direction.
I also feel like the IRA does a lot with electricity, a lot with transportation, and maybe a bit with industry. It kind of depends on how you see carbon capture, utilization, and storage being adopted by industry. If the 45Q tax incentives aren’t taken up by industry, then the sector’s carbon emissions will continue to be hard to abate, with industry as the next frontier for climate policy.
More as hopecasting than forecasting: You could imagine a scenario in which the Trump tax cuts expire in 2025 as interest rates and deficits go up. We’ll want to put the tax cuts back in place, but we’ll be looking for revenue sources. I could imagine some kind of carbon price, at least in the industrial sector.
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I’d also say it’s important to think about how our approach to climate change mitigation relates to international trade. How US policies interact with European policies will be important going forward. Most of the rest of the developed world has some form of carbon pricing. The Clean Competition Act, a bill introduced by Senator Sheldon Whitehouse (D-RI), envisions something that resembles a carbon price—the bill proposes a border adjustment mechanism that’s paired with a fee (the bill doesn’t use the term “carbon tax”) on industrial facilities that are above the median in terms of pollution. It’s like a “dirty-emitters fee,” which ratchets down over time. You start at the top half of facilities, charging those that exceed median emissions, and over time expand the number of facilities that are paying the fee. I could imagine a future of focusing on decarbonizing the industrial sector, which, because of pressure from our trade partners, could be a carbon price.
Do you think that a sector-based approach, with a combination of the current policies and decarbonizing the industrial sector, can get us to net zero? Or will we eventually need to think about a more unified approach?
I don’t see the distinction quite so starkly. For example, if various sectors of the economy embrace carbon capture, utilization, and storage, we’ll see spillovers across the sectors, and if the industrial sector develops new methods of transporting and storing carbon dioxide, the power sector will get those benefits, too.
I do think that a sectoral approach is the most likely outcome, although I imagine that we’ll see spillovers across sectors.
I think it’s interesting that the IRA is a kind of continuation of laws that have passed. The law includes a lot of tax credits and incentives—a lot of carrots, and not a lot of sticks. But, in many ways, the IRA is a departure from the American Clean Energy and Security Act and other prior big climate bills. In addition to a sectoral approach, carbon border adjustment mechanisms, and maybe even a carbon tax in the industrial sector, all of which you’ve mentioned, what other sectoral policies could get the United States to our emissions goals in the post-IRA world?
I’ve been thinking a lot about methane emissions. From a trade perspective, the IRA contains references to methane from the oil and gas sector that are more aligned with what some of our trading partners are doing. I can imagine some kind of agreement with the Europeans, or an even broader set of countries, on a methane border adjustment policy based on the regulations that the US Environmental Protection Agency is working on and the methane fee that’s in the IRA.
A sector-based approach could be easier and a good glide path to something broader. For example, if the United States works with Europe on methane, we could make a lot of progress on methane emissions in some of the most highly polluting countries. In doing so, the United States also could gain experience working with Europe on border adjustments, climate change, and trade issues.
This doesn’t exactly answer your question about meeting US climate goals, as the IRA already has some serious methane provisions, but a trade agreement could lead to some very meaningful reductions worldwide.
I think the sector-based approach lets us have those conversations without having to talk about the whole entire climate change problem, and the whole economy, and all the carbon emissions in the world. Maybe we could consider it a lower-stakes way to have some productive conversations.
The electricity sector has a huge menu of policy options, and you’ve talked about decarbonizing the industrial sector. What policies have potential to decarbonize the transportation sector?
I think that the Infrastructure Investment and Jobs Act, and its investments in charging stations, are important. The economics literature suggests that a dollar spent on charging infrastructure is very productive—more productive than a dollar spent on vehicle subsidies. We’re already employing this option, but I would definitely include more charging stations in the list for future consideration.
I don’t see much potential for a carbon price on gasoline. We might get to that eventually, but a lot of sensitivity surrounds gas prices, which makes a carbon price on gas somewhat unrealistic.
The IRA looks a lot like it’s a technology policy. Billions of dollars of investment are in the IRA, including demonstration funding and other subsidies for deployment. What do you think of subsidizing technology in the hope of pushing down prices?
Theoretically, both a carbon price and a subsidy could get us to similar outcomes in terms of innovation. But if you think like an investor for, let’s say, direct air capture or small modular reactors, it’s probably a lot easier to estimate the amount you’ll get from a direct subsidy—whereas with a carbon tax, you need to work a bit harder to figure out what the wholesale power price will amount to, and how that figure translates into profits.
I think the certainty of the amount of money that you’ll get under the subsidy, and the IRA’s 10-year time span, could be quite valuable for nascent technologies.
Credit: Drew Angerer / Getty Images
It’s also encouraging that the tax credits for renewable electricity are technology neutral starting in 2025; I think that’s a step in the right direction. If small modular reactors (or some other technology we haven’t even heard of yet) become cheap, then that’s the technology we’ll build.
Also, at a non-economic, moral level, I think it’s important to recognize that the energy transition is going to hurt some people and that we need to do what we can to support them. I think some of the add-ons in the IRA do that.
Do you think this focus on technologies is short term, or do you see it as being part of climate policy for a while?
I think technological innovation is important, because technologies are one of the main things we can export to the rest of the world. Figuring out how to influence the behavior of suburbanite Americans doesn’t necessarily do much good in driving down the costs in Vietnam and China and India.
On the other hand, if we can figure out how to make cheap hydrogen and use hydrogen for steel production in a way that’s valuable for the rest of the world—that will be something we can export. I think that’s another advantage of going the technology route.
Another feature of the IRA has been a policy of industrial onshoring, which may not make our trading partners happy. What do you think this means both for US climate policy going forward and for international cooperation on climate policy?
I think the climate and trade issues are super important. I fear a negative outcome. In a worstcase scenario, all this could lead to the dissolution of the European Union Emissions Trading System, because the big member states really want to subsidize, but the smaller member states can’t afford it; meanwhile, European governments are getting political pressure from industries that are trying to compete with subsidized counterparts in the United States. Those reasons could make it hard to sustain the EU Emissions Trading System. I hope this outcome doesn’t come to pass—and the Europeans seem committed—but we’re not making it easy for them.
I think and hope that outcome is unlikely, but I do think we need to pay attention to these climate and trade issues and figure out a way to work productively with our trading partners. If we’re pushing technologies down the learning curve, let’s make sure that we use trade to diffuse those technologies and that they’re adopted in other parts of the world.
We’re in a regime now in which we’re paying lots of money out of the federal government to lots of people, which creates an entrenched interest. What does the transition out of the subsidy regime look like? At some point, will we need an economy-wide policy? Or is that something that may never happen—or, at least something we won’t need to worry about for a while?
I see this sector-based approach as a kind of gateway to an economy-wide strategy. For example, we might impose a carbon price in the industrial sector, which raises money, which in turn persuades people that we could find revenue in other similar ways, as well. Getting to a carbon price may be easier with baby steps rather than a wholesale flip.
I also think about carbon border adjustment mechanisms. If Canada imposes a carbon border adjustment mechanism, and US industry winds up facing those prices when we export to some of our big trading partners, but the Canadian Treasury collects that money and not the US Treasury, then the United States will have lost an opportunity. I could see carbon border adjustment mechanisms starting to look compelling if those types of policies progress globally.
The economics literature suggests that a dollar spent on charging infrastructure is very productive—more productive than a dollar spent on vehicle subsidies.
Catherine Wolfram
Another thing to note on subsidies: To date, we actually have had carbon pricing, but just in the form of renewable portfolio standards. We’ve basically been funding those types of mandates at the state level. Essentially, we’ve been funding the climate transition on the backs of utility ratepayers, which is regressive. The IRA gets taxpayers to foot some of the bill, which indicates that, from a distributional perspective, we’re moving toward solutions that are more progressive. Even if we’re moving away from imposing costs and toward subsidies, I think the distributional implications are something to pay attention to, as well.
And one further thing on subsidies: The media has been reporting “$369 billion” offered in the IRA as though it’s a super precise number and that the US Treasury is going to write a check for that exact amount. I think it’s important to note that these tax credits aren’t capped, and there’s a wide range of uncertainty. For example, if lots of barriers to permitting prevent construction of new renewables, or renewable developers have trouble with transmission interconnections, or interest rates go up, then we won’t see very much new wind and solar, and the government won’t be issuing many tax credits. Clean energy technologies are particularly sensitive to the cost of capital—more sensitive to capital costs than natural gas. To the extent that interest rates keep going up, the investments that the IRA is subsidizing could get more expensive.
I think the true cost of the IRA could end up being a lot more than $369 billion—or, it’s looking unlikely, but it could be less than that.
On the other hand, the impacts of the IRA on the macroeconomy aren’t that big. You can imagine that the impacts could be big in certain parts of the country that invest a lot in wind or solar. We can draw an analogy to the shale boom: The expenditures on fracking weren’t big enough to move the needle on unemployment nationwide, but in certain sectors and in certain regions, the impacts were large.
What can RFF do to move the climate policy conversation forward?
I’d rephrase that as, What can RFF continue to do? I think RFF’s modeling is extremely valuable. I’m a fan of RFF’s Carbon Scoring Project; having concurrence between the fiscal cost and the emissions estimates is important. The work that RFF has done on carbon border adjustment mechanisms, and ongoing work on hydrogen-fuel technologies and the 45V tax credit introduced in the IRA for hydrogen, is all super worthwhile.
I think hundreds of economics papers will be written on the IRA, so it’s an exciting time for the profession.
A version of this article appeared in print in the Spring 2024 issue of Resources magazine.
