What happens if the Inflation Reduction Act goes away?
“IT’LL BE somewhere between a scalpel and a sledgehammer,” was how Mike Johnson, speaker of the House, described the emerging Republican approach to the Inflation Reduction Act (IRA), Joe Biden’s signature climate law. Pressure from companies and congressmen with clean-energy projects benefiting from its subsidies in their districts (most are found in Republican counties) suggested surgical precision would prevail. But relentless pressure to abolish the IRA from the president, who is a fan of drilling, baby, drilling and denounced the law as the “Green New Scam,” pointed instead to brute force. The president reinforced this by dropping in on a private party caucus on May 20th to strong-arm waverers and threaten dissenters with a MAGA primary challenge. “They won’t be Republicans much longer…they’d be knocked out so fast,” he declared.
The House Ways and Means committee has already approved a draft law that, when it comes to the IRA, looks more like a sledgehammer. A bill resembling it could be passed by the full House before long. Then the Senate will get to work on its proposal. The two versions will then be reconciled by committee. The White House wants the compromise deal ready by July 4th, though August seems more realistic (a collapse of the whole effort remains possible, too). All this sausage-making raises two questions for energy policy. Is the IRA dead? And if it is, will that end America’s clean-energy boom and herald an sooty recarbonisation of the economy?
At first glance the bill makes seems more scalpel-like. The House proposal phases out renewable subsidies between 2029 and 2032, in line with the IRA’s original timeline. It includes seemingly innocuous rules on which institutions are eligible for tax credits and keeping China out of the energy supply chain.
The original law aimed to make clean energy politically popular in America by subsidising domestic manufacturing of solar panels, wind turbines and other components. Voters might not prioritise reducing carbon emissions, the theory went, but they do like domestic manufacturing. There ought to be some overlap with the new orthodoxy on economics.
Because the cost of tax credits depends on private investment plans, estimates of the bill’s effect come in a range rather than a dollar amount. The American Action Forum, a conservative think-tank, reckons the bill would trim about 60% of the IRA’s tax credits, saving $515bn by 2034. The Cato Institute, a libertarian think-tank which previously warned that the IRA’s uncapped provisions could cost $4.7trn by 2050, has called the Republican effort too timid. That makes it sound as if it falls short of the president’s aim to kill the IRA.
Look closer, though, and the proposal brims with rules designed to stifle clean energy. “It is a sledgehammer masquerading as a scalpel,” says Abigail Ross Hopper, head of the Solar Energy Industries Association, a lobby group. Wood Mackenzie, an energy consultancy, argues that the details will undermine the business case for “the vast majority of clean energy projects in the United States”.
Three provisions in particular stand out. First, the bill kills “transferability”. The IRA incentivised companies with a wide range of tax liabilities to invest in clean energy. The new bill eliminates this sweetener, even for technologies like nuclear power and carbon capture that are generally favoured by Republicans.
Second, provisions regarding “foreign entities of concern” (read: China) are written with calculated vagueness. While Biden-era rules narrowly restricted imports of Chinese battery cells, the new legislation is at once sweeping and impenetrable. Credits appear denied if “any component, subcomponent, or applicable critical mineral” is “extracted, processed, recycled, manufactured, or assembled” with forbidden foreign connections. Various such provisions guarantee years of regulatory confusion. Higher tariffs on Chinese-made components would come on top of that.
The third change is the timing of payments. Currently, projects qualify for tax credits from when construction begins but earn them only when operational. The new proposal awards credits only after operations begin. Given the vagaries of permit-granting, it can take years to start generating power. That will make it harder for new projects to earn credits.
Together, these provisions make the House proposal “unworkable”, says Rich Powell, head of the Clean Energy Buyers’ Association (CEBA), a trade group representing large electricity users (which include America’s big tech companies). Studies commissioned by CEBA predict that the repeal effort will lead to sharp increases in electricity prices, by roughly 10% in 2026 for industrial and commercial customers. Mr Powell warns that it “will make it harder to stand-up US manufacturing in clean energy,” which ought to bother a president obsessed with factory jobs.
If the outlook for the IRA seems bleak, what does that mean for energy and carbon emissions in America? Analysis by the Rhodium Group, a research firm, suggests that, under the IRA, America was on track to slash its greenhouse gases by 40% from their 2005 level by 2035. With a de facto repeal it will slow down, but may still manage a reduction of nearly 30% below the same benchmark (see chart). Even taking account of oil-friendly provisions in the current budget bill, such as the end of credits for purchasing electric vehicles and a repeal of more stringent fuel-economy standards for petrol vehicles introduced by the Biden administration, America will continue to decarbonise. Clean energy supply will continue to grow, but at a slower pace than it would have with the IRA.
The reason, explains Kevin Book of ClearView Energy Partners, a research firm, is that tax credits are only one factor. State-level regulations like “renewable portfolio standards” play an important role. Not only will these not be abandoned with the IRA, they may be strengthened in Democratic states. Such a “rollback rebound” took place in response to the first Trump administration’s attempted assault on green energy.
Price helps, too. The International Energy Agency, an official body, estimates that unsubsidised renewables already compete with, or beat, new fossil-fuel plants in many parts of America. Rhodium projects 342GW of renewable capacity will still be added by 2035, producing as much electricity (after accounting for intermittency) as roughly 100 nuclear plants.
John Ketchum, the CEO of NextEra Energy, a renewable-energy generator, recently offered investors this dose of what he called energy pragmatism. “Renewables are here today. You can build a wind project in 12 months, a storage facility in 15, and a solar project in 18 months.” Gas turbines, by contrast, require four years or more to acquire, permit and connect.
Last year, 90% of new power capacity in America came from carbon-free sources. Fresh data from the early days of Mr Trump’s second term confirm that over half of all electricity in March came from non-fossil sources for the first month on record. These may be dark days for green energy on Capitol Hill. Slowing the rate of decarbonisation is bad news. But sunlit uplands do still beckon. ■