Policy Oct 13, 2022
What the New Climate Bill Means for the U.S.—and the World
The Inflation Reduction Act won’t reverse inflation or halt climate change, but it’s still a big deal.
For the majority of Americans who are concerned about climate change, it’s easy to feel that little is being done to combat rising temperatures. But there’s reason for optimism in the climate provisions of the 2022 Inflation Reduction Act (IRA), says David Besanko, a strategy professor at Kellogg.
“There are a lot of very important, innovative climate incentives to build a robust climate economy,” he says.
In a recent The Insightful Leader Live webinar, Besanko explains why the IRA is a big deal, particularly when it comes to spurring an economy that grows while at the same time combating climate change. He makes this case despite the fact that, on its own, the bill will have only a minor impact on global temperature rise.
What Is in the Inflation Reduction Act?
The IRA includes provisions covering health care, taxation, and climate.
In terms of health care and taxes, it raises money via new corporate taxes, including a minimum corporate tax and taxes on share buybacks. It also allows Medicare to negotiate or cap the prices of certain drugs and boosts IRS enforcement of tax scofflaws. On the spending side, it extends pandemic-era premium subsidies on American Healthcare Act insurance plans.
Overall, the impact on inflation and the deficit will be minimal. The bill is estimated to trim a mere 0.1 percent from inflation starting around five years from now. And the $238 billion that it will cut from the deficit in a decade represents just 1.38 percent of a projected $17.3 trillion debt by 2021.
The act’s biggest line item is $235.67 billion in spending on clean energy tax credits, Besanko estimates. Other climate-related investments total over $83 billion.
Even so, the impact on the climate—at least on the surface—seems almost negligible. The IRA is predicted to reduce total global temperature rise by just 0.1-degree C. “There are still a lot of other emissions coming from China, Europe, India, and the rest of the world. The IRA will help but won’t make a big dent. It will require much more in terms of global cooperation,” says Besanko.
Still, Besanko uses a Biden-ism to describe the magnitude and importance of the IRA, which he politely abbreviates as “a BFD.”
For one, the bill does cut U.S. greenhouse gas emissions by roughly 2.5 percent per year, or 42 percent by 2030. That goes a long way toward halving carbon emissions from the U.S. by 2030, helping to meet the ambitious climate goals of the Biden administration.
And there’s potential for the bill to have a much broader global reach. The IRA helps to boost the U.S.’s credibility in climate diplomacy: as other countries make decisions about whether and how to invest for their future energy needs, their leaders will look to the U.S. to see what is happening here. The IRA could also spur development of emission-reduction technologies, which could then be exported to developing markets.
All of this begs the question: How will the IRA reduce emissions—and potentially galvanize the global landscape around clean energy?
One way the IRA will boost production of clean energy is by expanding the use of the production tax credit, or PTC. Right now, renewable-energy facilities that generate power using wind, solar, or some other technologies get a credit that reduces their corporate taxes. The IRA expands that popular program to new projects that get underway by the end of 2024. Plus, starting in 2025, the PTC along with a new investment tax credit, will become technology-neutral. This means that the incentives apply to any technology with greenhouse-gas emissions of zero or less, such as new energy storage facilities.
Besanko likens the broadly applicable tax credit to a carbon tax. With a carbon tax, an energy producer has to pay for each ton of carbon it emits. Under the IRA, companies that emit greenhouse gases forgo subsidies that would otherwise boost their bottom line.
“That creates incentives for fossil-based facilities to reduce emission such as by installing carbon-removal technologies or building new natural-gas plants with direct air capture. It’s a more powerful incentive than the PTC, which was already powerful.”
A second climate provision looks even more like a carbon tax, but it applies to methane. Right now, the roughly 2,200 facilities in the U.S. that produce, process, and transport methane emit 78 million metric tons per year of the powerful greenhouse gas. Starting in 2024, they will pay an emissions fee of $900 for each ton, which will rise to $1,500 after 2025.
A third example of why the IRA is a big deal for the climate economy, Besanko says, is the $27 billion in funds for competitive grants to finance greenhouse-gas reduction projects. The funds will go to state, local, and tribal governments as well as nonprofits, with more than $15 million targeting low-income and disadvantaged communities.
Besanko says that communities will be able to put together grant funds, private capital, and the tax-credit provisions in the IRA to build projects that are socially valuable but would not otherwise be financially viable.
Finally, it’s important to note that the IRA boasts a number of tax and investment credits to support climate-friendly tech advances that are not yet as proven as solar and wind. Many of those, including hydrogen made from renewable energy, direct air capture of carbon dioxide, sustainable aviation fuels, and advanced manufacturing, can be exported to developing countries to enable them to reduce their own emissions.
A Wide Range of Social Benefits
Besanko points out that investing in clean-energy production will bring a host of social benefits, too. For instance, it will allow the U.S. to better control its own fate in the global energy markets and help buffer consumers from oil-price shocks.
It could also generate a lot of jobs. An analysis by Princeton University shows that the bill could translate to employment growth in the various energy sectors by a net of 2.3 million jobs by 2035.
Finally, the IRA could bring widespread health benefits. Lowering sulfur dioxide and nitrogen oxides emissions, as well as deadly pollutants like lung-penetrating particulates, will reduce risk of premature deaths from a wide range of diseases. Tackling climate change will also save lives from heat-related deaths and causalities of extreme weather like drownings during floods.
Add it all up, Besanko says, and “the social benefits of this bill exceed the social costs by a lot.”For more details, watch the full webinar above.
Melody Bomgardner is a freelance writer in Bend, Oregon.