After the malaise of Build Back Better, Senate Democrats on Sunday passed a successor-of-sorts in the form of the Inflation Reduction Act (IRA). The act is rather humorously titled, considering it will have a negligible effect on inflation, according to the Congressional Budget Office (CBO). But the IRA is also hailed as the most important climate action in U.S. history. Perhaps, then, a better name for it would be the Emissions Reduction Act.
At first glance, the alternative name may seem appropriate. The bulk of IRA investments—$385 billion over 10 years—target clean energy and climate, with the main thrust being long-term extensions of production and investment tax credits for mature power technologies. The central estimates of three modeling exercises project that the IRA will drive an additional 10 to 15 percent greenhouse gas emissions reductions economy-wide by 2030, relative to 2005 levels, with the power industry taking the lead. Another analysis found 21 to 26 percent reductions from the IRA just in the power industry. These results might generally indicate the IRA’s effect if you presume that the private sector is emissions agnostic and that few constraints to build and integrate new technologies exist.
The reality, especially in the power industry, is that private markets are brimming with clean energy and carbon reduction appetite but cannot satisfy their hunger because of pervasive flaws in regulatory architecture. Hundreds of gigawatts of new zero-emission generators are massively backlogged, and it is getting worse. Industry cites a record volume of potential clean energy development, yet the rate of growth is slowing. This means voluntary clean energy demand goes unsatisfied, while states fall behind on mandatory renewable portfolio standards.
A closer look reveals that the main secular headwinds are all regulatory, putting aside episodic issues like supply chain disruption. Renewables developers say that new generator interconnection processes are the biggest barrier to renewables development, and the data make a strong case. The operator of the largest wholesale electricity market is so backlogged that it expects to start reviewing interconnection applications filed this past year beginning in 2026. Depending on who you ask in the industry, permitting/siting and transmission congestion/generator curtailment are jockeying for second and third place. Permitting alone takes four years on average and, in some cases, decades.
This does not even get into the additional intricacies of land use, grid reliability and expansion that renewable developers say are underappreciated. For example, outmoded electricity market design, reliability rules and utility procurement practices restrict the ability of unconventional resources to displace conventional power plants reliably and cost effectively. Even if regulators miraculously resolve all these, most relief will not begin for five to 10 years, given implementation and infrastructure timelines. That casts serious doubt on the marginal deployment effect of tax credits and other subsidies, especially in this decade.
Add it all up, and there are scant signs in the market that the hard costs of clean energy are inhibiting development. But there is ample evidence that regulatory quality dictates the pace of the energy transition. Clean energy deployment is a kinked regulatory hose, and subsidies increase the pressure.
These regulatory limitations are, in modeling speak, the binding constraints on deployment. Yet the aforementioned modeling exercises, plus a similar analysis by Moody’s Analytics, do not even reference whether they account for generator interconnection processes. Four of the five studies make no direct or implied reference to transmission congestion or generator curtailment, while three do not note any treatment of permitting or siting constraints. One study capped its model at double annual year-over-year growth to reflect siting and related issues, far above what project developers experience. The Princeton University assessment explained that constraints like siting, permitting and transmission expansion are hard to model and thus may limit energy growth rates in practice.
Clearly, what is hard to model matters most. These constraints are already binding and establish a ceiling for clean energy development far below what simulations expect. As such, it is hard to place much stock on the indicative—much less predictive—value of these studies.
Models are only as good as the assumptions behind them, no matter how sophisticated and well intended they are. These models hardly reflect the recent past, much less the future. For half a decade, subsidizing mature clean power technologies has been a peripheral driver of deployment and primarily constitutes a public-to-private wealth transfer. This was the case even when markets almost exclusively chose the least-cost technology, whereas in recent years market behavior reveals a healthy willingness to pay a clean premium. By severely discounting what motivates and constrains energy markets, such modeling overstates the effect of subsidies and mandates while discounting the performance of unfettered markets.
Going forward, models must be more than engineering exercises. They need to reflect lessons from observed behavior, such as the demand-side clean premium as well as transportation behavior, where new peer-reviewed evidence suggests that conventional electric vehicle subsidies increase emissions. Modeling needs to incorporate regulatory features accurately at a minimum and, ideally, assess alternative regulatory structures to determine what emissions impact reforms might have.
Assessing an array of prospective policies within the existing policy framework is critical to inform policymakers of the costs and benefits of different policy instruments and select the right ones. Doing so reveals that there are individual regulatory reforms with more emissions impact than the core energy subsidies of Build Back Better, which are largely replicated in the IRA. Those core subsidies conservatively cost north of $115 per ton of carbon abated, more than doubling estimates of their climate benefits. By contrast, regulatory reforms that enable energy development often have negative abatement costs; they are good economic policy before counting emissions benefits.
An optimistic take on the IRA is that it provides a guarantee that power markets will be motivated, while yielding emissions reductions from some smaller provisions. A realistic take is that the IRA mostly subsidizes what the private sector plans to invest in without remedying what inhibits those investments. Altogether, there is a real risk that the IRA spends hundreds of billions of dollars in a manner that harms social welfare (i.e., negative net benefits). It will be far less efficient and effective at reducing emissions than other policy options, especially in the power industry, where the IRA throws subsidies at a regulatory blockade.
As for now, the question remains: how much climate impact will the IRA have? Nobody has a good guess until we start modeling the real world. In the meantime, the best way to identify climate solutions is to have our ear to the ground.