Last year’s Inflation Reduction Act (IRA) faces renewed scrutiny with new, fiscally austere congressional leadership (see last week’s LEF). Meanwhile, evidence mounts that the IRA’s emissions promise was greatly oversold, while its price tag balloons to multiples of what Congress intended. With or without the IRA’s subsidies, the energy transition looks more like a trickle than a wave without massive regulatory reform. 

Ironically, the prospects for the renewable energy industry are dimmer now than when the IRA passed. Macroeconomic conditions, especially rising interest rates, have created sharp pressure on energy financing. Such cyclical conditions should self-correct, but persistent regulatory trends will not. 

Clean energy prices have doubled since 2018, spearheaded by a cocktail of inefficient permitting, generator interconnection and transmission regulation. These delay projects by a decade in many regions, threatening grid reliability as demand growth outstrips supply. The exception is Texas, which is exempt from much federal regulation and boasts efficient processes that unleash supply, lower emissions and augment grid reliability despite “remarkable load growth.” 

Pre-IRA, it was clear that regulatory roadblocks would dictate energy emissions. The environmental movement instead rallied around research that overlooked regulatory constraints and exaggerated the IRA’s benefits. Subsequent analyses revealed most benefits are unachievable in this regulatory climate. In hindsight, environmental interests prioritized the wrong agenda.

The result is that regulatory reform is far behind schedule. Recent permitting and interconnection reforms helped, but most critical reforms remain unaddressed. Clean energy continues to be a kinked regulatory hose. Subsidies merely increase the pressure. Predictably, capital markets see a “dislocation between policy intent and current investment,” causing worse bottlenecks and energy market dysfunction.

Regulation constrains mature technology investment beneath the unsubsidized level. This means the main provisions of the IRA—mature renewables subsidies—are primarily a wealth transfer from taxpayers to developers. Deployment additionality appears more evident from early stage technology, especially energy storage, and perhaps hydrogen and carbon capture. 

If the IRA were to accomplish its billing—drive innovation and emissions cuts through 2032 at a cost of $370 billion—it may be political water under the bridge. Red states will have disproportionately more subsidy recipients, which will dilute calls for IRA reform when the checks get cashed. Crucially, however, the IRA’s conditions for extending tax credits beyond 2032 are likely to be realized, costing trillions of dollars over multiple decades. 

This “unstable number with no reasonable cap” is on a collision course with an unsustainable public debt load, now on course for 129 percent of gross domestic product in 2033. Make no mistake, a fiscal reckoning is coming. When it does, cutting corporate welfare—green or not—is a likely priority to soften the blow to government expenditures with greater social benefit. 

All this begs the question of whether fiscal and environmental responsibility are compatible. Substantively, they have never held more in common. Politically, as the IRA honeymoon period fades, reality is setting in: Decarbonization requires profound regulatory reform, irrespective of subsidies we can no longer afford. 

The reform path might consider Texas as a regulatory north star. One fiscal reform option is to sunset subsidies according to the expenditure level Congress intended. Another is to slash subsidies for mature technologies (which are the bulk of IRA funds) and shift a fraction toward early technology applications (the minority of IRA funds) to achieve superior results at a fraction of the cost. A microcosm of joint fiscal and regulatory reform played out when permitting reform was folded into The Fiscal Responsibility Act of 2023, a potential blueprint for future regulatory reform in must-pass fiscal legislation.

Fiscal and regulatory reform is inevitable. The sooner we diagnose the faults with subsidy and regulatory regimes, the sooner we can work toward solutions. 




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