Low-Energy Fridays: Credit Downgrades Pressure Clean Energy Subsidies

The United States has lost its last AAA credit rating. Given that the nation’s fiscal trajectory hasn’t improved since the other two times the nation’s credit was downgraded, this is hardly surprising. After the last downgrade in 2023, I wrote a Low-Energy Fridays explaining its relevance to clean energy—an issue worth revisiting in light of the latest news.

Put simply, despite what many politicians desire, the United States has a finite capacity to spend money. Exactly how much can be spent depends upon various factors, but as anyone who has taken out a loan knows, creditworthiness (i.e., the confidence that loans can be repaid) is key to determining how much debt can be incurred. This is especially important when the nation is running a deficit, as the United States has been for over two decades. Eventually, we will reach a point where there are fewer willing financiers of our debt, or they demand higher returns. Debate regarding the long-term suitability of running a continuous deficit shows a distinction between how budget hawks and spending advocates view the issue.

For a long time, interest rates were so low—and the U.S. credit rating so strong—that there was a compelling argument for the United States to rack up significant debt as a means of boosting the economy in the short term. Think of this like a business taking out a loan. By contrast, budget hawks have largely viewed more downside from incurring debt that must eventually be repaid because of its effects on long-term growth. From my perspective, the budget hawks have it right. When the government spends a lot of money, there is a “crowding out” concern that ends in spending displacing—rather than complementing—private-sector investment and hurting long-term economic growth. But when debt was cheap, the pro-spending camp made a convincing argument to politicians who favor near-term victories.

Clean energy subsidies were no exception to this debate. When the Inflation Reduction Act (IRA) was first passed, the estimated cost of included energy subsidies was $271 billion. That cost has gone up every year and currently sits at $1.2 trillion. Even so, there is no shortage of IRA defenders—perhaps because the downsides of unsustainable spending have not yet manifested.

But with the latest credit rating news, the worm seems to be turning. Back in 2023, I argued that the downgraded credit weakened the defense of IRA subsidies due to increased pressure to cut spending— particularly to preserve lower tax rates for individuals, which voters prioritize over clean energy subsidies. This is exactly what’s happening now, as the House’s budget reconciliation bill proposes about $500 billion of IRA energy subsidy curtailment.

Historically, the House tends to be more aggressive about cutting subsidies than the Senate, so we’ll see what final bill emerges. But the drop in credit rating weakens the argument Senate Republicans may have for retaining IRA subsidies as the cost of servicing the nation’s debt increases. To wit, the latest projected interest payments for 2025 are $952 billion, making this the first year we spend more on servicing our debt than on national defense.

In other words, the pressure on Congress to justify its expenditures is increasing each year. Clean energy subsidy debates are no longer simply a matter of policy effectiveness; instead, they’re about whether such subsidies are worth cutting into other major spending priorities like Social Security, Medicare, and low-income assistance. In fact, that exact dynamic seems to be coloring current budget debates. And while voters like clean energy subsidies when presented on their own, they are far less supportive when policy is presented with tradeoffs.

The latest credit rating news ultimately illustrates that “subsidize clean energy as much as possible” is not a sustainable climate policy, even if it were effective. If we want to reduce emissions, the policy strategy that led to the IRA is increasingly less attractive amid the nation’s unsustainable fiscal trajectory.