Low-Energy Fridays: Would IRA repeal end clean energy growth?

Congress is teeing up a budget reconciliation package, and a big outstanding question is the fate of the clean energy subsidies (in the form of tax credits) expanded under the Inflation Reduction Act (IRA). Opponents and supporters alike are stressing over this issue, so it’s worth thinking about the most extreme scenario of full repeal to better understand the magnitude (or lack thereof) from the policy change. Analyzing the IRA subsidies in such a manner shows that, while they have a statistically significant effect on emissions, the cost is so high that they are inefficient as climate policy.

First, let’s look at the full cost of IRA subsidies and how much money could be saved if they were repealed. The biggest elements are clean electricity subsidies, which predominantly go toward wind and solar power. These are projected to cost approximately $504 billion over the next decade. The Production Tax Credit is especially noteworthy, granting a cash payment for each kilowatt-hour of electricity generated by an eligible project for 10 years and costing $304 billion over the next decade. Other notably expensive subsidy categories are transportation-related subsidies for electric vehicles and clean fuels ($234 billion) and clean manufacturing ($214 billion). Overall, the IRA energy subsidies cost about $1.2 trillion. If the subsidies were fully repealed, the potential revenue raised would be $851 billion (some subsidies are already committed, and Congress is unlikely to retroactively repeal subsidies).

Cost aside, are these subsidies actually helping? Initially, the IRA was estimated to have a big impact on clean energy growth, given the massively increased subsidy expenditure (pre-IRA annual energy subsidies were only about a third of what they are now). Later studies cast some doubt on the effectiveness of the subsidies owing to deployment constraints like permitting. Notably, a survey of clean energy developers found that financing difficulties—the one challenge IRA subsidies can ameliorate—was the least likely reason for a project to be cancelled. Permitting and siting were the most likely reasons.

This is important because early estimates of the IRA’s effectiveness assumed no challenges to new clean energy deployment and that clean energy would replace fossil fuels. Newer data shows that the capture of the subsidies is less efficient. For example, one way to claim subsidy eligibility is to “repower” a wind farm, which means installing new turbines. While newer wind turbines can generate more power than old ones, such subsidization goes toward replacing other renewable energy rather than fossil fuel use as subsidy proponents had initially argued.

But anecdotal evidence and speculation aren’t particularly useful. Data is more important, and our best source of it is the Energy Information Administration (EIA). After the IRA’s passage, the EIA prepared two projections of emissions and clean energy growth: one with the IRA and one without. The projected emissions difference over the long term was 360 million metric tons of lower annual carbon dioxide emissions, or about 8 percent. This is significant, but not game changing for climate issues.

It should also be noted that the EIA has struggled to estimate clean energy growth, largely owing to the complexity and frequent alteration of subsidies. For what it’s worth, it looks as if the EIA has overestimated the effect of the subsidies in the near term. Their latest projections (which include IRA subsidies) are closer to their earlier no-IRA estimates than their with-IRA reference case. In other words, the subsidies are giving much less of a boost to clean energy growth than initially projected.

This begs the question of the cost-efficiency of the IRA subsidies. After all, an 8 percent improvement is amazing if it’s free, but terrible if it costs so much that nothing else could be done. R Street assessed that cost and found that the IRA subsidies have an overall abatement cost of $375 per metric ton of carbon dioxide avoided. There is variance on the effectiveness of the subsidies, but compared to the exceptionally high social cost of carbon under the Biden administration ($190 per metric ton), the subsidies are more likely to be a net-negative compared to avoided climate change.

A past edition of Low-Energy Fridays explained that some subsidies do have merit, such as when they address innovation constraints or genuine market failure. But as far as most of the IRA subsidies go, it’s a worthwhile question as to whether they are a good deal and perhaps worthy of additional scrutiny.

Ultimately, it will be up to Congress—or more accurately, congressional Republicans—how to proceed with the IRA subsidies. From a policy perspective, the subsidies’ costs outweigh their benefits, making them inefficient policy. Additionally, since survey data reveals that financing is rarely a constraint for clean energy, there’s a strong case to be made that some of these subsidies have little positive effect on emissions. Regardless of what direction Congress goes, the data indicates considerable room for improvement on the effectiveness of the IRA subsidies.