The Inflation Reduction Act’s Energy Provisions Require Reform to Benefit Society

Few laws have proven as contentious as the Inflation Reduction Act (IRA) of 2022. The IRA was passed exclusively by Democrats, with Republicans voicing concerns over its cost. Following the November 2024 election, Republican leadership eyed repeal or phase-out of individual IRA provisions in 2025. As expected, some Republicans are tempted to defend IRA’s energy subsidies as their constituents have begun receiving government compensation. Things appear to be coming to a head as congressional Republicans work through budget reconciliation, where IRA’s subsidies for wind power, solar power, and electric vehicles (EVs) may be cut or reformed. The key takeaway is that IRA’s emissions abatement levels were vastly overstated upfront, while the costs exceed the climate benefits in hindsight.

Environmental Context

The IRA, despite its title, was never intended to have significant inflation benefits. Rather, it was presented as the preeminent climate action in U.S. history. Therefore, the primary benefit worth examining is emissions abatement–specifically for wind, solar, and EVs.

Four ex ante analyses were conducted to inform Congress of the IRA’s merits. The central estimates of three assessments projected that the IRA would reduce emissions 10 to 15 percent by 2030, relative to 2005 levels, primarily from the power industry. The other analysis found 21 to 26 percent reductions in the power industry alone. This, rightfully, left Congress with the impression that the IRA would have a relatively large emissions abatement benefit. However, the abatement estimates of the four were wildly optimistic because they did not accurately model what constrained or motivated capital markets. 

Before the IRA passed, markets were motivated to invest robustly in wind and solar. At the time, hundreds of gigawatts of proposed wind and solar plants – enough to power a whole region of the country – planned to come online with no expectation of additional subsidy. Renewables demand was already outpacing supply, with voluntary demand surpassing mandatory state renewable portfolio standard (RPS) compliance and on track to double mandatory compliance by 2030. Thus, the IRA was appropriately categorized at its inception as a wealth transfer from taxpayers to subsidy claimants, as my colleague Philip Rossetti testified before the Select Committee on the Climate Crisis in 2022. 

In the months before the IRA passed, it was clear that the primary impediment to renewables was not financing but a massive regulatory backlog that has since grown worse. A Brookings Institution survey of wind and solar developers revealed that the leading impediments to wind and solar projects from 2016 to 2023 were artificial barriers to entry, and that insufficient funding was the lowest cause of project cancellation. An analogy is that renewable energy is a kinked regulatory hose. For wind and solar, subsidies turn up the hose pressure more than they change developers’ technology choice or deployment rate. 

Renewables deployment trends and updated projections indicate the deployment constraint is regulatory, irrespective of subsidy level. The Energy Information Administration’s 2025 renewables projections are closer to their “no-IRA” scenario in 2023 than their scenario with the IRA. Some large energy consumers issue requests for proposals for renewables procurement that come back empty. 

Power sector emissions trajectories were (and remain) dictated by the extent of permitting, siting, generator interconnection, market liberalization, and transmission reforms (i.e., barriers to capital stock turnover). One of the ex ante report’s authors conducted another assessment after the IRA passed, finding that most of the IRA’s hoped-for emissions abatement in 2030 could not be met without “more than doubling the historical pace of electricity transmission expansion than over the last decade.” Similarly, new R Street analysis finds that permitting reform may achieve emissions cuts in excess of overly optimistic IRA abatement estimates. Overall, IRA subsidies are having far less effect on abatement and renewables deployment than first anticipated, while other policy factors play a larger role. 

Unlike renewables, high cost is a primary barrier to EV adoption, which suggests a possibly greater subsidy effect. However, the leading constraint on EV deployment when the IRA passed was charging issues. Furthermore, expected emissions abatement of EV subsidies also declined sharply when accounting for the behavioral characteristics of EV adopters. IRA’s transportation-related subsidies, including EVs, are extremely inefficient emissions abatement approaches, with an estimated cost of over $1600 per metric ton of CO₂ . 

Altogether, these conditions imply IRA emissions abatement well below expectations. The ex ante analyses vastly overstated benefits and understated regulatory problems, but they also neglected to consider costs. A recent R Street assessment found that the subsidies for wind, solar, and EVs clocked in at an abatement cost of $375 per metric ton of CO₂. This is multiple times higher than any credible social cost of carbon, indicating that the IRA leaves society worse off on a climate-only cost-benefit test. 

Of course, the IRA has other environmental benefits like particulate matter reduction that warrant consideration. However, factoring these co-benefits must be taken with a grain of salt because those pollutants are regulated separately to meet ever-tightening health-based standards under the Clean Air Act.

Energy Context

The IRA’s proponents tend to tout its job creation and downward effect on energy prices. A recent study noted that repealing certain IRA tax credits would add $83 per year to average residential electricity bills. However, unlike emissions reductions, the IRA’s downward pressure on electric rates and prices should not be considered an economic benefit. A subsidy merely shifts costs, in this case mostly from ratepayers to taxpayers. Interestingly, the redistributional effect of the IRA subsidies is also extraordinarily regressive, with the vast majority of beneficiaries in the top one percent of income earners.

Similarly, the creation of jobs should not be considered an economic benefit, irrespective of the political optics. Labor is considered a cost in cost-benefit analysis. If public policy merely sought to create jobs, the government could arbitrarily subsidize millions of positions, only to impose costs on taxpayers without creating any benefit. Rather, economic opportunity is created by policy reforms that increase productivity, such as liberating markets through permitting and interconnection reform. Such actions lower costs and create job opportunities where labor is the most valuable. Regardless, the net effect of the IRA on the U.S. employment rate is likely small. 

The IRA’s critics have asserted that it will raise energy prices, compromise mobility, diminish grid reliability, and impose excessive costs. The first claim is incorrect. Subsidies unequivocally lower prices, as noted previously. It is unclear how subsidies for EVs would compromise mobility – they reduce the price of one mode of transportation – in contrast to a policy like EV mandates, which restrict mobility options. 

The IRA’s effect on reliability is more nuanced. One prominent perspective is that renewable energy subsidies undermine the economics of conventional power plants, which have steadier output than renewable sources. However, reliability services are remunerated through electricity market design, most commonly through a capacity accreditation process. This assigns a far greater reliability value for conventional plants than weather-dependent wind and solar, and the gap widens with higher levels of renewables integration. To the extent renewables – subsidized or otherwise – drive conventional plants into retirement, it is only where they substitute for the reliability services of legacy plants in a portfolio context. This is why reliability authorities focus on ensuring market design accurately reflects reliability attributes, regardless of subsidy levels. 

Grid reliability concerns usually result from resource shortfalls, yet subsidies increase market-clearing quantities. However, oversupply can also create reliability problems, as grid operators must precisely balance supply and demand instantaneously. Subsidies for producing electricity from renewables, which already have zero fuel costs, incentivize them to operate even when prices are negative during grid oversupply events. Initiatives to improve the dispatchability of wind and solar plants – where they curtail output when ordered to by grid operators – have largely mitigated oversupply from utility-scale renewables. 

The final claim – that the IRA imposes a high cost – is without doubt. The Tax Foundation projected that the IRA’s green credits will cost $1.16 trillion from 2025 to 2034. The Cato Institute placed the upper bound at $1.97 trillion over the same time period. The objective policy question is whether the benefit exceeds this cost.

Verdict

Based on direct cost and benefit, the IRA’s wind, solar, and EV subsidies likely create a sizable loss in social welfare. It is economically inefficient environmental policy under normal fiscal conditions. However, the fiscal condition of the United States is exceptionally poor. This means the opportunity costs of subsidies are even higher as the country faces an inevitable era of austerity. 

This concern is exacerbated by the fact that IRA’s subsidies may continue indefinitely, well beyond the 10-year budget window that Congress initially accounted for. This raises the total cost of the IRA from the hundreds of billions of dollars first anticipated to multiple trillions. An analysis by the Cato Institute placed the cost at roughly between $2 to $5 trillion by 2050. 

Whether essential economywide austerity measures come in the 2020s or early 2030s is unclear, but it is clearly within the IRA-relevant timeline. The Congressional Budget Office projects federal budget deficits to reach $20 trillion over 2025-2034 as federal debt reaches 116% of gross domestic product. 

Further, the policies that matter more for emissions reductions and clean energy deployment are more likely to get passed with a commitment to subsidy phase-out. Federal conservatives are more prone to resist generator interconnection, transmission, and permitting and siting reforms, such as the Energy Permitting Reform Act of 2024, because they would exacerbate IRA expenditures. Grassroots angst toward wind and solar has surged since the IRA passed, with a wave of anti-renewables bills hitting state legislatures in 2025. State and local permitting and siting restrictions may present the greatest long-term headwind to renewables deployment. The IRA carries an indirect cost – an increased likelihood of state restrictions and a lower likelihood of productive federal infrastructure policy reform – that is unquantifiable in conventional cost-benefit analysis.

Reform Prospects

Ex post IRA scholarship has emphasized implementation practices. A prominent paper in 2024 suggested government failure is not a necessary feature of industrial policy, including the IRA, yet governance practices under the current and prior presidential administrations contradict this assertion. Overall, IRA scholarship presents limited evaluation of the complete merits of IRA and reforms that would improve social welfare. This has left an informational void during a period of high political interest in IRA reform. However, several think tanks recently produced IRA reform proposals within prevailing political constraints. 

The Tax Foundation produced an analysis that estimated the federal cost savings of four reform options, including: 

1. Full repeal of IRA green energy tax credits, saving $851 billion from 2025 to 2034. 
2. Repeal of credits for EVs, refueling property, clean fuel production, and those in the residential sector totaling $295 billion in savings within the budget window. 
3. Repealing add-on subsidies like prevailing wage and apprenticeship requirements, plus replacing the investment tax credit (ITC) with the production tax credit (PTC), would yield $207 billion in savings over the budget window. 
4. A repeal of most credits, leaving the nuclear and carbon sequestration credits, and including the PTC replacement option would achieve $746 billion in savings over the budget window. 

The R Street Institute produced an IRA modification proposal designed to maximize environmental benefits while eliminating most taxpayer liabilities. The proposal would sunset the most expensive and least beneficial subsidies, namely those for mature technologies, and introduce more efficient subsidies for innovation purposes in early-stage technologies. This would retain an estimated 66% of IRA’s initial abatement benefits while lowering their costs by 64% (reduce costs from $1.2 trillion to $412 billion). It would improve social welfare by increasing innovation and lowering subsidy abatement costs from $375 per ton to $198 per ton. 

Similarly, the Breakthrough Institute issued an IRA reform proposal aiming to reduce total federal spending and pivot spending from mature technologies (60 to 80% of anticipated spending from 2025 to 2034) to nascent technologies. It primarily retains credits for carbon sequestration, nuclear, clean hydrogen, and advanced manufacturing. It modifies vehicle credits and repeals, phases-out, and selectively re-allocates remaining subsidies. This nets an estimated $421 billion in federal savings. 

Finally, a recent report from C3 Solutions and the Abundance Institute proposed swapping out tax credits for specific energy technologies for full and immediate expensing, including for research and development expenses. Full expensing improves economic performance and creates environmental benefits at lower cost to taxpayers.

Forward Directions

Before looking forward, it is worth reflecting on the last few decades of energy subsidy policy. In previous decades, scholars had mixed thoughts on whether subsidies for infant industries would improve society on balance. The literature has long demonstrated that innovation subsidies are most effective when made predictable, outcome- or performance-based, and include sunset provisions. Congress established renewables tax credits in the 1990s to aid the infant industry. In the 2010s, Congress and industry agreed to phase-out the subsidies as the renewables industry reached maturity and, by its own admission, did not need them to compete. 

The late 2010s into this decade saw a sudden legitimization of subsidies for mature clean technologies. Some scholars argued it was a necessary second-best policy to reduce emissions, paired with optimism in overcoming government failures. Politically, sentiment among voters and officials shifted away from the fiscal discipline of decades past, despite a deteriorating fiscal outlook. Meanwhile, the industry engaged in “rent-maintenance” behavior to secure subsidies after the industry matured. This provided a backdrop ripe for IRA, which serves as a flagship experiment in new industrial policy. 

Today, the high cost of IRA’s wind, solar, and EV credits – especially given the imploding U.S. fiscal condition – suggests that energy subsidy reform is a matter of when, not if. IRA proponents and opponents would be wise to pursue a politically durable phase-out schedule for subsidies for mature technologies. Recent reports of a 2028-2030 phase-out window are on point. This would expedite the tax stability industry seeks and improve the likelihood of other policy reforms with superior emissions abatement that actually benefit the economy. These include limiting public spending to innovation policy and fixing myriad government failures that hinder an increasingly green invisible hand. A national commitment to fiscal and environmental responsibility charts the path to a cleaner and prosperous future.