The Climate Bill That Keeps On Giving

The Inflation Reduction Act could be mucher bigger than originally anticipated

When the Inflation Reduction Act (IRA) was signed into law last August, politicians and press alike highlighted the fact that it included $370 billion in climate investments. This made it the largest piece of climate legislation ever passed in the United States.

But this headline figure—$370 billion—that so many journalists, myself included, reported at the time was in many ways misleading. That’s because the federal government didn’t earmark $370 billion for clean energy investments and climate action last fall. They wrote a blank check.

What many people failed to comprehend at the time was the fact that two-thirds of the tax credits and subsidies in the IRA—including many of the credits that are expected to drive the most emissions reductions—were uncapped. 

This isn’t how all tax credits work. When the federal government subsidized electric vehicles a decade ago, they offered a $7,500 tax credit, but capped it at 200,000 per manufacturer. When companies like Tesla exceeded this threshold, consumers could no longer claim a credit. City and state rebates are often even more finite. When my hometown of Denver offered rebates on heat pumps and e-bikes, they had a set number to dole out based on a fixed budget. They sold out in a matter of days.

With capped tax credits, the total impact and investment is limited. But the IRA is different. There is no limit on the true size of this bill. Instead, the total size will depend on how many solar panels, wind turbines, heat pumps, and other clean energy technologies Americans collectively decide to manufacture and install over the next decade. It’s more like a 401k matching program than a one-time investment.

“The IRA is the biggest climate bill in American history,” Alisa Petersen, a program manager at RMI told Inside Climate News. “But much of it will hinge on the extent of people actually utilizing the tax incentives in that bill.”

Take the clean electricity tax credits for example. The bill offers developers a series of incentives to build more solar, wind, or other clean energy production facilities. But these tax credits aren’t capped, and unlike the ones that preceded them, they don’t phase down over time. That means if the price of solar falls faster than anyone expects—which is very much a thing that happens—and it suddenly makes sense to build solar farms in new markets, developers will likely leverage more tax credits. 

According to an analysis by Credit Suisse earlier this year, the clean electricity portion of the IRA could be three times larger than the federal government initially projected. 

But this spending delta is nothing compared to what Credit Suisse found when they looked at how much the federal government could spend on clean energy manufacturing over the next decade. 

The IRA was as much an industrial policy bill as it was a climate bill. In crafting the legislation, the Biden administration wanted to spur a manufacturing revival in America by incentivizing the construction of factories that would build everything from EV batteries to solar panels to wind turbines.

Since the bill became law one year ago, dozens of companies have announced plans to build new factories. Many, like Hanwha Qcells, a South Korean solar company who plans to build a $2.5 billion factory in Georgia, have cited the IRA as the reason for their investment.

“Investment is moving forward five times faster than ever before,” Jason Grumet, the CEO of the American Clean Power Association, told the New York Times earlier this year.

The Congressional Budget Office (CBO) originally projected that the federal government would spend $31 billion on advanced manufacturing tax credits and subsidies. According to Credit Suisse, the true number could be as much as $250 billion, more than 8 times the original estimate.

These credits will drive down clean energy costs significantly. As Credit Suisse writes in their report, “IRA subsidies would make US solar modules the cheapest in the world, even lower than China made modules from 2025 to 2030.”

Look at each of the most important provisions in the IRA and you’ll see the same pattern. The CBO originally estimated that they would spend $5 billion on clean hydrogen incentives. But more recently, the Department of Energy has said that the true number could be closer to $100 billion. 

Estimates of the bill’s total size range widely, from the CBO’s $380 billion to a recent report by Goldman Sachs, which put the number at $1.2 trillion. 

Ultimately, the true size of the IRA—and in turn, the total amount that America invests in climate action over the next decade—will depend on the actions and decisions of millions of people across the country.

Coming up next week: Enhanced geothermal, explained

There’s been a lot of news about enhanced geothermal recently. And for good reason: It’s a very promising clean energy technology that could provide huge amounts of 24/7 carbon-free power. There have also been some notable breakthroughs this year.

Next week I’m planning to publish a story about enhanced geothermal based on interviews and deep research. If you enjoyed my recent story about battery storage, I think you’ll like this one.

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