Why the cost of Biden’s climate law continues to rise

The estimated price tag for President Biden’s clean energy and climate agenda has effectively doubled since the Inflation Reduction Act was signed a year and a half ago.

Nearly all of the increase can be attributed to forecasters’ belief that the law will be more popular than they initially expected, in part because of the way the Biden administration wrote certain rules. That rising price tag could be good for reducing greenhouse gas emissions — and for the U.S. economy.

The Inflation Reduction Act, which Democrats passed on a party-line vote in the summer of 2022, includes tax credits and other subsidies for low-emission energy technologies aimed at helping the country transition away from fossil fuels.

Many of these credits are effectively unlimited, meaning the more people or businesses choose to claim them, the more they will contribute to federal deficits. The unlimited credits include incentives for manufacturers to build factories for solar panels or wind turbines, and for consumers to buy electric vehicles. Budget scorers must estimate how popular these credits will be in order to predict how much they will cost.

When the law was passed, the nonpartisan Congressional Budget Office projected that the energy components would add $391 billion to the deficit over ten years, from 2022 to 2031. These forecasts were adjusted upwards last spring and on Wednesday. The agency now expects that the energy incentives in the law for the period 2022 to 2031 will cost about twice as much. Over the next ten years, through 2033, the budget office expects the facilities to cost more than $800 billion.

Here’s what’s changed and why it matters for emissions, the economy and the budget.

The law has boosted investment in U.S. manufacturing facilities for a number of low-emission technologies, including solar panels, advanced batteries and the entire electric vehicle supply chain.

An investment tracker from the Rhodium Group, a consultancy that tracks energy and climate spending, and the Massachusetts Institute of Technology shows that companies spent $44 billion on producing clean energy in America last year, with more to come in the coming years. are significantly more planned. These companies will benefit directly or indirectly from the tax benefits in the climate law.

The popularity of these credits has surprised forecasters at the budget office and Congress’ nonpartisan Joint Committee on Taxation. Budget officials said Wednesday that they now expect the provisions to add about $205 billion more to the deficit through 2031 than they initially expected.

Forecasters now expect that consumer credit for electric vehicles, which is as much as $7,500 for an electric car or truck, will cost several times as much as originally expected. That calculation isn’t actually based on electric vehicle sales, which hit a record last year even as annual sales growth slowed starting in 2022. It stems from a pair of Biden administration rules intended to slow electric vehicle sales – and which the Budget Office expects will be quite effective.

The first regulation is in effect and expands access to credit for electric vehicles. The IRA does not allow every electric vehicle sold in America to qualify for the credit. It limits subsidies to cars and trucks that are largely purchased and assembled in the United States, to support domestic production. But there’s a loophole, codified by a Treasury Department regulation: car buyers who lease rather than buy their electric car can actually receive the full credit even if their car doesn’t otherwise meet the purchase requirements. and production requirements. It is no coincidence that lease prices for electric vehicles have risen enormously last year.

The second regulation is a proposal from the Environmental Protection Agency that would require two-thirds of new passenger cars sold in the United States to be all-electric by 2032. The budget office estimates that the regulations, once finalized, will encourage more Americans to buy cars. electric vehicles and cash in on the tax credit. They will also burn less gasoline, which will reduce federal gas tax revenue.

Rhodium models estimated last year that the IRA will result in a sharp reduction in U.S. emissions, but not enough to meet the country’s 2030 pledges under the Paris Agreement on climate change. The rising costs in the law suggest that this could lead to even deeper emissions reductions than these predictions.

A more effective Biden climate agenda could potentially catalyze more ambitious global action to cut emissions and prevent economically catastrophic levels of warming. Government officials have warned that the risks of inaction on climate are high for the economy and the budget. In 2022, the White House budget office estimated that unchecked climate change could reduce the size of the economy by as much as a tenth by the end of this century.

They also estimate that climate damage could force the government to spend an additional trillion or more in today’s dollars over the course of a decade on flood insurance, disaster relief, health care costs from heat waves and more.

The IRA was more than a climate law. It also raised some business taxes, increased subsidies for some people who buy health care through the Affordable Care Act and reduced federal spending on prescription drugs by allowing the government to negotiate prices with drug companies. It also gave more money to the Internal Revenue Service to crack down on corporations and high earners who have managed to avoid the taxes they owe. The net result, the budget office initially estimated, was a law that reduced deficits somewhat over a decade.

The rising costs of energy and climate incentives are now reversing that math. According to the budget office’s accounting, the law is on track to slightly increase deficits between 2022 and 2031.

Biden officials still argue the law will reduce grid shortages. They estimated this week that the IRS’s enforcement efforts will generate $432 billion between 2022 and 2031, which is $252 billion more than the budget agency’s forecast. Treasury officials say that, by their calculations, this is more than enough to offset the losses from a more successful climate effort and ensure that the law still reduces deficits.

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