Avoid the Phase-Out Fallacy Trap

TL/DR –

The Inflation Reduction Act’s (IRA) green energy subsidies are reportedly being considered for a phase-down by Congressional Republicans. However, historical evidence shows such subsidies are not temporary and are often extended, thus destabilizing the electric grid and becoming a financial burden. The subsidies distort electricity markets, leading to negative wholesale power prices and forcing conventional power companies to operate at a loss.

Why Temporary Government Programs like Energy Subsidies Never Phase Out

Economist Milton Friedman said: “Nothing is so permanent as a temporary government program.” The saying holds true for energy subsidies. Taxes, credits, and production mandates may be introduced as temporary solutions, but history proves these ‘temporary’ extensions persist, year after year.

Despite Congressional Republicans considering a “phase down” of the Inflation Reduction Act’s (IRA) green energy subsidies, history suggests these policies will endure. The only way to protect taxpayers from endless subsidies and maintain the electric grid stability is to end these tax credits now.

The High Cost of the IRA’s Tax Credits

Treasury Department’s analysis reveals the high cost of the IRA’s tax credits – the Investment Tax Credit (ITC) for wind and the Production Tax Credit (PTC) for solar. They are the most expensive energy-related tax expenditures, predicted to cost $31.4 billion in 2024 alone. The Cato Institute projects the IRA’s green energy subsidies could reach between $2.04 trillion and $4.67 trillion by 2050. Furthermore, repealing the IRA’s green energy tax credits could return $851 billion to federal coffers over the next decade, as estimated by the Tax Foundation.

Impact of the IRA’s Tax Credits on Electric Grid Stability

These tax credits not only distort electricity markets – even turning wholesale power prices negative – but also forces conventional power plants to operate at a loss under such conditions. Consequently, many of these baseload generators have been forced to shut down, even as electricity demand is expected to soar due to the growth of AI data centers and manufacturing. This causes loss of reliable generation capacity, leading to a supply-demand imbalance, which leaves major energy users scrambling for dedicated power sources.

Why “Temporary” Tax Credits Persist – An Historical Overview

The persistence of subsidy programs like the Wind Production Tax Credit, Solar Investment Tax Credit, Biomass-based Diesel Tax Credit, and federal Electric Vehicle (EV) tax credits highlight a clear pattern: policies designed to sunset endure. Despite their designs originally including phase-out plans, these programs have been extended and expanded multiple times.

Why IRA Energy Subsidies May Never Phase Out – Without Immediate Action

If federal energy subsidies are not repealed now, they may never be. The longer these programs persist, the more politically entrenched they become. Factors like path dependency and vested interests, evolving purposes of these subsidies, “market stability” arguments, and the reinvention of these programs contribute to their persistence. These subsidies create economic inefficiencies and misallocate capital. The only solution to control wasteful, distortionary spending is through complete and permanent repeal.

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