Tech Policy Over Emissions Policy
TL/DR –
Congressional Republicans are expected to repeal significant parts of the Inflation Reduction Act (IRA) to offset the cost of extending the 2017 Tax Cut and Jobs Act, prompting alarm from climate and clean energy advocates who fear such a move could harm clean energy sectors. The majority of federal spending under the IRA is projected to go towards mature low-carbon technologies such as solar photovoltaics, onshore wind, and electric vehicles. Policymakers are advised to guide their decision-making on technological maturity when considering reforming the IRA and focus public spending on technologies and projects with high innovation value.
Republican Repeal of the Inflation Reduction Act: Implications for Clean Energy
Congressional Republicans are anticipated to repeal significant portions of the Inflation Reduction Act (IRA) under reconciliation procedures this term. This move, aimed at offsetting the budgetary cost of extending the 2017 Tax Cut and Jobs Act and other fiscal measures, has sparked concern among climate and clean energy advocates due to the potential harm to clean energy sectors. However, targeted reforms could potentially reduce the cost of the IRA while continuing to support energy innovation.
Projected Expenditures Under The IRA
The majority of federal expenditures under the IRA are projected to fund mature low-carbon technologies like solar photovoltaics, onshore wind, and electric vehicles. These technologies account for 60%-80% of anticipated spending over the 2025-2034 period. In contrast, less mature technologies such as green hydrogen, carbon removal, and advanced nuclear reactors are projected to cost significantly less over the next decade. Consequently, the repeal of public incentives for these promising but less mature sectors could greatly hinder technological progress and U.S. competitiveness without substantially reducing federal expenditures.
A New Approach to Energy Provisions of the IRA
Our proposal presents a different approach to the energy provisions of the IRA. Key changes focus on the Section 30D New Clean Vehicle Tax Credit and the Section 45Y and Section 48E “technology-neutral” tax credits for clean electricity production and investment. These revised tax credit structures can achieve significant fiscal savings of nearly $421 billion while still prioritizing U.S. energy technology leadership and critical minerals supply chain security.
45Y and 48E Clean Electricity Production and Investment Credits
Current incentives for 45Y and 48E phase out nationwide when the Secretary of Energy confirms that annual power-sector carbon emissions have declined below 25% of 2022 levels or by the year 2032. This incentive structure imposes significant economic distortions. Firstly, excessive spending on subsidies for commercially mature technologies like Solar PV and onshore wind, which comprise the majority of new growth in U.S. electricity generation and installed capacity. Secondly, the risk of subsidizing technologies to the point of causing price volatility and reliability impacts on the grid.
Proposed Changes to 45Y and 48E Credits
We propose phasing out Section 45Y and 48E credits for individual generation technologies when a given technology exceeds 5% of utility-scale generation within a given North American Electric Reliability Corporation (NERC) region. This change is estimated to reduce total federal spending on these credits to $60 billion, a decrease of approximately $361 billion relative to the Treasury’s estimate of $421 billion of clean electricity credit spending over the 2025-2034 period.
Additional Proposed Changes to IRA Provisions
We have several additional proposals for IRA provisions, including closing the leasing loophole for the 45W Commercial Clean Vehicle Credit, adjusting the domestic component assembly credit eligibility requirement, and maintaining the Section 45Q Carbon Sequestration credit. We also propose maintaining the 45V clean hydrogen production tax credit and repealing subsidies for first generation crop-based biofuels.
Conclusion of Proposed Reforms
In summary, our proposed reforms could save approximately $421 billion in federal spending. While technology-neutral policies and regulations have their benefits, we believe it’s important not to remain neutral to the point of inefficiency. Instead, subsidies should be used as a tool to maximize innovation and support nascent industries. This requires a targeted and evolving mix of technology-inclusive and technology-specific subsidies.
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