The estimated price tag for President Biden’s clean energy and climate agenda has essentially doubled since the deflation bill was signed into law a year and a half ago.
Almost all of the increase is due to forecasters’ belief that the law will be more popular than they initially expected, in part because of the way the Biden administration wrote some regulations. This rising price may actually be good for reducing greenhouse gas emissions — and for the US 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 intended to help wean the nation off fossil fuels.
Many of these credits are essentially unlimited, meaning that the more people or companies that choose to claim them, the more they will add to federal deficits. The uncapped credits include incentives for manufacturers to build factories of solar panels or wind turbines and for consumers to buy electric vehicles. Budget raters need to 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 released an estimate based on work by the Joint Committee on Taxation, projecting that energy items would add $391 billion to deficits over a decade, from 2022 to 2031. He revised those forecasts upward last spring and again on Wednesday based on the joint committee’s calculations.
The new projections predict that the energy incentives in the law will cost about twice as much over that 2022-2031 period. For the next decade, through 2033, the budget office projects that the provisions will cost more than $800 billion.
Here’s what’s changed and why it matters for emissions, the economy and the budget.
Clean energy production is booming.
The law has supercharged investment in U.S. manufacturing facilities for certain low-emissions technologies, led by solar panels, advanced batteries and the complete supply chain for electric vehicles.
An investment tracker from the Rhodium Group, a consulting firm that tracks energy and climate spending, and the Massachusetts Institute of Technology shows that companies spent $44 billion on clean energy production in America last year, with significantly more planned for next years. These companies will benefit from tax breaks in the Climate Act, either directly or indirectly.
The popularity of these credits has surprised meteorologists. Budget office officials said Wednesday that they now expect the provisions to add about $205 billion more to deficits through 2031 than they originally projected, based on joint committee estimates.
Electric vehicles could also increase.
Forecasters now expect the consumer credit for electric vehicles, which runs as high as $7,500 for an electric car or truck, to cost many times more than originally expected. That calculation isn’t actually based on electric vehicle sales, which hit a record last year, even though annual sales growth has slowed since 2022. It comes from two Biden administration regulations intended to fuel more electric vehicle sales — and which the office budget expects to be quite effective.
The first regulation is in place and expands access to electric vehicle credit. The IRA does not allow every electric vehicle sold in America to qualify for the credit. Limits subsidies on cars and trucks that are largely sourced and assembled in the United States in order to support domestic manufacturing. But there’s a loophole, codified by a Treasury regulation: Car buyers who lease, rather than buy, their electric vehicles can essentially get the full credit even if their vehicles don’t otherwise meet the supply and manufacturing requirements . Not coincidentally, electric vehicle leases skyrocketed last year.
The second regulation is a proposal from the Environmental Protection Agency that could lead to two-thirds of new passenger cars sold in the United States being fully electric by 2032. The budget office estimates that the regulation, once finalized, will give incentivize more Americans to buy electric vehicles and cash in on the tax credit. They will also burn less gasoline, which will reduce federal gas tax revenue.
Concerted climate action could help the economy and the budget.
Rhodium modelers estimated last year that the IRA would lead to a sharp reduction in US emissions, though not enough to meet the country’s 2030 commitments under the Paris Agreement on climate change. The growing costs of the law suggest it could trigger even deeper emissions cuts than those projections.
A more effective Biden climate agenda could potentially catalyze more ambitious global action to reduce emissions and prevent economically catastrophic levels of warming. Administration officials have warned that the risks of climate inaction are great 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 one-tenth by the end of this century.
They also estimated that climate damage could force the government to spend an extra $1 trillion or more in today’s dollars over a decade for flood insurance, disaster relief, health care costs from heat waves and more.
But the climate law now probably adds to the deficit.
The IRA was more than a climate act. It also raised some corporate taxes, increased subsidies for some people who buy health coverage through the Affordable Care Act, and cut federal spending on prescription drugs by allowing the government to negotiate prices with drug companies. He also gave more money to the Internal Revenue Service to crack down on corporations and high earners who were able to avoid paying the taxes they owed. The net result, as the budget office initially estimated, was a law that narrowed deficits slightly over a decade.
The rising cost of energy and climate incentives is now reversing that math. The law, by CBO and JCT accounting, is on track to add slightly to deficits from 2022 to 2031.
Biden officials still maintain that the law will reduce deficits on net. They estimated this week that IRS enforcement efforts would bring in $432 billion from 2022 to 2031, which is $252 billion more than the budget office forecast. Treasury officials say that’s more than enough, by their math, to offset losses from a more successful climate effort and ensure the law continues to reduce deficits.
“The Deflation Act brings billions of private-sector capital off the shelf to invest in America,” White House spokesman Michael Kikukawa said Thursday. He said the law would “reduce the deficit over the long term by cutting wasteful spending by special interests, making big corporations pay their fair share and cracking down on wealthy tax dodgers.”
