Experts React: The IRA One Year On
A short, spoken-word summary from CSIS’s Cy McGeady on his commentary with Kevin Book, Jane Nakano, Kartikeya Singh, and Janet Whittaker, Experts React: The IRA One Year On.
One year ago today, on August 16, 2022, the Inflation Reduction Act (IRA) was passed by Congress and signed into law. This landmark legislative package authorized vast new spending, primarily in the form of tax credits, in a wide range of energy and climate-critical sectors. Wind, solar, batteries, electric vehicles, and clean hydrogen are just a few of the key sectors receiving support. Though the IRA was scored by the Congressional Budget Office as authorizing $391 billion in energy and climate spending, private estimates run far higher, reaching up to $1.2 trillion over the next decade. Much of the impact of the IRA remains tentative since guidance from the Treasury Department for many credits remains unpublished. However, the vast impact of the IRA on markets, politics, international trade, and more is undeniable; below, CSIS experts detail the impacts so far and lay out the challenges ahead.
Pendulum Risk and the IRA
Kevin Book, Senior Adviser (Non-resident), Energy Security and Climate Change Program
A stranger to Washington might innocently think the congressional “reconciliation” process Democrats invoked to pass the IRA had something to do with getting along. Instead, when the majority party uses that process to bypass the minority party’s filibuster—as Majority Leader Chuck Schumer (D-NY) did last year—it tends to catalyze partisan pushback. This has raised questions regarding the IRA’s durability if Republicans gain ground in next year’s elections. At a minimum, a future president’s federal agency appointees could reinterpret the IRA, revising rules and guidance. And a GOP sweep of the House, Senate, and White House could set the stage for a new law curtailing or canceling programs and potentially rescinding unobligated IRA program balances.
Reinterpretation risks seem nontrivial after recent political pendulum swings led to energy and climate policy rewrites. Notwithstanding green job growth in Republican-leaning states, a future administration might try to establish new barriers to clean energy incentives. Judicial review offers one check on executive actions of this sort—federal courts could overturn final rules that exceed statutory boundaries. Political reality offers another. Some GOP lawmakers have defended energy tax credits in the past by characterizing them as tax cuts. A future president might reconsider revisions with potential to alienate allies, or which critics could deride as dampening economic growth.
Legislative risks may be overstated, not least because campaigning against a popular law can prove easier than rolling it back. Two earlier reconciliation packages remain substantially intact: Democrats’ Affordable Care Act (a.k.a. “Obamacare”) and Republicans’ Tax Cuts and Jobs Act. Legislative risks also may be directionally subsiding. In April, Republicans’ debt ceiling bill, the Limit, Save, Grow Act, would have broadly rolled back IRA tax credits. By contrast, the GOP’s Build It in America Act, which cleared the House Ways and Means Committee on June 13, would leave in place the IRA’s support for existing nuclear power, clean fuels, clean hydrogen, and clean manufacturing; it would also preserve the IRA’s extensions of legacy wind, solar, and biodiesel credits.
This is not to discount partisan overhang, however—even if the IRA ended up largely unchanged, policy uncertainty could still delay investment.
IRA Impact on Electric Reliability Risk, and the Policy Work Needed Next
Cy McGeady, Associate Fellow, Energy Security and Climate Change Program
The IRA has significantly accelerated preexisting trends toward decreasing reliability in U.S. power grids. Photovoltaic (PV) solar and onshore wind generation deployment is growing thanks to the extended and enriched production tax credits (PTCs). These resources deliver low-cost, carbon-free energy but create challenging grid conditions such as the increasingly steep net-load ramps experienced in Texas and California.
Battery storage, supported by investment tax credits (ITCs) in the IRA, plays a growing role in balancing these conditions and is flooding onto the grid in jurisdictions where market structures are accommodating. But with electric demand growth set to rapidly accelerate (via rollout of electric vehicles [EVs] and a mass electrification campaign), coal power plants set to retire at an ever more rapid pace, and interconnection queues for new generation resources clogged, the reliability balancing act grows increasingly tenuous.
On this point, recent testimony to Congress from North American Electric Reliability Corporation (NERC) commissioner Jim Robb leaves no doubt: “Current trends indicate the potential for more frequent and more serious long duration reliability disruptions, including the possibility of national consequence events.” The generation mix is undergoing rapid change, and integrating new technologies into markets and regulatory models is both politically and technically challenging. Policy solutions are needed.
Transmission planning and construction must be expanded and accelerated. Likewise, nuclear energy—fundamental for decarbonization and system reliability—needs support; deep reforms are needed at the U.S. Nuclear Regulatory Commission, as is funding for project development. Finally, over the near and medium term, natural gas will be increasingly entwined with renewable intermittency as the essential balancing agent; Congress needs to support critical investments in hardening the natural gas distribution network to extreme weather. This fall, legislators should seize the opportunity to deliver a follow-up package to the IRA that remedies its shortcomings and ensures the grid goes green rather than dark.
The U.S. EV Battery Supply Chain Effort: A Strong Start, but No Time for Complacency
Jane Nakano, Senior Fellow, Energy Security and Climate Change Program
Domestic supply chains for EV battery minerals and components are emerging thanks to several IRA provisions. While the Qualifying Advanced Energy Project Credit (48C) incentivizes investments in industrial facilities for mineral processing, refining, or recycling, the Advanced Manufacturing Production Credit (45X) stimulates the production of battery components and critical minerals. Meanwhile, the Clean Vehicle Credit (30D) incentivizes onshoring of EV supply chains through domestic content requirements. Together, the IRA has yielded EV battery-related projects at 21 sites in the United States, worth about $15 billion in the first 11 months. Additional projects have been planned at 42 domestic sites, worth about $33.8 billion.
Several challenges loom large, however. Mining continues to face public acceptance challenges, whether from local apprehension over sustainability or strong opposition to the building of new infrastructure. While the Defense Production Act funding was awarded for graphite mining in Alaska in mid-July, the Thacker Pass lithium project in Nevada is thus far the only mining project that has progressed since the IRA passage. Further down the supply chain, automakers, battery manufacturers, and investors await clarity from the Treasury Department on the nature and level of Chinese involvement allowed if an EV is to qualify for the 30D tax credit, starting in January 2024. High thresholds could significantly limit the number of qualifying vehicle models from the current menu of 34 models and slow EV adoption given China’s preeminence in the U.S. EV battery supply chain. This is most emblematic of the difficulty that the Biden administration faces in balancing increasing EV deployment for decarbonization and safeguarding national security through reduced dependence on China. The U.S. effort is off to a strong start, but there is no time for complacency given the heightening competition with China. The U.S. endeavor warrants continued bipartisan support if it is to reap economic, security, and decarbonization benefits for the nation.
Bolstering Capacity Domestically and Abroad
Kartikeya Singh, Senior Associate (Non-resident), Energy Security and Climate Change Program and Chair in U.S.-India Policy Studies
The success of the IRA lies in bolstering or operationalizing capacity both at home and abroad. Domestically, state and local governments must be savvy enough to attract the best firms from across the planet to invest in local clean energy technology manufacturing and deployment. To be able to do so requires subnational governments to stimulate institutional innovation in existing departments of commerce and industry. While state departments of commerce are focused on helping existing local firms reach global markets through trade delegations and managing market access through foreign trade offices, they must now recruit talent (or build capacity) to help court foreign firms driving the fourth industrial revolution. But plucking firms from foreign environments requires more than just financial incentives. To allow them to thrive, the entire ecosystem that supports them must be considered. Careful study and replication of how foreign jurisdictions have successfully stitched together robust innovation ecosystems to sustain the growth of such firms will be key. Undoubtedly, this will require commerce departments to strengthen ties with local research institutions. Having the U.S. Department of Commerce organize a summit akin to the flagship SelectUSA Investment Summit to focus on just IRA-relevant industries would bolster these state-led efforts.
Finally, the United States should aggressively support partner countries, particularly those in the Indo-Pacific Economic Framework for Prosperity (IPEF), to design and execute their own versions of the IRA. Failure to do so will only frustrate U.S. partners and drive inequity as a new global climate-aligned industrial era takes shape. IRA-style policies abroad will bolster U.S. national security interests, as they hinge on foreign partners having strong and stable economies. The State Department’s Bureau of Energy Resources is best suited to lead an interagency effort to help develop capacity in partner countries.
The International Response to the IRA’s Incentives
Janet Whittaker, Senior Associate (Non-resident), Energy Security and Climate Change Program
The evolution of the international response to the IRA’s carrots-based approach to stimulating climate action over the past year has been interesting to watch. Alongside the CHIPS and Science Act, the IRA marks a shift in the U.S. approach to industrial subsidies. Less than a year before the IRA came into effect, the United States, the European Union, and Japan were focused on reining in industrial subsidies, having relaunched a trilateral initiative on combating trade-distorting state interventions. A year on from the IRA being signed into law, the conversation in the United States and among certain allies around subsidies has substantially evolved—at least regarding two priorities, advancing the climate transition and supply chain security.
The initial response to the IRA, including from key trading partners like Canada and the European Union, was a loud outcry about the discriminatory and market-transforming nature of the IRA incentives (depending in significant part on domestic production requirements), prompted by fears that they would draw clean energy industries to invest in the United States to the detriment of domestic economies. Threats of trade action against the United States quickly followed.
Since then, there have been two significant developments: First, the Biden administration has engaged in diplomatic efforts to allay allies’ concerns about the IRA unfairly favoring U.S. businesses, including through facilitating their industries’ participation in the IRA. Second, economies like Canada and the European Union are assembling substantial funding packages and other incentives to avoid being left behind in the green economy and to promote their own supply chain security.
While the administration has encouraged others to follow its lead and commit more funding to the transition, trade experts have argued that escalating subsidies that incentivize localized production will impair global trade and impede the transition—especially in developing countries that cannot compete and need green investment. Likewise, the administration’s claim that the IRA’s subsidies will benefit all countries by lessening the price of clean technologies has its skeptics. A key question is how the United States and others will ensure that climate finance is directed to developing countries to enable their transition. In addition, the administration will need to navigate the possibility that its policy approach to emissions reduction in the IRA will lead to trade disputes, with countries including China continuing to call out the incentives as discriminatory and inconsistent with international trade rules.