As debates over what to include in the upcoming budget reconciliation bill are poised to begin, Congressional Republicans are making their views known regarding the 2022 Inflation Reduction Act (IRA). Despite passing with zero Republican votes, some Republicans want to uphold some of the bill’s tax credits for green energy. In a letter to Rep. Jason Smith (R-MO), chairman of the House Ways and Means Committee, 21 Republican representatives called for “any proposed changes to the tax code be conducted in a targeted and pragmatic fashion,” in contrast to simply eliminating all of its tax credits.
It’s no surprise that some Republicans have cold feet now that they have the opportunity to repeal the bill in full. The IRA’s tax credits have overwhelmingly benefited Republican congressional districts — which have received 85% of the investments and 68% of the jobs resulting from IRA-funded projects — making repealing them politically unpalatable in those districts.
In making their case for maintaining some of the tax credits, these Republicans claim that an “all-of-the-above energy approach” is necessary to equip the U.S. for the projected increase in demand for energy. They claim: “As energy demand continues to skyrocket, any modifications that inhibit our ability to deploy new energy production risk sparking an energy crisis in our country, resulting in drastically higher power bills for American families.”
House Republicans aren’t alone in declaring the IRA’s green energy tax credits as essential to meeting future demand; ConservAmerica, an environmentalist group, released a report prepared by the Brattle Group in February declaring that the “[e]limination of clean energy credits would raise customer rates, reduce economic growth and eliminate jobs.”
The report has several key findings worth examining:
- Due to increased demand from data centers, reshoring of manufacturing, electrification of industry, and growing oil and gas extraction, the U.S. is projected to need 50% more annual electric energy production in 2035 than it does today.
- There is less natural gas generation in development, and the turbine supply chain is limited.
- Eliminating clean energy credits would increase going-forward generation system costs by 14%, raising electricity prices for American consumers.
These findings paint a clear picture of the economic logic behind advocating for the tax credits: increasing demand for electricity, which natural gas generation will be unable to meet, requires that Congress uphold the tax credits to incentivize more solar and wind investment. Failure to do so means increased electricity costs for Americans and all the negative economic effects that entails.
However, an examination of the assumptions underlying this study is needed to paint a more complete picture of the economic impact of maintaining the tax credits. The study acknowledges as much in the “Qualifiers” section, where it claims that its analysis “does not account for economic benefits of alternative uses of tax dollars, deficit reduction, or taxpayer savings if clean energy credits were removed.”
Therefore, the conclusions of this report are applicable only if one assumes that an alternative situation in which the tax credits were removed would not lead to enough production to meet future electricity demand — an assumption that neglects how markets function.
If there is demand for increased electricity production, the higher price of electricity caused by that demand will induce producers to meet it by increasing the production of the best possible product at the lowest possible cost. Since natural gas is cheap, reliable, and already accounts for 43% of electricity generation in the U.S., it makes sense to assume that producers would build more natural gas power plants to meet electricity demand.
This would already be the case if not for regulatory burdens placed on natural gas production by the Biden administration, including the pause of liquified natural gas exports and restrictions on drilling. Though now reversed, the uncertainty created by these regulations delayed investment in natural gas infrastructure, leading to the current supply bottleneck cited in the report. Instead of subsidizing unreliable green energy sources, creating the conditions for increased investment in reliable energy sources like natural gas would allow producers to more efficiently meet electricity demand.
Utilizing tax credits to create more electricity supply from solar and wind leads to inefficiencies and high costs by diverting capital away from investments that would be more economical. Although there will be immediate benefits from increased production, there is a massive opportunity cost from producing less efficiently that will lead to less economic growth in the long run.
French economist Frédéric Bastiat distinguished the difference between the immediate and long-term costs and benefits of this type of economic decision as the effects seen and unseen. Good economic analysis takes into account the unseen costs imposed by investing money inefficiently — in this case, in solar and wind, which are inferior electricity producers — while poor analysis only examines the immediate benefits of such investment.
The opportunity cost of these poor investment decisions incentivized by the IRA is not small. According to the Cato Institute, the cost of the IRA’s energy subsidies could reach $4.67 trillion by 2050. If Congress refuses to repeal the bill, the amount of money wasted on investments not guided by the market will cost the taxpayers significantly over the next few decades.
Therefore, Congress needs to learn to look past the immediate benefits of spending IRA money if it wants to create the conditions for prosperity in the future. Failing to do so may help us meet electricity demand in the short term, but with higher costs and less reliability than if the act were repealed.
