Inflation Reduction Act and Climate Change: Could it lead to a forty-percent reduction in emissions?

The short answer is yes…the Inflation Reduction Act (IRA) could decrease emissions by forty percent by 2030. The long answer, however, is much more complicated and nuanced. Understanding the possible historic decrease in emissions requires us to consider the ideological logic behind the measures included in the bill.

Under the non-binding Paris Climate Accords, the US committed to slashing its emissions in half compared to 2005 levels by 2030. When entering office, President Biden reaffirmed the US’ commitment to the argreement. Last week the adminstration announced the IRA, which would be a first step in making food on these climate targets.

Without legislation, the US is on track to reduce its emissions by between seventeen and twenty-five percent by 2030. The IRA, which will include over $300 billion to combat climate change, builds on this status quo, bringing the total emissions reduction up to forty-four percent by the end of the decade.

Energy Wire reported on modeling from the Rhodium Group, which modeled the changes included in the bill could lead to a reduction of emissions between thirty-one and forty-four percent –around six to nineteen percent more than the status quo. This is a wide range in emissions reduction, so we will examine what the package includes.

Climate activists continue to push for total decarbonization

First, to get Senator Joe Manchin on board, Senate Democrats had to include some measures that increase oil and gas production –undermining the efforts on climate from the jump. In describing the legislation, the White House said it “makes the largest investment in history in combatting climate change and increasing energy security.” By increasing energy security, the finds for the perpetuation of new fossil fuel production permits and facilities. Climate activists disagree with this approach as it continues our dependence on fossil fuels, which are already responsible for one in five deaths globally.

In response, Executive Director at 350 Wisconsin, John Greenler, called the proposal “a mixed bag,” but that the organization was “pleased to see meaningful forward movement with advancing clean energy production and related (solar, wind, EVs…) here in the United States.”

“At the same time, we need to not turn our backs on the fact that there are significant concessions to the fossil fuel industry in this proposal. These cannot be left unaddressed, and we will continue to pursue a no new fossil fuels infrastructure approach, as was committed to by President Biden,” noted Greenler.

Tax credits and private sector investment

When evaluating a policy, it is crucial to look at two aspects, measures that incentivize a positive change through increasing the benefits (i.e., carrots) and those that have the same outcome through a punitive legal change (i.e., sticks). The package is full of sticks and carrots. Some carrots focus on tax credits for electric vehicles, particularly for consumers. In contrast, others are focused on pushing the private sector towards renewable energies to invest more of their resources in the growing industry. If climate change presents a negative externality caused by economic activity, the literature says it must be internalized as a cost. Once the producer feels the cost of their polluting behavior, they will change course and turn to cheaper power sources.

If the IRA is passed renewable energy companies will see tax critical credits extended for ten years to make these products more competitive in the market. Credits will be larger for companies that invest in hiring workers in the US as well as have a focus on environmental justice within their production process. Close eyes will be needed on these requirements, considering the level of human rights violations rampant within the mining industry.

Sticks and carrots for the oil and gas industry

While there are certain carrots for oil and gas companies, there are some sticks as well.

For instance, the bill would increase royalties on these corporations when drilling on federal land. Many of these royalties have not been increased since the 1920s. The expected increase in revenue could top more than $13 billion, which is the estimated loss in revanue faced by the government over the last ten years because they failed to increase royalties on public lands to 18.75 percent.

Oil and gas companies have said this will kill the sector, but it is critical to mention that this industry is not struggling. Exxon Mobile, a US-based oil and gas company, raked in more than $17 billion in the second quarter of 2022. In a quarter of a year, one company made more in profits than the government could make in revenue over a ten-year period. The surplus value that years of corporate lobbying have been able to purchase is astounding. By increasing the royalties, the federal government can reinvest some of those profits into programs and projects that decrease energy costs for consumers and increase energy security without continuing our fatal dependence on fossil fuels.

Small oil and gas companies have complained that this will unfairly advantage larger companies. This may be true, and it would be up to the government to implement a progressive royalty system. Such a proposal is not even on the table because the lobbyist representing the largest companies in the sector are not looking to make any assistance to the little guys.

Response from the oil and gas sector

The American Petroleum Institute’s Chief Advocacy Officer Amanda Eversole said, “While there are some improved provisions in the spending package,” the organization opposes “policies that increase taxes and discourage investment in America’s oil and natural gas.”

The Democrats cannot say this is not their intention because they do not say the act will ensure that investment within the sector remains at its current levels. Instead, the act aims to increase energy security and independence, which in a warming climate should focus on efficiency and non-polluting forms of energy, both for commercial and residential use.

The juxtaposition of climate change leading to record warming and draught levels across the globe and the US’ reluctance to sign onto a plan that does not pander to the oil and gas lobby.

There is no way to compete with the fossil fuel industry if the prices of renewables do not come down and therefore, become competitive. The industry is heavily subsidized which gives it an artificial advantage in the market.

According to Generation 180, around eighty percent of the more than $20 billion in subsidies go to oil and gas; the majority of funds, $14.7 billion, come from the federal government through tax credits and other loopholes.