The Cost of Biden’s Climate Tax Credits Is Soaring
Fast growth in clean energy and EVs boosts estimates by $428 billion while cutting emissions
President Biden’s 2022 climate law is driving faster-than-expected growth in electric-vehicle purchases and clean-energy projects, doubling the projected cost to taxpayers while potentially accelerating emissions reductions.
The Congressional Budget Office this week bumped up its projection of the law’s climate tax credits through fiscal year 2033 by $428 billion, putting an official stamp on what public and private analysts had been saying for the past year. The law, known as the Inflation Reduction Act, is expected to spur up to $3 trillion in total public and private investment over the next decade.
The CBO’s increase is driven by a flood of clean-energy factory announcements, proposed environmental regulations that would push more buyers to electric vehicles and rules allowing leased electric cars to qualify for generous tax breaks with fewer restrictions. The list of corporate investment pledges got bigger on Tuesday, when Toyota said it is spending $1.3 billion to expand EV production at a factory in Kentucky.
When enacted, the IRA was expected to include $271 billion in tax breaks over a decade, though that can’t be compared directly to the $428 billion increase. The CBO said this week that the IRA’s budgetary effects are still highly uncertain.
The tax credits’ popularity and increasing cost could fuel concerns about rising government budget deficits and make the energy incentives a big target for some Republicans if they take full control of Congress and the White House next year.
But many analysts think it will be difficult for lawmakers to repeal subsidies that are popular among a swath of businesses including fossil-fuel, manufacturing and transportation companies. The subsidies are designed to increase energy security and have been boosting job creation, particularly in Republican districts.
“These dollars will soon be flowing quickly out the door to projects and factories across the U.S., with a really strong concentration in red states,” said Eric Scheriff, who leads energy and sustainability advising at Capstone, a Washington-based firm that tracks regulatory and legislative issues. “That’s going to do a lot in terms of members supporting keeping these credits around.”
Proponents of the law, which passed without any Republican votes, argue that the higher expenses are worth it because they will reduce the long-term costs associated with climate change and extreme weather, including major storms, droughts and wildfires.
Companies announced more than $100 billion in clean-energy manufacturing facilities in the year after the climate law passed.
“The Inflation Reduction Act is bringing billions in private-sector capital off the sidelines to invest in America,” said White House spokesman Michael Kikukawa, who said the law’s other provisions, including expanded tax enforcement, mean it will reduce budget deficits in the long run.
One potential risk is that some companies will try to abuse the system or reap benefits without changing their behavior. Critics say that much of the money for wind and solar-power projects is subsidizing investment that would have happened anyway.
“It’s not like there was no interest in wind, solar, offshore wind. There was, and we had some existing credits. They just put them on steroids,” said Douglas Holtz-Eakin, a former CBO director who now runs the conservative American Action Forum.
When Congress passes laws, it asks its official nonpartisan experts—the CBO and the Joint Committee on Taxation—to estimate the fiscal impact.
The task is sometimes relatively easy and accurate, like predicting the cost of a $2,000-per-person stimulus check. The IRA’s tax credits were much harder to forecast because they required estimates of new industries like clean hydrogen and guesses about consumer behavior while interest rates and prices were rapidly changing.
Tighter rules for products like electric cars and hydrogen as well as project delays could shrink the amount of tax credits claimed in the coming years.
In explaining the revision, the CBO said the biggest change came from the Environmental Protection Agency’s proposed rule to tighten vehicle-emissions standards. That would force automakers to increase EV production, driving more sales that will qualify for tax credits worth up to $7,500.
The impact is even larger than it looks because the CBO only includes half of the effects of any proposed rule. If the EPA completes the rule as expected, the CBO would include the other half in its next update.
The rules for leased vehicles created another discrepancy from original forecasts. For purchases, the EV tax credits are limited by the buyer’s income and the vehicle’s cost and manufacturing location. But those rules don’t apply to commercial vehicles.
That commercial-vehicle section was projected to cost just $3.6 billion, but the Treasury Department said leased vehicles can qualify for the open-ended commercial-vehicle credits rather than the restrictive regular credits. EV leasing has since expanded.
A Treasury official said Treasury’s leasing rules clearly follow the statute.
Source: WSJ