Biden’s Climate Tax Breaks Are Popular, Driving Up Law’s Cost
A law to boost clean energy appears to be more potent than predicted, with big implications for both budget talks and efforts to fight climate change.
President Biden’s signature climate law appears to be encouraging more investment in American manufacturing than initially expected, powering what’s expected to be a surge in new factory jobs and domestic clean energy technologies, according to independent forecasters.
If the boom in new battery factories, wind and solar farms, electric vehicle plants and other investments is sustained, the law could prove even more effective than administration officials had hoped at reducing the fossil fuel emissions that are dangerously heating the planet.
But all that new economic activity centered around green technology is also driving up costs for taxpayers, who are subsidizing the investments.
When Democrats passed the Inflation Reduction Act last August, the Congressional Budget Office estimated that the law’s climate and clean energy tax credits would cost roughly $391 billion between 2022 and 2031. But the budget office’s updated score, based on estimates from the Joint Committee on Taxation, found that the clean energy tax breaks would cost at least $180 billion more than originally forecast over that time period.
Other experts and investment banks have estimated that the law’s energy provisions could end up costing as much as $1.2 trillion over the next decade.
In just eight months since Mr. Biden signed the bill, companies have announced plans to invest at least $150 billion in clean energy projects, including at least 46 new or expanded large-scale factories making everything from wind turbine towers to electric vehicle batteries.
Some companies planned their projects before the climate law passed and would have built them regardless. But others have cited the law as a catalyst, such as Hanwha Qcells, a South Korean solar company, which in January announced it would build a $2.5 billion manufacturing complex in Georgia.
“Investment is moving forward five times faster than ever before,” said Jason Grumet, the chief executive of the American Clean Power Association, a renewable energy trade group. “The early signs are really encouraging.”
The growth spurt in green energy is happening as other segments of manufacturing appear to be cooling off.
While the climate law was a top priority of the Biden administration and was passed without a single Republican vote, much of the money has so far flowed to red states, particularly in the Southeast, South and Midwest, where land is abundant, labor is generally not unionized and costs are relatively low.
One analysis by Climate Power, an advocacy group, found that out of 191 clean energy projects announced since the bill’s passage, more than half have been in congressional districts held by Republicans, who have often welcomed the investment while criticizing the law.
The rush to cash in on the credits has delighted administration officials, environmental activists and clean energy industry groups, who say it is catalyzing a rapid transition from an economy rooted in burning coal, gas and oil to one that runs on renewable sources such as wind and solar power.
But the rising cost estimates have fueled an angry response from Senator Joe Manchin III, Democrat of West Virginia, who cast the vote that was crucial to the law’s passage. Mr. Manchin now faces a potentially difficult re-election campaign that could pit him against Gov. Jim Justice, a Republican who announced last week he will run for the Senate in 2024. West Virginia has increasingly shifted to the right; voters backed Donald J. Trump over Mr. Biden by 39 points in 2020.
Mr. Manchin has threatened to vote to repeal the law if administration officials do not take steps that would reduce its costs. Mr. Justice, whose family owns several coal mines and processing plants, has called Mr. Manchin’s vote to pass the Inflation Reduction Act “a real, real screw-up.”
The price of the tax credits has also become a focal point in the ongoing standoff between House Republicans and Mr. Biden over raising the nation’s borrowing limit and avoiding an economically catastrophic default. The bill Republicans passed last week to lift the limit would repeal most of the climate tax credits from the Inflation Reduction Act, which the budget office said would save more than $500 billion over the next decade.
Republicans say the tax credits have distorted markets by steering investment to preferred green technologies. Democrats point to the U.S. tax code that has for decades provided tax incentives for the fossil fuel industry worth an estimated $10 billion to $50 billion per year.
Administration officials say that Republicans who want to repeal the clean energy tax credits would jeopardize the local economy in their own districts.
“We’re seeing tens of thousands of jobs being created across the country as a result of this law in just a matter of months. We expect to see even more,” said Kristina Costa, Mr. Biden’s deputy for clean energy implementation and innovation. “The Republican proposal would roll all of that back.”
Architects of the law say it will reinvigorate American manufacturing in a global competition to produce advanced energy technologies — and more important, speed the fight against climate change.
“It will be a net job creator, for sure,” said Brian Deese, Mr. Biden’s former National Economic Council director, who stepped down in February. But the larger economic benefit, he said, would be “rapid decarbonization of the American economy on a low-cost, instead of a high-cost, path.”
The new climate law offers a wide range of hefty tax breaks for both individuals and businesses. Consumers can get tax credits for buying certain electric vehicles, electric stoves and electric heat pumps, among other goods. Utilities can earn credits by generating electricity from wind or solar farms. And businesses are eligible for tax incentives if they manufacture batteries or solar panels in the United States.
Those tax credits are uncapped, which means that theoretically there is no limit to how many companies and households can ultimately claim them.
Christine McDaniel, a senior research fellow at George Mason University’s Mercatus Center, tallied all the recent announcements for U.S. battery manufacturing and estimated that if they all claimed a new manufacturing tax break, the cost would range from $43.7 billion to $196.5 billion between now and 2032 — not the $30.6 billion that the Congressional Budget Office initially predicted for that one break alone.
“Whether or not you agree with the policy goals here, I do think we need to be honest about how much this is going to cost,” Ms. McDaniel said. “Because the budget is only so big, and there are always going to be trade-offs to spending.”
One recent academic paper presented at the Brookings Institution used detailed energy modeling to estimate that the law’s climate provisions could cost anywhere from $240 billion to $1.2 trillion over the next decade — and potentially hundreds of billions of dollars past 2031.
“What you’re seeing is a large amount of uncertainty in how much clean energy is actually going to be deployed,” said John Bistline, program manager at the Electric Power Research Institute and an author of the paper.
Consider, for instance, the provision in the bill that provides a $7,500 tax credit for consumers to buy electric vehicles. In theory, the full credit is available only to electric cars that are assembled in North America and get most of their battery components and critical minerals from either the United States or trade allies. But that is a moving target; as automakers and battery manufacturers open new factories in the United States, more cars would qualify.
At the same time, the Treasury Department has interpreted certain language in the tax rules in ways that could expand eligibility for certain cars, drawing criticism from Mr. Manchin, who has pushed for more restrictive rules.
“When the law originally passed, I didn’t think any vehicles would qualify for the full credit right off the bat,” said Nick Nigro, founder of Atlas Public Policy, an electric vehicle research group. “But there are already at least 10 that do, and we’re seeing that automakers can be very creative in setting up their supply chains when they have incentive to do so.”
One analysis from Goldman Sachs suggested that electric vehicle provision alone could cost $379 billion more over the next decade than the budget office estimated.
On the flip side, it is also possible that the law ends up being far less potent than many experts are now assuming. Even with tax credits, many car buyers might be reluctant to purchase electric vehicles because of a lack of reliable charging stations. Developers of large-scale solar and wind farms could face increasing opposition in communities where they want to build. And, while companies have announced plans for more than $150 billion in clean energy projects so far, some of those investments depend on the Treasury Department to enact favorable rules around certain tax provisions that have yet to be clarified, Mr. Grumet said.
Because of all those variables, the law’s true price tag may not be known for years.
“So much depends on questions like: Can the permitting process for clean energy projects become easier to navigate? Will there be enough skilled workers and critical minerals available?” said Melissa Lott, research director for the Center on Global Energy Policy at Columbia University. “The law is almost certainly going to move the needle on emissions, but the degree to which it does so is still unclear.”