No, the Inflation Reduction Act is not a carbon tax — but it would be cheaper if it were: the Hill

Icymi

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CarrZee is loving this headline so much …I’m going to repeat it a few more times:

No, the IRA is not

a carbon tax — but

it would be cheaper

if it were

No, the IRA is not a carbon tax — but it would be cheaper if it were

The 2022 Inflation Reduction Act (IRA), signed into law by President Biden on Aug. 16, includes provisions for lowering the deficit and lowering prescription drug costs even as it subsidizes substantial investment in renewable sources of clean energy. It devotes $369 billion to those investments. It derives its funding by imposing a 15 percent minimum tax on large corporations and a 1 percent excise tax on corporations’ buying back their own stock; it also funds enhanced IRS enforcement applied to high-income taxpayers.

With regard to climate change, the IRA targets roughly a 40 percent cut greenhouse gas emissions relative to 2005 levels by around 2030, but it is silent about what happens if that target is not met.

Some think these programs will not be as effective as anticipated so that goals will not be achieved because there are real-world obstacles that have not been included in the budget impact and economic efficacy calculus. Others, like me, think that the prescribed goals and objectives will more than meet expectations because there are real-world opportunities that come into play given the strong and, frankly, unexpected signal of significant U.S. action on climate change. That translates into an anticipation that relying on carbon in your business planning and personal investment will become increasingly expensive and decreasingly profitable.

Two caveats apply at this point. The first is the 40 percent by 2030 target. The lates Carnegie Mellon University Professor Lester Lave, an old colleague, once advised that economists should give a date or a number but not both. Emissions will be down by 2030, but perhaps not by 40 percent. Emissions will be down by 40 percent, but perhaps not before 2031. The real question is whether or not the IRA will put us on a trajectory that keeps open the potential of achieving the long-term goal of net-zero emissions sometime well before the turn of the next century.

The second caveat arises from the simple fact that the IRA does not explicitly price carbon at the point of its use. Economists have long pointed to the efficiency of such a plan, but the U.S. Congress (particularly the Senate) is allergic to taxing carbon. Indeed, five carbon pricing and revenue-sharing bills have been proposed in this 117th Congress, but none of them has come anywhere close to the president’s little signing desk.

So, is there any way to infer that the IRA contains enough pricing substance to pick up the efficiency gains of a pricing mechanism? I think so — at least modestly.

In the first and most obvious instance, the new law increases or tax credits for capturing and (re)utilizing or sequestering carbon dioxide at industrial facilities and power plants. The increase is from $50 to $85 per ton for carbon stored by industry and from $30 to $60 per ton if it is used in drilling. The increase is from $50 to $180 per ton for carbon removed from the atmosphere if it is stored and from $35 to $130 if it is used. Don’t look now, but these are ranges on the price of carbon that are higher than last month. They set a context for decision-makers looking to the future when their use of carbon might be taxed at a socially accepted price that will persistently climb over time.

In a second less direct way, the IRA creates “shadow prices” for carbon that are related directly to its various investment provisions. Take, for example, the incentives for individuals to install solar panels. They will reduce personal and industrial demand for electricity from fossil fuel plants by very simple economically driven substitution. Every student in an introductory economics course would understand that.

The extended point about shadow prices is not much more complicated. There is a price of carbon (tax) that could accomplish the same substitution. That is a shadow price reflective of a tax intervention that would be equivalent to the IRA effects.

The shadow price will even increase as solar investments increase over time in projectable ways. Even though nobody is paying a “shadow tax,” investors in all sorts of energy projects will likely use the distributions of those prices as signals — representations of the effects of IRA that will influence their decisions of where to put their long-term investment money. These are the opportunities mentioned above.

The IRA creates an economic environment that is muddier than one in which there would one price for carbon that would increase every year at a predictable rate. There is a different shadow price for each component in IRA and there are codified ranges for carbon capture, utilization and storage. That variability is a source of efficiency loss. So, too, is inertia in industrial policy that has been created by the IRA. Finally, the IRA generates its compensating revenue from tax provisions that are not at all related to carbon emissions while a carbon tax directly influences the relative prices of all goods with respect to their carbon content.

There are efficiencies that have been foregone for political expedience, but the IRA can nonetheless have a comparable long-term effect on reducing fossil fuel reliance. It is better than nothing by a long shot.

It is not a solution, though. There are no solutions to the climate problem. We can only create some combination of abate, adapt and suffer. So, the real questions in evaluating the IRA are only:

1) Is it enough to put us on the right track?

2) How soon will we have to make a mid-course correction?

Gary Yohe, Ph.D., is the Huffington Foundation professor of Economics and Environmental Studies, Emeritus at Wesleyan University.

Washington moves fast. We move faster.

Our newsletter team cuts through the clutter to deliver essential insight on politics and policy. Sign up for The Hill’s free newsletters and get expert analysis and insider tips direct to your inbox.

Click here to sign up

No, the IRA is not a carbon tax — but it would be cheaper if it were

The 2022 Inflation Reduction Act (IRA), signed into law by President Biden on Aug. 16, includes provisions for lowering the deficit and lowering prescription drug costs even as it subsidizes substantial investment in renewable sources of clean energy. It devotes $369 billion to those investments. It derives its funding by imposing a 15 percent minimum tax on large corporations and a 1 percent excise tax on corporations’ buying back their own stock; it also funds enhanced IRS enforcement applied to high-income taxpayers.

With regard to climate change, the IRA targets roughly a 40 percent cut greenhouse gas emissions relative to 2005 levels by around 2030, but it is silent about what happens if that target is not met.

Some think these programs will not be as effective as anticipated so that goals will not be achieved because there are real-world obstacles that have not been included in the budget impact and economic efficacy calculus. Others, like me, think that the prescribed goals and objectives will more than meet expectations because there are real-world opportunities that come into play given the strong and, frankly, unexpected signal of significant U.S. action on climate change. That translates into an anticipation that relying on carbon in your business planning and personal investment will become increasingly expensive and decreasingly profitable.

Two caveats apply at this point. The first is the 40 percent by 2030 target. The lates Carnegie Mellon University Professor Lester Lave, an old colleague, once advised that economists should give a date or a number but not both. Emissions will be down by 2030, but perhaps not by 40 percent. Emissions will be down by 40 percent, but perhaps not before 2031. The real question is whether or not the IRA will put us on a trajectory that keeps open the potential of achieving the long-term goal of net-zero emissions sometime well before the turn of the next century.

The second caveat arises from the simple fact that the IRA does not explicitly price carbon at the point of its use. Economists have long pointed to the efficiency of such a plan, but the U.S. Congress (particularly the Senate) is allergic to taxing carbon. Indeed, five carbon pricing and revenue-sharing bills have been proposed in this 117th Congress, but none of them has come anywhere close to the president’s little signing desk.

So, is there any way to infer that the IRA contains enough pricing substance to pick up the efficiency gains of a pricing mechanism? I think so — at least modestly.

In the first and most obvious instance, the new law increases or tax credits for capturing and (re)utilizing or sequestering carbon dioxide at industrial facilities and power plants. The increase is from $50 to $85 per ton for carbon stored by industry and from $30 to $60 per ton if it is used in drilling. The increase is from $50 to $180 per ton for carbon removed from the atmosphere if it is stored and from $35 to $130 if it is used. Don’t look now, but these are ranges on the price of carbon that are higher than last month. They set a context for decision-makers looking to the future when their use of carbon might be taxed at a socially accepted price that will persistently climb over time.

In a second less direct way, the IRA creates “shadow prices” for carbon that are related directly to its various investment provisions. Take, for example, the incentives for individuals to install solar panels. They will reduce personal and industrial demand for electricity from fossil fuel plants by very simple economically driven substitution. Every student in an introductory economics course would understand that.

The extended point about shadow prices is not much more complicated. There is a price of carbon (tax) that could accomplish the same substitution. That is a shadow price reflective of a tax intervention that would be equivalent to the IRA effects.

The shadow price will even increase as solar investments increase over time in projectable ways. Even though nobody is paying a “shadow tax,” investors in all sorts of energy projects will likely use the distributions of those prices as signals — representations of the effects of IRA that will influence their decisions of where to put their long-term investment money. These are the opportunities mentioned above.

The IRA creates an economic environment that is muddier than one in which there would one price for carbon that would increase every year at a predictable rate. There is a different shadow price for each component in IRA and there are codified ranges for carbon capture, utilization and storage. That variability is a source of efficiency loss. So, too, is inertia in industrial policy that has been created by the IRA. Finally, the IRA generates its compensating revenue from tax provisions that are not at all related to carbon emissions while a carbon tax directly influences the relative prices of all goods with respect to their carbon content.

There are efficiencies that have been foregone for political expedience, but the IRA can nonetheless have a comparable long-term effect on reducing fossil fuel reliance. It is better than nothing by a long shot.

It is not a solution, though. There are no solutions to the climate problem. We can only create some combination of abate, adapt and suffer. So, the real questions in evaluating the IRA are only:

1) Is it enough to put us on the right track?

2) How soon will we have to make a mid-course correction?

Gary Yohe, Ph.D., is the Huffington Foundation professor of Economics and Environmental Studies, Emeritus at Wesleyan University.

Washington moves fast. We move faster.

Our newsletter team cuts through the clutter to deliver essential insight on politics and policy. Sign up for The Hill’s free newsletters and get expert analysis and insider tips direct to your inbox.

Click here to sign up

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