Passing any significant climate, health-care, or tax legislation seemed impossible a month ago, frustrating and worrying Democrats, whose razor-thin Senate majority may not survive the November midterms. But on August 16, President Joe Biden signed into law the Inflation Reduction Act of 2022 (IRA), after months of stalled Senate negotiations. The new law is aimed at helping reduce consumer spending in two major categories—health care and energy—with investments offset by corporate-minimum and stock-buyback taxes, and increased funding for the IRS to pursue wealthy tax cheats. The law also contains long-awaited provisions that will allow Medicare to negotiate with pharmaceutical companies, cap the price of insulin, limit out-of-pocket drug costs for seniors, and extend tax credits that help keep millions of Americans insured. But it is the law’s climate provisions that have garnered the most attention. Its historic investments in clean energy are projected to result in a 40-percent reduction in U.S. emissions (from 2005 levels) by 2030—well above the 25-percent reduction projected before the new law.
The IRA comes in the wake of last fall’s failed Build Back Better bill, and while it is not nearly as big ($369 billion compared to $3.5 trillion), it is still a major step forward in the fight against climate change—one the reluctance of Sen. Joe Manchin (D-WV) almost kept us from taking. But the smaller scale of the new bill, combined with certain concessions (including a pipeline deal in Manchin’s home state), convinced him to join the rest of his party. The other Democratic senator whose support was not assured, Arizona’s Kyrsten Sinema, voted for the law on the condition that it not eliminate the egregiously unfair carried-interest tax loophole. (Private-equity managers, who benefit from that loophole, have donated nearly a million dollars to Sinema in the past year). Not a single Republican voted for the law.
Unlike earlier climate legislation, the IRA focuses more on the demand than the supply side of the energy industry, providing consumers with tax incentives to electrify their vehicles, appliances, and heating and cooling systems. Crucially, it also locks in tax credits for clean energy for the next ten years. This allows businesses and investors to rely on those credits, rather than making their renewal vulnerable to every change in administration. Still, the law’s compromises are frustrating for those who had hoped for something more like a Green New Deal. Its provisions will not get the United States all the way to its Paris Agreement goals. It also ties leases on new land for renewable energy to leases on land for oil and gas drilling (which may or may not lead to actual drilling). Nevertheless, the IRA includes the largest-ever investment in environmental justice, with money dedicated to cleaning polluted ports and block grants provided for community-run projects. The scale and variety of issues it addresses is impressive—from electrifying the USPS to reducing agricultural emissions to restoring coastal ecosystems.
Despite its name, the IRA is unlikely to have a large effect on inflation, at least in the short term. While the tax provisions and savings on health-care spending may help in that regard, some of this will be offset by the law’s environmental provisions, which will encourage more short-term consumer spending via tax credits and rebates. In any case, the law’s greatest impact will be not on inflation or the deficit but on investments in renewable energy. It will thus give a much-needed boost to the transition away from fossil fuels, and not a moment too soon.
