It's been exactly one year since President Joe Biden signed the Inflation Reduction Act, securing a core part of his domestic agenda with what's by far the most significant climate law in U.S. history. There's been no shortage of numbers attesting to the rapid transformation of the American economy: $86 billion in private investment, 51 new or expanded plants for producing solar panels, 10 new factories for making batteries, more than 100,000 clean-energy jobs.
One number has remained much harder to pin down over the past year: precisely how much will be spent as a result of the IRA. Cost estimates have continued to shift upward and now span a range of more than half a trillion dollars.
This is a far cry from the headlines that greeted the law's surprising passage through Congress last summer. With some slight variation, news organizations put a price tag of about $370 billion on the climate-spending measures. That number ended up with more or less official stature, repeated in White House assessments.
But it was always an estimate. In hindsight, the cost of the tax credits and incentives to the U.S. Treasury is clearly going to be much higher — and even after a year, there's no way to pinpoint the amount of spending that will ultimately occur.
At the core of the forecasting challenge are two structural elements of the IRA's financial mechanics: Most of the spending comes in the form of tax credits that are uncapped, and those unlimited credits are designed to be rolled out over a 10-year span. That introduced a big element of guesswork because there's no restriction on how many businesses or citizens can claim new tax incentives made available to support everything from the purchase of electric vehicles to the production of green hydrogen and assembled-in-America batteries.
The closest thing to an official price tag comes from the Congressional Budget Office, whose job it is to score legislation for cost. By September 2022, a month after Biden signed the IRA, the clean energy and climate portions of the bill had an estimated cost of about $391 billion between 2022 and 2031. Yet even at the time experts saw it as a lowball figure and they have offered a stream of much higher estimates ever since.
By April, to take one high-profile example, a team of researchers at the University of Pennsylvania's Wharton School, working with Goldman Sachs, updated their own earlier estimate of $385 billion with a staggering new figure in excess of $1 trillion. The report's authors cited "newer implementation" details and more optimistic assumptions about how much private capital will pour into the economy, particularly electric vehicles, in response to the promise of leveraging tax credits.
But that's not nearly the only way experts came up with enlarged estimates of how much spending would be triggered by the IRA.
John Bistline of the Electric Power Research Institute, along with colleagues, ran a model considering a wide variety of economic variables — what happens if inflation rates continue to rise, for example, or if there is a recession — and came up with a middle figure of $781 billion for tax credit uptake. But even Bistline's work can't overcome the fact that the IRA's true dollar figure will remain a mystery for a long time.
"One thing our modeling comparison really underscored for me is that a lot of the spending tends to happen close to the end of the 10-year budget window, so closer to 2030," Bistline said. "So we won't really know about costs for a lot of years."
A puzzle for the IRS
Both citizens and corporations will file their first deductions under the IRA next year, and what the Internal Revenue Service allows and doesn't allow under those tax filings could be revealing. But once again, this is just a start.
The IRS is still struggling to issue guidance for some parts of this complicated law. Take the confusion over EV credits. The law wants to see U.S. manufacturers protected, so cars that use parts made in China aren't eligible for the credits. But what about parts made with Chinese capital in other countries? The IRS is still debating.
Similarly, U.S. tax officials have yet to define what projects will qualify for the green hydrogen tax credit. At stake is potentially as much as $120 billion, according to Adithya Bhashyam of BloombergNEF. It's another uncapped incentive, though, so the cost will depend on how much qualifying green hydrogen gets produced.
Macroeconomic trends are also critical. If the inflation that the climate-spending law was named after stays high, that could slow the rollout of new projects due to higher costs. There are behavioral unknowns, too, as in how many people will really buy electric vehicles or heat pumps, even with generous incentives.
Another potent variable is just time. Mona Dajani, global head of energy and infrastructure projects at the law firm Shearman & Sterling, has seen a rush of investors looking to structure projects to best take advantage of IRA incentives. But a year later businesses are still "just dipping their toes in," she said, because there are ongoing political attacks from Republicans in Congress. If that partisan rancor settles down — something unlikely in a presidential election year — then the real "floodgates of investment could open."
That would mean that the cost of the climate and energy provisions of the legislation could skyrocket well past the $1 trillion mark, which could create a negative feedback loop of its own. West Virginia Senator Joe Manchin, a Democrat whose 11th-hour support secured passage of the IRA, has been furious over rising cost estimates and has criticized the Biden administration for issuing guidance that he considers beyond the scope of the law.
Christina DeConcini, director of government affairs at the World Resources Institute, a climate research group, sees ballooning use of the tax credits as a good thing. It represents more people investing. "It's not like there's a window you can just go up to and get money out," she said.
Indeed, expert estimates indicate private money is pouring into the system and will, if anything, continue to increase. Venture capital investment in climate tech reached a record $70.1 billion last year, according to HolonIQ Global Impact Intelligence, for an enormous 89% rise over 2021. A recently released Goldman Sachs report thinks that the bill will eventually drive a whopping $3.3 trillion in investments, though much of the money will be back loaded to the end of the 10-year period.
"The tax credit is incentivizing this private investment to create manufacturing jobs in parts of the countries that have been overlooked for decades," DeConcini said. "It's good news."
More importantly, said Bill Hoagland, senior vice president at the Bipartisan Policy Center and a former director of the Senate Budget Committee, there are a lot of things that the budget scoring doesn't take into account. Nothing in the IRA attempts to price the social costs of carbon dioxide emissions, which include more frequent natural disasters like this summer's intense heat waves and last week's devastating wildfires in Maui. In addition to tragic loss of lives, such events take a growing toll on federal relief funds. Lower emissions from the law could avoid worst-case scenarios and their costs.
"If you believe in — and I do — that climate change is an existential threat to the economy and that this law will reduce some of these external costs, whether it's health care or disaster coverage," said Hoagland, "then that could be a plus to revenues in the long haul."
