Home Employment Biden’s climate tax breaks are popular, increasing the cost of the law

Biden’s climate tax breaks are popular, increasing the cost of the law

Biden's climate tax breaks are popular, increasing the cost of the law

According to independent forecasters, President Biden’s signature climate bill appears to be encouraging more investment in US manufacturing than initially expected, expected to spark a wave of new factory jobs and household clean energy technologies.

If the boom in new battery plants, wind and solar farms, electric vehicle plants and other investments continues, the law could prove even more effective than government officials had hoped in reducing fossil fuel emissions that are dangerously warming the planet.

But all this new economic activity around green technology also drives up costs for taxpayers, who subsidize the investments.

When Democrats passed the Inflation Reduction Act last August, the Congressional Budget Office estimated that the act’s climate and clean energy tax credits would cost about $391 billion between 2022 and 2031. But the budget office’s updated score, based on estimates from the Joint Committee on Taxation, found that clean energy tax breaks would cost at least $180 billion more over that period than originally predicted.

Other experts and investment banks estimate that the bill’s energy supply could cost as much as $1.2 trillion over the next decade.

In just eight months since Mr Biden signed the bill into law, companies have announced plans to invest at least $150 billion in clean energy projects, including at least 46 new or expanded large-scale plants making everything from wind turbine towers to batteries for electric power plants. vehicles.

Some companies planned their projects before the climate law was passed and would have built them anyway. But others have cited the law as a catalyst, such as Hanwha Qcells, a South Korean solar company, which announced in January it would build a $2.5 billion manufacturing complex in Georgia.

“Investments are moving five times faster than ever before,” said Jason Grumet, the CEO 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 while other segments of manufacturing appear to be cooling.

While the climate bill was a top priority of the Biden administration and was passed without a single Republican vote, much of the money so far has flowed to red states, particularly in the Southeast, South and Midwest, where land is plentiful, labor over generally not unionized and costs are relatively low.

An analysis by Climate Power, an advocacy group, found that of the 191 clean energy projects announced since the bill’s passage, more than half have been in congressional districts controlled by Republicans, who have often favored the investment. applauded while criticizing the law.

The rush to cash in on the credits has delighted the administration, environmentalists and clean energy industry groups, who say it catalyzes a rapid transition from an economy rooted in burning coal, gas and oil to one that is running on renewable sources such as wind and solar energy.

But the rising cost estimates have led to an angry backlash from West Virginia Democrat Senator Joe Manchin III, who cast the vote crucial to the bill’s passage. Mr. Manchin now faces a potentially difficult re-election campaign that could see him face off against Governor Jim Justice, a Republican who announced last week that he will run for the Senate in 2024. West Virginia has moved increasingly 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 government officials do not take steps that would reduce its cost. Mr Justice, whose family owns several coal mines and processing plants, called Mr Manchin’s vote to pass the Inflation Reduction Act “a real, real mistake”.

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 country’s borrowing limit and avoiding an economically catastrophic bankruptcy. The bill Republicans passed last week to remove the cap would remove most of the climate tax credits from the Inflation Reduction Act, which the budget office says would save more than $500 billion over the next decade.

Republicans say the tax credits have distorted markets by directing investment toward preferred green technologies. Democrats point to the US tax code that has provided fiscal incentives to the fossil fuel industry for decades worth an estimated $10 billion to $50 billion annually.

Government officials say Republicans seeking to revoke the clean energy tax cuts would endanger the local economy in their own districts.

“We are seeing tens of thousands of jobs created across the country as a result of this law in just a few months. We expect more,” said Kristina Costa, Mr. Biden’s deputy for clean energy implementation and innovation. “The Republican proposal would reverse all that.”

Law’s architects say it will reinvigorate U.S. manufacturing in a global competition to produce advanced energy technologies — and, more importantly, accelerate the fight against climate change.

“It will certainly be a net job creator,” said Brian Deese, the former director of Mr Biden’s National Economic Council, who resigned in February. But the bigger economic benefit, he said, would be “rapid decarbonization of the U.S. economy on a cheap, rather than expensive, path.”

The new climate law offers a wide range of hefty tax benefits for both individuals and companies. Consumers can obtain tax relief for, among other things, the purchase of certain electric vehicles, electric heaters and electric heat pumps. Utilities can earn credits by generating electricity from wind or solar farms. And companies qualify for tax breaks if they manufacture batteries or solar panels in the United States.

These tax credits are unlimited, which means that in theory there is no limit to the number of companies and households that can ultimately claim them.

Christine McDaniel, a senior research fellow at George Mason University’s Mercatus Center, tallied up all of the recent U.S. battery production announcements and estimated that if they all claimed another tax credit, the cost would range from $43,000 between now and 2032. 7 billion to $196.5 billion. — not the $30.6 billion the Congressional Budget Office initially predicted for that one break alone.

“Whether or not you agree with the policy goals here, I think we have to be honest about how much this is going to cost,” Ms McDaniel said. “Because the budget is only so big and there will always be compromises between spending.”

A recent academic paper presented to the Brookings Institution used detailed energy models to estimate that the Act’s climate provisions could cost between $240 billion and $1.2 trillion over the next decade — and potentially hundreds of billions of dollars after 2031.

“What you’re seeing is a large amount of uncertainty about how much clean energy will actually be deployed,” said John Bistline, a program manager at the Electric Power Research Institute and an author of the paper.

For example, consider the provision in the bill that provides a $7,500 tax credit for consumers to purchase electric vehicles. In theory, full credit is only available to electric cars that are assembled in North America and get most of their battery components and critical minerals from the United States or trading partners. But that’s a moving target; as automakers and battery manufacturers open new plants in the United States, more cars would qualify.

At the same time, the Treasury Department has interpreted language in the tax rules in a way that could increase suitability for certain cars, drawing criticism from Mr Manchin, who has pushed for more restrictive rules.

“When the law was originally passed, I didn’t think vehicles would immediately qualify for the full credit,” said Nick Nigro, founder of Atlas Public Policy, an electric vehicle research group. “But there are at least 10 already doing that, and we see that automakers can be very creative in setting up their supply chains when they have an incentive to do so.”

An analysis by Goldman Sachs suggested that electric vehicle deliveries alone could cost $379 billion more over the next decade than the budget bureau estimated.

On the other hand, it is also possible that the law will ultimately be much less powerful than many experts now assume. Even with tax credits, many car buyers may be reluctant to buy electric vehicles due to a lack of reliable charging stations. Developers of large-scale solar and wind farms may face increasing opposition in communities where they want to build. And while companies have so far announced plans for more than $150 billion in clean energy projects, some of those investments depend on the Treasury Department enacting favorable rules around certain tax provisions that have yet to be clarified, Mr. Grumet.

Because of all those variables, the real price tag of the law may not be known for years.

“So much hinges on questions like: Can the permitting process for clean energy projects become easier? Will sufficient skilled workers and critical minerals be available?” said Melissa Lott, director of research for the Center on Global Energy Policy at Columbia University. “The law will almost certainly move the needle on emissions, but the extent to which this happens is still unclear.”

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