At the risk of being the weak student, I argue that it is a bit of both. Politically, by being the first successful bill that is explicitly aimed at targeting climate change – even if the Democrats had to hide that with a disingenuous name – it may be a game-changer. For the first time the U.S. has taken legislative action that, at least for now, commits it to active policies that will reduce greenhouse gas emissions, as opposed to just stated goals. Whether these policies will survive the 2024 presidential and congressional elections is unknowable, of course. Potentially this all gets repealed within a few years, forcing Democrats to start from scratch. But if not, it sets the stage for marginal enhancements in the future, just as the Clean Air and Clean Water Acts were successively strengthened in years following their original passage.
But on the actual policy level, the gains appear to be much more marginal than revolutionary. That’s not because of the oil lease mandates, but because of the marginal nature of the policies themselves.
Renewable Energy Investments
Much has been made of the expected great effect of production and investment tax credits on solar and wind power. But these are not new, they are extensions of existing tax credits that were due to expire this year. The investment tax credits, for example, have been extended to projects whose construction begins before January 1, 2025, and it is reasonable to assume they will yet again be extended after that, at least if Democrats control the government after the 2024 elections, or whenever they again do.
Solar power is still bogged down with
supply chain issues and a federal investigation into alleged
Chinese dumping. Not surprisingly, federal policy is at war with itself. We want more solar as fast as we can possibly install it, but we also want to design our foreign and economic policy around limiting Chinese, and promoting domestic, production.
In addition, installing more solar has limited value unless and until we can expand transmission lines to move it from where it’s produced to where it’s needed. Every model you may have seen that argues the U.S. can advance to 85 percent or more of renewables penetration in our energy supply is built on the assumption that this vast increase in our trans-continental transmission capability is built out. But that’s primarily under the control of states and communities. There is no unitary national policy or authority managing it.
The act grants $10 billion to the development of infrastructure for clean tech manufacturing, including wind turbines, solar panels, and electric vehicles. This is likely to be most heavily fought over by Atlantic Coast states, as they are the most advanced in developing offshore wind. But this is not the game-changer it might appear to be. It’s actually just federal money substituting for state and private funds that are effectively already committed. Federal subsidies don’t always make things happen that otherwise wouldn’t; sometimes they just appear to.
The act extends investment and production tax credits for renewable energy. But these credits have been repeatedly extended. They are the subsidy that never ends, despite claims that wind and solar are now cost-competitive with fossil fuel electricity production. So this is perhaps the single most predictable element of the bill. The most substantive change here is that to get the full amount of the subsidies (30 percent for investment tax credits, and $0.015 per kilowatt hour for production tax credits), firms must pay so-called prevailing wages. If anything, that added labor cost constrains renewables development at the margin by increasing its cost.
Zero-emission Vehicle Subsidies
The subsidies for electric vehicles also are a continuation of past policy, rather than a substantively new policy, although this time it includes a tax credit for used zero-emission vehicles. But they come with new limitations that may hinder their effectiveness. In an effort to minimize the extent to which such subsidies have been a gift to the well-to-do, there are both income limits and limits on the cost of electric vehicles to which the subsidies can be applied. But these are still expensive cars, so to the extent the subsidy increases purchases instead of subsidizing purchases that would have happened anyway, they will be at the margin of those who were close to considering one anyway.
Worse, the subsidies will apply only to vehicles with batteries mostly built or assembled in the U.S. and with critical battery materials extracted or processed in North America or other countries with which the U.S. has a free trade agreement. The tax credit is split into two halves, with one half applying to each of those categories.
The assembly requirement begins at 50 percent and increases to 100 percent after 2028. The critical materials requirement starts at 40 percent and increases annually up to 80 percent after 2026. Most materials are mined outside the U.S. (and the Biden administration has made it
difficult to open mines domestically), and China is the leading processor. It is questionable whether supply chains can adapt on such a rapid schedule.
By mixing social, economic, and foreign policy together, Congress likely has limited the effect of the continued subsidy on ZEV sales. . .
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