The Climate Challenges Ahead After Inflation Reduction Act

Following 30 years’ worth of failures to pass bold climate legislation, the United States entered a new period when President Joe Biden signed Tuesday’s Inflation Reduction Act. For the first time, the surprise deal gives the nation a way to lower its greenhouse gas emissions according to the Paris Agreement. “This bill is the biggest step forward on climate, ever,” Biden said.

It is time to fight for the remaining gaps.

The specifics of the law’s climate provisions are a reflection of 30 years of trial and error. Instead of relying on taxes on carbon, as has been done in the past by some business leaders, it relies instead on incentives to encourage companies to reduce their emissions. The plan includes hundreds of billions in investment in environmentally just provisions, which will keep activists engaged. It also avoids the difficult problem of slowing the growth of the fossil fuel sector, which is a matter of contention for both sides. The document sets an ambitious goal for U.S. policy on climate change and offers incentives to do so. However, details remain to be decided.

This future will be shaped by many factors. Inflation Reduction Act: The market will react to it. It will drive the repricing and push the U.S. toward cleaner methods of powering its factories, homes and cars. The economic factors that influence which technologies will win the market, such as the fluctuating prices of fossil fuels and the rate of economic growth, are a major factor in which technologies prevail. Technology’s success will also be determined by investors. But the market won’t be the only force determining how the Inflation Reduction Act ends up working. Next chapter in the fight for climate change will see a tug-of-war between activists, policymakers, and industry all vying to implement their respective approaches to reduce emissions and address the social consequences of energy transition.

We know the law will reduce emissions, but we don’t know by exactly how much. We know that clean energy will receive a boost, but we don’t know which companies or which technologies will end up thriving. And we know that the social ills caused by climate change have finally received due attention, but we don’t know whether the law’s justice-oriented provisions will spur enough change for the impacted communities.

“If you’re a solar developer or a utility, or in an industry looking to become more efficient and competitive globally, all of that now is aligned with the direction of travel,” says Jesse Jenkins, who leads the REPEAT project at Princeton University which analyzes the U.S. energy system. “How does that work out in reality? I’m very excited to conduct this experiment and find out in 10 years.”

Now, the Inflation Reduction Act’s supporters, politicians, activists, business leaders and policy-wonks can enjoy a momentary celebration of their hard won victory. Soon, however, these same individuals will have to take on the next challenges set by the law. They’ll be pushing for more environmental justice provisions, negotiating which companies need federal support and debating the future of fossil fuels.

The best and the worst scenarios

While signing the Inflation Reduction Act is a major step forward in the climate fight, there’s a wide range of possible outcomes ahead.

Economic modelers are unanimous in their belief that the law will significantly reduce carbon emissions. However, this is still unclear. A Rhodium group analysis, which is one of only a few firms to have released publicly available modeling about the emission implications, has shown that the legislation will reduce U.S. carbon emissions between 32% to 42% by 2030 compared to 2005 levels. That’s a significant improvement: without it, U.S. emissions were expected to fall between 24% and 35% in the same time period. The Biden Administration is now within striking distance to its goal of reducing emissions by 50% in the same time period.

You can boil the difference between worst-case and best-case emissions down to the market. High fossil fuel prices in a low-emission scenario will drive companies to seek out alternatives such as wind and solar, which will soon become more affordable. However, prolonged use of cheap fossil fuels could slow down rapid decarbonization.

It will be important that the market also plays a major role in which clean technologies are successful. The Inflation Reduction Act deliberately takes what is often called a “technology neutral” approach. All methods of producing electricity that do not produce carbon will be eligible to receive a tax incentive for zero emissions starting in 2025. It’s safe to assume that will mean a lot more wind and solar power than without the incentive. It could mean that there will be continued production of fossil fuels and nuclear power, which are hotly debated power sources.

How investors read these signals—a combination of the incentives in the law and the costs of various energy sources—and then deploy their capital will in large part determine both how much we decarbonize as well which technologies we use to get there. The race to develop the new clean technologies has already begun, and it’s safe to expect the cash will continue to flow. “The set of incentives out there has changed,” says Karen Karniol-Tambour, chief investment officer for sustainability at Bridgewater. “That just makes anything in the space more competitive—and that’s a great thing.”

But even the best economic modeler would acknowledge that while models give a hint of the potential future, they can’t predict it. There are many other factors that will influence the direction of U.S.’s decarbonization initiative. Even if the economics align, state and local officials in some recalcitrant red areas will have to overcome ideological skepticism to approve new clean energy power plants—and shut down dirty polluting ones. Companies who want to take advantage of the low emission fossil fuel incentives will need to confront activist resistance, which has been successful in slowing down or closing pipelines. And companies will have to face the myriad political hurdles to, for example, build a domestic supply chain for electric vehicles to get the full credit—a requirement in the law that no electric vehicles currently satisfy.

And, while the market is theoretically good at propelling the most cost-effective technologies, it doesn’t always do a great job of accounting for the social ramifications of that process. Historically, that’s especially been the case for communities of color that have borne the brunt of environmental hazards, from refineries built in backyards to pipelines that pass by schools. Inflation Reduction Act includes $60 billion for environmental justice and grants to communities. However, activists claim the provisions are inadequate. They also object to the inclusion of the fossil fuel sector in the energy mix.

As companies seek to profit from the incentives, activists will continue the battle for fossil fuels’ future as they take on new pipelines and export terminals. “We can stop the build out,” says Jane Kleeb, founder of Bold Nebraska, a group that fights fossil fuel pipelines. “It’s going to take all the legal avenues that we currently have on the ground.”

Fighting fossil fuels on the ground is a high-profile way for activists to ramp up the climate fight, but it is far from the only front that’s likely to see renewed interest. Science suggests that the Inflation Reduction Act is not enough to prevent the worst impacts of climate change.

“Now that this legislation has passed, one of the most dangerous outcomes would be if people threw up their hands and said ‘mission accomplished, we’re done,’” says Jean Su, a senior attorney at the Center for Biological Diversity. We can safely say, so far, that not many are saying that.

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