Biden Energy Subsidies More Popular Than Projected
The projections were way off---in a good way.
Yahoo Finance senior columnist Rick Newman is hilariously backhanded in his analysis “Biden’s green energy law is turning out to be huge.”
The biggest sleeper event of the Biden presidency may end up being the laughably misnamed and poorly understood Inflation Reduction Act.
The law that Congress passed on Aug. 12, 2022, and Biden signed four days later was a remnant of Biden’s “Build Back Better (BBB)” plan, which Democrats were unable to pass even though they controlled both houses of Congress at the time. The IRA, as it’s known, includes a mishmash of leftover BBB provisions, including green energy incentives, beefier tax enforcement, a minor business-tax increase, healthcare subsidies, and cheaper drugs for Medicare enrollees. Budget analysts estimated the Inflation Reduction Act would have little to no effect on inflation. Democrats who passed the law with no Republican votes probably named it that so they’d be able to claim credit if high inflation at the time came down, which it has.
Well, yes. And because Joe Manchin pretty much demanded it. But it’s true: we knew from the outset that the Inflation Reduction Act wasn’t going to reduce inflation; it was never intended to. It was just the parts of BBB that Manchin and Kyrsten Sinema would vote for.
Inflation is moderating for other reasons, but a year after its passage, the IRA is shaping up to be immensely consequential anyway. The green energy portion of the bill — the biggest chunk — is the most aggressive effort to decarbonize the US economy ever. But it’s turning out to be even bigger than analysts thought at the time.
Initial estimates ballparked the cost of the bill’s green energy provisions at around $385 billion over 10 years. Those green energy provisions are now likely to cost around $1.2 trillion, according to the latest analysis from Goldman Sachs and the Penn Wharton Budget Model. That’s three times the original cost estimate.
But, as we’ll eventually see, “cost” isn’t the right way to look at this.
As for the entire bill, Penn Wharton initially thought it would reduce the national debt by about $264 billion over the 10-year budget window. That’s because some provisions cost money while others saved money, with the net effect being a modest savings to taxpayers. But Penn Wharton now thinks the IRA will add about $1 trillion to the debt, for a net swing of nearly $1.3 trillion out of the federal purse.
The soaring cost of the IRA might make it sound like Congressional Democrats who voted for the bill relied on rigged budget math to pass a law that promptly became a lot more expensive than advertised. But the added cost is also a sign of the IRA’s success, because green energy tax incentives are turning out to be way more popular than expected. The cost of the law is rising because there’s a lot more private sector investment in green energy, driven by tax breaks included in the law. Given that the law’s main purpose was to speed green energy adoption, rising costs mean a faster transition away from fossil fuels and a more muscular response to global warming.
Considering that encouraging investment in these technologies was the goal, this is a good thing, no? And they’re only “out of the federal purse” in the sense that the money would otherwise have been taxable.
Most of the green energy provisions in the IRA aren’t direct spending by the government but tax breaks for private entities that invest in green energy. And most of those tax breaks are uncapped, meaning there’s no dollar limit on the amount of tax breaks the government will allow. In other words, anybody who meets the requirements for various tax breaks will be able to get them, no matter how much the tally adds up to. The “cost” isn’t government spending, it’s foregone tax revenue over the 10-year window.
Indeed, my complaint about many of these programs is that they are in fact capped or means-tested. So, for example, we’re subsidizing electric vehicles again—but only ones under a certain price. Or we’ll subsidize replacing a traditional HVAC unit with a heat pump—but only if you make under a certain income threshold. I get why we don’t want to subsidize the relatively well-off. On the other hand, though, if the point is to encourage green energy, it’s counterproductive.
So initial cost estimates for the IRA relied on some guesswork about the amount of private investment that would qualify for the tax breaks. It’s that private investment that’s turning out to be far stronger than expected a year ago. Those tax breaks increase the return on private sector investments in green energy, and in some cases turn a likely negative return into a positive one. With government subsidies, some private investors who would otherwise take a pass on unproven technology such as biofuels or green hydrogen might decide to give it a shot.
Well, yeah. Why would we give people subsidies for doing something they were going to do, anyway? The whole point is to incentivize different choices.
Your real problem is not anything you are focused on as focus on Consumer end is presently a fundamental error, really fundamental.
Rather the real problem at this time is not Consumer end, it is rather industrial capacity – and the addition of industrial capacity in complex areas along multiple parallel series of industrial value chains from mining
A timing issue which can (and is starting to) lead to physical binding constraint in combination with the return to normal industrial sector facing interest rates (from the highly abnormal conditions of the past 15-20 years post 2008 crisis).
The Financial Times has a rather useful recent set of articles
* Offshore Wind (but more broadly): https://www.ft.com/content/8b8aaa67-0c9c-47a6-949d-09bd79a5241d
* Industrial elec cablling (transversal constraint, transmission, off-shore, onshores, etc) https://www.ft.com/content/c88c0c6d-c4b2-4c16-9b51-7b8beed88d75
* Grid expansion https://www.ft.com/content/a3be0c1a-15df-4970-810a-8b958608ca0f
As I am quite literally an RE infra investor, these issues are my bread and butter. Regrettably at present the greatest threats are (a) NIMBYism on transmission, extraction, RE siting, (b) Green Left NGO magical thinking and blind parroting of mantras like RE costs going down [ ignoring the economics drivers, scale scale scale] (c) Nationalist Protectionism of which the Biden policies are sadly contaminated with at present, where significant advantages of joint US-EU zone common investment zone (to offset China) are medium term WinWins (even short term) (d) and for God’s sake the mad MAGA idiot denialism (and the largely USA centric hydrocarbon lobby idiots, although they are really quite secondary except in your MAGA politics to real binding constraints that are much more dangerous as they are ignored in real fact).
Adding industrial capacity in these areas is not easy nor face, it’s not USA App Tech land.
You have far too much focus on Consumer (a very USA bias) and far too little on the Infra and the fundamental Industrial Mfg add invest.
Badly needed given the return to normalised interest rates are interest rate levelising mechanisms (notably proven tools as like developer focused project guarantees [tied to effective launch of investment] to shave off points and bring down financing cost while leveraging private capital and not heavily drawing on government direct balance sheet)
ETA
In respect to “I get why we don’t want to subsidize the relatively well-off. ” (understood as a counter-comment)
Generally speaking there are trade-offs in cost between controlling for access (documentary, direct costs, etc) and also politics.
If one’s goal is to (a) accelerate adoption and scaling [although with the issues of industrial band-width this is a qualified goal]; (b) broader buy-in, the trade-off in Control Cost versus political capital generated by broader access.
While I have not run any particular numbers, in my non American experience, frankly the control trade off cost strikes me in current environment as Penny Wise Pound Foolish – having an Accountant myopic view in the end.
However this is from Euro-Mediterranean world experience, but I rather suspect that at this time restrictions are Pound Foolish. so in end I am agreeing I have just realised with your observation.
I think the US is more likely to emphasize the consumer side as people are leery of appearing to pick winners and losers on the industrial side. Look at Solyndra. It was a government financed loan program and Solyndra lost money, but the program as a whole made money, while also providing financing to a number of green energy projects. So we made money and increased industrial capacity, a win. Well, a win except its now used over and over as an example to avoid govt involvement on the industry side and since most people are not well informed they believe it. That said, in this particular program it looks to me like it should have positive effects on industry.
On the consumer side it’s a tax break. It’s not picking who gets it other than some income limits.
Steve
I think the reason this sort of thing isn’t better than it is from a wonkish point of view is that climate change policy doesn’t turn out to be anybody’s Number One policy priority. For many, it’s on the list, but there’s always something they care more of it.
All the other stuff, like the income caps, and so on, demonstrate this.
@steve: USA has an enormous conceptual biais to consumer based thinking ….
Regarldess you are setting yourselves up for a train wreck if you do not grapple with the industrial policy. As anyone can know from my history, I am no great fan of industrial policy but I am also a pragmatist who is against letting ideology constrain.
And in terms of timing, speed and adaptation, this is pragmatically justifiable industrial policy area if one is aligning with broadly accessible approach (it could be for USA you may need to delegate down to a private FI, certainly having lending or guarantee inside of a Ministry like Dep of Energy is generally a Bad Idea structurally, it is much better to have specialist development lender. Your USDFC might be a vehicle but as it is international focused, probably a parallel or a mirrored).
The immediate constraint on financing costs rising back up to historically normal levels are digestible but need adjustment time as the entire system adjusts back up.
Focusing on driving consumer demand is the Wrong Approach now as it is more than clear that across multiple first order industrial areas (primary inputs, secondary inputs as cabling – either equipment or transmission, etc) severe binding physical production constraints are emerging.
I fear that inattention to this risks generating a mass-scale Yellow Vests backlash which ultimately undercuts the otherwise highly positive transition investment to “green”
And the tendency on Greeny NGO Left to blither on about Big Oil and otherwise engage in magical thinking regrettably is contributing more to unrealism than the idiotic WSJ – Exxon lobby (for all that this of course is also a negative – I presume the utterly idiotic articles I read about New Jersey whales is from this hidden lobby).
@Jay L Gischer:
@Lounsbury:
Whichever approach is taken, climate action in the US has become another front in the culture war. Krugman, this AM:
In the last couple of weeks a prominent R blamed the killing heat of this season to, well it’s summer, and the usual suspects released an energy plan for the next R admin, cut Biden’s environmental programs and burn more fossil fuels.
We’re at the point where what is left is to cope and retreat.
Climate has been an irrational culture war issue with USA land now for as long as I have been in RE investment, indeed longer perhaps.
That is besides the point – Mr Biden rather cleverly managed to pass his bill and laying the market foundations for support (and conversion if one will) is your path.
Regardless, investment is needed – spend less time selling Save the Planet, more
I frequently tell the touchy feely greenies who come up to congralate on the hundreds of millions of euros moved into RE under what I manage we are successful because I don’t sell goddamn save the planet and touchy feely enviro, I sell centimes. Savings, fixed cost revenue streams (or energy cost streams and avoidance of cost variability). I hate nothing more than being invited to bloody save the planet bloody ateliers.
More of this is needed, more hard infra or indeed it all will fail.
Scale infra, scale grids – focus on bread and butter.
@Lounsbury:
This. I cut my teeth in campaign work through the efforts to pass ACES back in 2009, 2010. Climate change denial then was almost entirely rooted in being against whatever the Dems were for, updated daily. Krugman and other literati back then loved to pretend the conservatives were a lively mix of country club republicans, moderate Christians, and maybe–maybe–a soupcon of white nationalist troglodytes, but really those guys were just outliers.
It was always Troglodytes All The Way Down
@Neil Hudelson:
And its worth mentioning that has been weaponized for years by industrial interests as @Lounsbury notes above when mentioning the lobbiests.
Which also gets to something challenging with their drum beat:
Again this is 100% true and also gets to this weird sort of abstraction about the “you” in this case. Because as they note a core issue here is “the largely USA-centric hydrocarbon lobby idiots” that are working in both the industrial and investment spaces. And I suspect this goes further than just that particular lobby actively fighting any industrial regulation at all political levels.
This, at least in the US, is a crisis of culture and capitalism.
@Lounsbury:
What?
Oh no! We were about to get insight into Louns’s wisdom and knowledge of what can be done and what would be wise to do but instead he leaps over to
losing the focus the first statement had and alienating at least part of the audience with a gratuitous insult. TRY TO STAY FOCUSED, DOOFUS!!!
ETA: Finish your original statement AND THEN go on to your insulting “touchy feely greenies” example. You might even find that the audience ignores the offensiveness of it and catches the way that it compounds the message–that some people didn’t get because they stopped reading a “touchy feely” (which should have been “touchy-feely” two words, single modifier).
ETA #2: ESL/EFL grammar training. It matters!
@Just nutha ignint cracker: I’m pretty sure Louseberry is a Large Language Model trained on unpublished and unedited late 19th century manuscripts and on its own output. Reified, if you will.
@Sleeping Dog:
There’s a not implausible theory that recent environmental changes to require cargo ships to use lower sulfur oil is decreasing the cloud coverage (previously you could see ship tracks as clouds from orbit, and now it is a lot harder, so that much is pretty solid), as well as the (acid) rain, and so it is heating up oceans. Basically that we just turned off a massive geoengineering experiment that was keeping our planet a little cooler.
@Gustopher: Certainly would explain some things.
@Matt Bernius:
it is not a crisis of bloody capitalism. Not even in USA. There is significant capital. It is s political problem certainly, but not a capitalism one.
The problem you have is the Left side reification of Business or Capitalism as a single entity, a thing, rather than abstractions that contain significant internal diversity of interest. Even speaking to “industriel interests” is fallacy.
I am lining up a half billion euro RE Facility right now as third génération investment facility. Capitalism. Pure Capitalism for markets rather more challenging than USA. Financing to private projects, some European “blending” to mitigate excess financial risk of ehich rate (interest and FX).
The useful interest of the Biden industriel policy is the advancement of development of domestic industriel and financial interest in favour and with significant economic interest in expansion and continuous expansion, meaning more facts on the ground (as Tesla managed).
Incentive on interest rate pricing and permit streamlining. More regulatory is not needed. Not adoption mandates when production constraints are primary. Less is reg and red tape is needed.
The economics on cost of REare generally moving in the right direction and will continue IF one does not engage in magical innumerate greeny NGO thinking and grapples with industriel capacity constrain, and infrastructure constraints (grid grid and more grid). Else the cost numbers will go wrong and its massive Yellow Vests type backlash.
The green Left shares with the WSJ cretins a set of thinking trapped in the logic of the state of RE circa 70-80s.
So rather than going on sbout capitalism.fallaciously, divide and conquer rather than throwing up your hands, wailing and rolling in ashes over the evil of capitalism, with modern numbers tcapital wishes to move, but speed, capacity and smoothing financing variability.
Like as you lot continuously sneering view MAGA and “GQP” or other useless BoBo Intelloist jargon, as one thing, hodge poge of corrupt and tubes, rather identify opportunities to split off subsets, small comprise to undercut the wider evil. (exemplified here@Neil Hudelson: as some of my best first American RE contacts were and are Texan Republicans, people with real economicinterests. But of course rather more satisfying to engage in inward tribalism than engage in id of opportunities of tactical compromise as unsatisfactory impure … slthough Biden has proven a masterful genuis in achievinggoals despite the pure wool Left decrying soi disant naïveté)
Globalement RE économics at utility scale need support to speed, not fundamentals. Given bloody Manchin his pipeline or coal candie, you are giving him what all investment banks know are dead end assets. Just ensure that the RE and nuclear and the massive long distance and retail grid is streamlined, and RE crushes.
@Just nutha ignint cracker: I really do not give a single care that the thin skinned weak minded Left gets upset, being largely ineffectual whingers.
@Lounsbury:
Well that clearly struck a nerve… you had to do even more lib-punching than usual to try and handwave away the role that lobbying and money played in creating the underlying anti-regulatory environment in the US (not to mention the denial of science) that is preventing the big industrial moves you correctly state are necessary.
Of course, as usual with you, it’s always the Libs fault, who are I guess worse than Maga. Never the various industries that have spent ungodly sums of money trying to prevent the very work you as asking for (and I will note you even acknowledge it in your original post).
I stand by my analysis, with one key addition: it’s a failure of American capitalism (and in particular how it intersects with our Government systems at the State and Federal levels)–which I think is a different entity that Capitalism as practiced in Europe (which also has a different regulatory landscape). Of course, I expect that will make your head spin–but frankly pissing you off with nuance is fun.
In the meantime, keep telling yourself Green Lantern myths and pretend that this isn’t a major part of the equation in the US.
BTW, as a perfect example of those conditions at play, see this awful platforming of the Trump era EPA Chief of Staff and convince us that you don’t hear the industry dollars backing this climate denying promise to undo everything that the Biden Administration has done in favor of a “free market” approach to adapting to climate change that really won’t be all that bad:
https://www.npr.org/2023/08/08/1192634090/if-republicans-win-the-white-house-in-2024-climate-policy-will-likely-change
@Lounsbury:
The one thing I will agree with in your post is this:
Completely right. However, there is more than equal capital fighting against any government interventions (in particular regulations and carrot-and-stick incentives for change).
I also agree that protectionist measures don’t make sense. And that neither side is particularly good with this.
@Lounsbury: Yeah. We’ve noticed that message takes second place in your view. I just wonder why all the verbiage given that viewpoint.
@Lounsbury:
Oh did they have real economic interests? For real real? And they were your contacts?
Well my bad.
Lol “inward tribalism.”
There is a certain type of loquacious elocutor who believes redundancy, superfluidity, and repetition is a perfectly adequate substitute for precision, even though it is a rather slowly inefficient method of achieving success in communicating ones thoughts vis a vie and in comparison to frank brevity, wouldn’t one say?
@Neil Hudelson: Witold Gombrowicz wrote a very nice novel, Trans-Atlantyk, about being a Polish author in Argentina as WW2 was breaking out, and not bothering to head back, despite all expectations placed upon him.
For reasons that escape me, it was translated into Faux Early 1700s English, and your Faux Louseberry has a touch of the extraneous vis a vie stuff used extensively in that translation.
There was a later translation, where the translator used the introduction to lament the poor choices of the previous translation, and how finally there would be a proper translation without all those truly bizarre decisions. This new translation is into Faux Late 1800s English, and honestly feels flat.
I await a third translation into Clockwork Orange Droog Slang or stream of consciousness Valley Girl.