Federal Energy Tax Credits Will Cost More Than $4 Trillion. Lawmakers Might Not Cut Them.
Republican members of Congress are lobbying to keep the Inflation Reduction Act's tax credits alive.
With a continuing resolution passed and the federal government funded through September, Republican members of Congress are aiming to finalize a budget resolution, which needs to be agreed to by both chambers, by the week of April 7, reports Politico. This self-imposed deadline may not be met.
One of the largest sticking points in House and Senate negotiations is the House-passed plan to identify $880 billion in spending cuts through FY 2034 in programs overseen by the Energy and Commerce Committee. This feat would likely require substantial reforms or cuts to entitlements like Medicaid. Sen. Lindsey Graham (R–S.C.), the chairman of the Senate Budget Committee, called the House's plan "woefully inadequate."
A source of wasteful spending that lawmakers could target is energy tax credits from the Inflation Reduction Act (IRA).
Passed in 2022, the IRA supercharged subsidies and tax credits for all types of energy technologies, including renewables, sustainable aviation fuel, nuclear power, and electric vehicles. The bill also gave oil and gas companies access to $500 billion in new tax credits, according to the tax firm Baker Tilly. So far, the IRA's subsidies have largely benefited wealthy households and large corporations.
The Congressional Budget Office initially projected the IRA to cost $370 billion over 10 years, but the price of the bill's energy and climate provisions has steadily climbed since. A recent report by Travis Fisher and Joshua Loucks of the Cato Institute estimates that the IRA's tax credits and subsidies will cost taxpayers $936 billion to $1.97 trillion in 10 years and between $2.04 trillion and $4.67 trillion by 2050. Tax returns already signal a higher bill than anticipated. Tax credits for residential clean energy and energy efficiency, which were originally estimated to cost $459 million in 2023, ended up costing $8.4 billion that year.
One of the most expensive provisions of the bill is its clean electricity investment and production tax credits, which have no set expiration date and will sunset when a 75 percent reduction (compared to 2022 levels) in greenhouse gas (GHG) emissions from the electricity sector is achieved.* As the report points out, growing power demand and the Trump administration's rollback of regulations will slow down or even stall decarbonization of the grid, leaving taxpayers on the hook to pay for these credits indefinitely. Cato says these two credits will "likely cost taxpayers between $70 billion and $180 billion per year in the years just before the GHG target is met."
Costs aside, the IRA, which has been heralded as the largest climate bill in history, does a poor job of reducing GHG emissions. Cato estimates that the bill's provisions will reduce carbon dioxide (CO2) emissions at a cost of $224 to $535 per ton. Tree planting and natural regeneration, meanwhile, can reduce CO2 emissions at a price of $23 per ton.
Despite the bill's ballooning costs and inefficient GHG reductions, a repeal of IRA spending, which would require full Republican support, is unlikely. Recently, 21 House Republicans signed a letter in support of keeping the bill's tax credits.
The IRA funding that's available to be cut could also be less than originally anticipated because "a lot of the dollars had already been pushed out by the Biden administration," Rep. Bob Latta (R–Ohio), the chairman of the Energy Subcommittee of the House Energy and Commerce Committee, told E&E News this week.
*CORRECTION: The original version of this article misstated the GHG reduction level at which the tax credits would expire.
