Members of Congress on both sides of the aisle have long recognized the need to reform our energy tax laws. But rather than work on stakeholder-informed, bipartisan energy tax policies that would support a technology-neutral approach, Democrats pursued a partisan path through their misnamed Inflation Reduction Act (IRA).
Republicans warned that the IRA would take us down a dangerous, fiscally irresponsible path to provide ever-ballooning subsidies, antagonize allies and, ironically, reward the very industries that are reliant on China. Unfortunately, what we warned of has come to pass, leaving Americans to deal with the fallout of these predicted consequences:
One consequence is the cost, which keeps rocketing upward by hundreds of billions of dollars. Cost estimates for the IRA’s energy tax incentives have increased markedly since the enactment of the law. Penn Wharton’s Budget Model originally estimated the climate and energy provisions in the IRA would cost nearly $385 billion. After new implementation details emerged, Penn Wharton revised the model, estimating the climate and energy provisions would actually cost upward of $1 trillion.
Spending on clean cars and trucks alone is now estimated to cost $393 billion over 10 years--more than the original estimate for the entirety of the IRA’s energy and climate-related provisions.
While many have focused on the fact the IRA is not forecasted to actually reduce inflation (indeed, Federal Reserve data on stubbornly-high electricity and fuel prices validate these concerns), some have persuasively argued it will actually fuel inflation. Their argument is that existing (and likely future) raw materials--both critical minerals, and metals like copper and aluminum--are insufficient to meet forecasted resource demand as the IRA forces a transition to an electricity-focused future. These supplies cannot be rapidly scaled up, whether at home or abroad.
As more money chases constrained raw material supplies, costs will increase. Given that many goods Americans use are also made from these materials, cost increases will ripple through the economy.
A strain on America’s trade relationships with allies is another predicted consequence. To mitigate our partners’ anger on electric vehicles tax credits, the Biden administration usurped congressional authority by redefining the long-understood concept of a market-oriented "free trade agreement" to now include agreements that fail to open any markets for American workers. Not only have these executive agreements caused significant foreign trade disputes with our allies, but they have also sparked bipartisan backlash from members of Congress.
CHINA'S THREAT TO OUR NATIONAL SECURITY THAT MIGHT SURPRISE YOU
The rushed, disjointed policies at the heart of the IRA’s provisions have put American companies and consumers at a disadvantage. The Biden administration has resorted to unilaterally walking back and diluting key guardrails at every opportunity. Each move supports manufacturing jobs overseas and cedes additional control of our supply chains to foreign competitors, as even some of my colleagues across the aisle have acknowledged.
Domestic supplies of critical minerals that are eligible for the credit are particularly insufficient to meet anticipated demand. While the IRA includes incentives to re-shore the production and refining of critical minerals, foreign actors--particularly China--have a significantly entrenched dominance in the area. Faster regulatory and permitting approval is necessary to reduce the barriers for investments in critical minerals in the U.S., and will have a far greater impact than any IRA incentive.
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While many U.S. companies and consumers are at a disadvantage under the new green energy regime, there is one clear winner: China. Given China’s dominant position in numerous aspects of the alternative energy ecosphere, any green energy tax incentives that do not explicitly prevent claimants from involving China in any aspect of the particular supply chain will benefit China.
In China, economies of scale, supply chains and first-mover advantages ensure that for the foreseeable future, most of America’s green energy growth will be originating from the one place the IRA claims it should not. Gaping loopholes in the bill, like the "leasing exception" for EVs, as well as expansive regulatory guidance that undercuts key legislative guardrails will enable Chinese minerals, materials and entities to qualify for IRA subsidies reinforce America’s dependence on China for alternative energy. Meanwhile, the administration’s rules and guidance may potentially exclude domestic players who are connected to traditional energy sources.
As the price of the misnamed Inflation Reduction Act escalates, it is increasingly clear that its costs and shortcomings far outweigh its benefits. We would do far better to roll back its directives and heed Americans’ justified concerns with the forced shift to certain types of green energy that the administration’s broad-based effort to eliminate traditional energy sources will lead to.
Instead of increasing U.S. dependence on China and further encouraging manufacturing overseas, we must pursue a commonsense "all of the above" approach to America’s energy needs, and we must do it now.
