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Economic Implications of the Climate Provisions of the Inflation Reduction Act

Author

Listed:
  • John E. T. Bistline

    (Electric Power Research Institute)

  • Neil R. Mehrotra

    (Federal Reserve Bank of Minneapolis)

  • Catherine Wolfram

    (Massachusetts Institute of Technology)

Abstract

The Inflation Reduction Act (IRA) represents the largest US federal response to climate change to date. We highlight the key climate provisions and assess the act's potential economic impacts. Substantially higher investments in clean energy and electric vehicles imply that fiscal costs may be larger than projected. However, even at the high end, IRA provisions remain cost-effective. The IRA has large impacts on power sector investments and electricity prices, lowering retail electricity rates and resulting in negative prices in some wholesale markets. We find small quantitative macroeconomic effects, including a small decline in headline inflation, but macroeconomic conditions - particularly higher interest rates and materials costs - may have substantial negative effects on clean energy investment. We show that the subsidy approach in the IRA has expansionary supply-side effects relative to a carbon tax but, in a representative-agent dynamic model, is preferable to a carbon tax only in the presence of a strong learning-by-doing externality. We also discuss the economics of the industrial policy aspects of the act as well as the distributional impacts and the possible incidence of the different tax credits in the IRA.

Suggested Citation

  • John E. T. Bistline & Neil R. Mehrotra & Catherine Wolfram, 2023. "Economic Implications of the Climate Provisions of the Inflation Reduction Act," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 54(1 (Spring), pages 77-182.
    • Handle: RePEc:bin:bpeajo:v:54:y:2023:i:2023-01:p:77-182
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    Citations

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    Cited by:

    1. Ambec, Stefan & Yang, Yuting, 2024. "Climate policy with electricity trade," Resource and Energy Economics, Elsevier, vol. 76(C).
    2. Bernardo Caldarola & Dario Mazzilli & Lorenzo Napolitano & Aurelio Patelli & Angelica Sbardella, 2023. "Economic complexity and the sustainability transition: A review of data, methods, and literature," Papers 2308.07172, arXiv.org, revised Mar 2024.
    3. Sandra Batten & Stephen Millard, 2024. "Energy and Climate Policy in a DSGE Model of the United Kingdom," National Institute of Economic and Social Research (NIESR) Discussion Papers 553, National Institute of Economic and Social Research.
    4. Caballero, Mariah D. & Vandenbergh, Michael P. & Gilligan, Jonathan M. & Currier, Elodie O., 2024. "Incentivizing household action: Exploring the behavioral wedge in the 2021 Infrastructure Investment and Jobs Act and the 2022 Inflation Reduction Act," Energy Policy, Elsevier, vol. 186(C).
    5. Zhang, Wenyan & Wang, Yanan, 2023. "Impacts of subsidy reallocation policy on the innovative performance: Empirical evidence from photovoltaic industry in China," Finance Research Letters, Elsevier, vol. 58(PB).
    6. Li, Yi & Liu, Christy Ying Ni & Lao, Ut & Dang, Jiangtong, 2024. "Navigating the path to environmental sustainability: Exploring the role of fintech, natural resources and green energy in Belt and Road countries," Resources Policy, Elsevier, vol. 88(C).
    7. John Bistlinea & Chikara Onda & Morgan Browning & Johannes Emmerling & Gokul Iyer & Megan Mahajan & Jim McFarland & Haewon McJeon & Robbie Orvis & Francisco Ralston Fonseca & Christopher Roney & Noah , 2024. "Equity Implications of Net-Zero Emissions: A Multi-Model Analysis of Energy Expenditures Across Income Classes Under Economy-Wide Deep Decarbonization Policies," Papers 2405.18748, arXiv.org.
    8. Stamatios K. Chrysikopoulos & Panos T. Chountalas & Dimitrios A. Georgakellos & Athanasios G. Lagodimos, 2024. "Green Certificates Research: Bibliometric Assessment of Current State and Future Directions," Sustainability, MDPI, vol. 16(3), pages 1-45, January.

    More about this item

    Keywords

    Climate change; Inflation Reduction Act; US economy;
    All these keywords.

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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