A recent op-ed in the New York Times declares the Inflation Reduction Act (IRA) “a huge political success.” It argues that green energy subsidies, as opposed to a carbon tax, are a winning climate strategy. According to the piece, continuing to subsidize clean energy technologies without a carbon tax will help achieve decarbonization. The author is right that the IRA credits would lead to some decarbonization. Still, lawmakers could improve climate policy by enacting a carbon tax.
A carbon tax is an ideal policy to address climate change. By pricing emissions directly, it would allow the market the flexibility to cut emissions quickly. Instead of a direct price on carbon, the 2022 Inflation Reduction Act enacted dozens of tax credits for clean energy producers and consumers. The Congressional Budget Office estimated that these tax breaks would cost more than $260 billion over ten years. Some of the major credits include the Production Tax Credit, the Investment Tax Credit, the Advanced Manufacturing Production Credit, and the Residential Clean Energy Tax Credit. The Rhodium Group estimated that the IRA climate provisions would reduce U.S. emissions by 40 percent below 2005 levels, compared to 24 percent to 35 percent under current policies.
Although the IRA’s tax credits are projected to reduce emissions, there are some notable downsides to this approach.
Because credits aren’t as broad as a carbon tax, they won’t reduce emissions as much. For example, the clean vehicle credits would create an incentive to purchase electric vehicles, and this would reduce gasoline consumption. However, electric vehicle owners may still be consuming electricity generated by coal rather than renewable energy. A carbon tax would encourage both switching to electric vehicles and the consumption of clean electricity.
What’s more, some of the money spent on credits is wasted in increasing overall energy consumption. With the IRA tax breaks, some consumers might switch to cheaper clean energy, but others might increase their overall energy consumption because energy is cheaper overall. This problem doesn’t arise under a carbon tax, and it would actually raise a significant amount of revenue that can be used to help develop clean energy technologies.
A carbon tax would discourage the consumption of fossil fuels and encourage the transition to clean energy. It would also enable the removal of most clean energy subsidies. This would significantly reduce government spending and alleviate the burden on the federal deficit. A carbon tax is also technology-neutral by nature, whereas sector-specific subsidies inevitably allow the government to arbitrarily pick winners and losers.
Relying on massive government subsidies is a sloppy climate strategy, especially when a carbon tax is such a viable alternative available for incentivizing emissions reduction. When there is a political window, policymakers should strongly consider pricing carbon to help achieve the net-zero climate goals effectively and efficiently.
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