The increasingly poorly named Inflation Reduction Act (IRA), signed by President Biden in 2022, comes with incredible costs. These come from massive spending, like tax credits and grants, as well as from the law’s market-distorting effects. The bill was marketed as a way to reduce inflation (but alas, this doesn’t make sense because it spends lots of money) and to decarbonize the economy through subsidies for clean energy and electric vehicles.
At the time of its passage, the cost of the IRA was significantly underestimated. The Congressional Budget Office (CBO) placed the cost of the law’s energy provisions at $370 billion. This estimate was unrealistically low, especially considering that many of those provisions are uncapped, so potential costs are essentially unlimited. This includes two of the law’s costliest subsidies, the Production Tax Credit and Investment Tax Credit, which pay clean energy producers for producing power and investing in new facilities, respectively.
Given the scope of the law and the costly, uncapped provisions, the CBO estimate was woefully low. New analysis from Travis Fisher and Joshua Loucks at the Cato Institute reveals the true extent of the IRA’s costs.
They place the 10-year costs of the IRA between $936 billion and $1.97 trillion. A 2023 estimate from Goldman Sachs for the 10-year costs places them within the Cato report’s window at $1.2 trillion. The report also projects that the costs by 2050 will be between $2.04 trillion and $4.67 trillion. This is an astronomical amount of money—far higher than the initial estimates for the IRA’s costs.
If this weren’t bad enough, the Investment and Production Tax Credits both cause significant market distortions in the power market. Because the qualifying energy sources are receiving so much taxpayer money, it’s hard for other sources to compete economically. The power grid relies on dispatchable sources like gas, coal, and nuclear to be able to respond to demand as it occurs. Nuclear plants receive subsidies under the IRA but would be better served by an undistorted market. Natural gas and coal plants are made uneconomical by these and other distortions.
As Fisher and Loucks point out in their report, making reliable power uneconomical will not necessarily force those facilities to close. They explain, “If the growth in nationwide electricity consumption continues, many of the existing GHG-emitting power plants will be needed for reliability—and this is true independent of their profitability.” Further intervention will be necessary because those plants keep the lights on. One market distortion leads to another, and another after that. If the initial distortion isn’t removed, the problem only snowballs.
The IRA is far more costly than advertised when it became law, and the market distortions that it creates are just as harmful as the spending.
Congress should make repealing the energy-related subsidies an important focus.