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Place your big bets: Long-term impacts of the Inflation Reduction Act

Five big ways in which the new U.S. climate legislation could reshape consumer behavior, economics and political alignment.

Inflation Reduction Act 2022

An opportunity message persuades far better than a fear message, one reason to be optimistic about the Inflation Reduction Act of 2022. Image via Shutterstock/Vitalii Vodolazskyi

Even in cynical, self-dealing Washington, D.C., fairy tales can come true, and legislative backflips can yield the occasional good outcome. Such was the case with Congressional passage of the Inflation Reduction Act (IRA) of 2022.

Most of the attention, to date, has focused on the goodie bags of grants, subsidies and tax incentives contained within the legislation, and the political winners and losers. More consequential will be the longer-term impacts of how this historic legislation can reshape consumer behavior, economics and political alignments. Five big bet outcomes are especially noteworthy:

1. The legislation incentivizes the middle class to buy into a cleaner, more competitive economy. For about 40 years, the liberal/progressive community has been singularly unsuccessful at positioning its climate proposals to gain the support of the middle and working classes. The 2022 Inflation Reduction Act goes a long way towards remedying this shortcoming by providing meaningful incentives for middle- and lower-income people to reduce their household energy costs and transform their energy use and consumption behavior. 

Specifics include a $7,500 tax credit applied at the point of sale for new electric vehicles and $4,000 for the purchase of a used EV. Tens of millions of people are eligible for these and other tax credits to buy heat pumps and renewable energy systems. Altogether, these incentives can save consumers about $1,800 in their annual energy bills, according to Rewiring America. To be sure, financial factors do not drive all consumer decisions, but they play a central role.

Another noteworthy part of the legislation is the absence of words such as "sustainability," "net zero," or other jargon favored by policy wonks who have never learned how to communicate with ordinary voters. Rather, the new law stresses expanded health care, deficit reduction, investments to improve our economy and communities, jobs creation and opportunities for a better way of life. Pollster Frank Luntz is correct: An opportunity message persuades far better than a fear message, and a goal of a "cleaner, safer, healthier" environment is more personally relevant to voters than terms such as "sustainability."

2. Industrial policy applies to climate change. As documented by economist Mariana Mazzucato ("The Entrepreneurial State") and others, the United States has practiced industrial policy on a grand scale throughout the entirety of the post-World War II era through investments in the creation of the Internet, telecommunications, the Interstate Highway System, pharmaceuticals and robotics, to name a few.

Using the federal government’s unique ability to socialize risks, the IRA makes explicit that it will provide the visible, guiding hand to directly invest in a suite of new and existing technologies to advance national competitiveness, energy security, greenhouse gas reductions, energy and transportation technology innovations, transformation of the electricity grid, environmental justice and support of underserved communities.

Through means direct, such as financial penalties for failure to achieve methane emission benchmarks or appropriations for the U.S. Postal Service to purchase zero-emission delivery vehicles, and indirect, including advanced energy credits for solar photovoltaic cells, wind technology components, battery cells and the production of clean hydrogen, the U.S. government will participate in the funding of research and development, commercialization and scaling of multiple families of technologies to achieve a 40 percent reduction of greenhouse gases by 2030.

Because the IRA relies primarily upon financial incentives rather than regulations to achieve its outcomes, there are numerous opportunities to build even stronger economic and political coalitions in the future ...

3. Newer industries are favored over older ones. Sen. Joseph Manchin (D-W.Va.) was able to insert provisions to authorize continued oil and gas leasing in Alaska and the Gulf of Mexico, and support a gas pipeline in his state, but these represented a relatively small fraction of the $369 billion approved in the climate provisions of IRA.

To its credit, Congress (including Manchin) designed a law that favors newer, emerging technologies over existing, fossil fuel-based sectors. While the chemical and petroleum industries will clearly be players to develop innovations for direct air capture of carbon or cleaner forms of hydrogen, the financing provided to non-fossil fuel technology development and collaborations should blow a strong breeze of competitiveness across the marketplace.

4. The potential for economic equity receives a significant push forward. Initiatives to advancing environmental justice and support underserved communities received a major push in the 2021 Bipartisan Infrastructure Law, with its emphasis upon investments in new drinking water systems and environmental remediation. The Inflation Reduction Act builds upon this foundation by prioritizing solar and wind energy for lower-income communities, providing building efficiency rebates, allocating rural development and assistance for underserved farmers and those living in high poverty areas, creating environmental and climate justice block grants, and focusing on enhanced air pollution monitoring and abatement.

It remains to be seen whether the armies of well-heeled architectural, engineering and legal consultants will crowd out the voices of those representing the disadvantaged and distressed in the competition for financial access and support. It is especially incumbent upon policymakers at the federal level to ensure that those most in need receive the benefits of this legislation.

5. Passage of IRA reflects an emerging realignment of priorities and politics. Public policy is catching up with public opinion. Enacting a pro-business, pro-consumer law clearly separates in the public’s mind those who can best address today’s economic and environmental anxieties (while protecting our access to a better future) compared to business and political interests that seek to perpetuate income, class and racial inequalities to the exclusion of a more socially mobile and just society.

Many current business leaders are confused or willfully duplicitous as to which side of the change pendulum they are on. A case in point is General Motors CEO Mary Barra. Upon her appointment in 2014, she accepted the bankruptcy bailout provided by the Obama administration and the higher auto mileage standards that accompanied it. With the arrival of the Trump administration, she joined other automakers to oppose the higher mileage commitment she previously made. The passage of the 2021 Bipartisan Infrastructure Act (and its generous public funding of electric vehicle charging stations) brought Barra, with an outstretched open palm, back into the line to receive federal largesse. However, as chair of the Business Roundtable, she opposed passage of the Inflation Reduction Act because of its corporate tax and environmental provisions.

Many progressives are disappointed that the final version of IRA did not meet their higher spending expectations. They should be thankful it did not. One of the most influential of all factors shaping the future success of this legislation is the number of skilled professionals across federal, state and local governments that possess knowledge of how to administer grants, contracts, cooperative agreements and other instruments of government so necessary for implementation success. Over multiple administrations there has been an extended erosion of talent and experience in these functions. Governments at all levels will be significantly challenged to effectively manage approved IRA funding over the next 10 years.

Because the IRA relies primarily upon financial incentives rather than regulations to achieve its outcomes, there are numerous opportunities to build even stronger economic and political coalitions in the future, rather than getting bogged down in the trench warfare of the regulatory process.

Faced with tangible evidence of new technology investments, significant job creation, wage increases and the ability to successfully mobilize the nation around the IRA’s big climate goal, progressives, the private sector, trade unions and middle- and working-class voters can position themselves for more ambitious push beyond 2030 to 2050 goals and investments.

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