Answering Frequently Asked Questions about the Inflation Reduction Act’s Energy Subsidies
Travis Fisher and Joshua Loucks
Last week, Cato published Policy Analysis No. 992, titled “The Budgetary Cost of the Inflation Reduction Act’s Energy Subsidies: IRA Energy Tax Credits Could Cost $4.7 Trillion by 2050.” This work is significant because the IRA is the largest climate subsidy package in US history (possibly in world history), yet no one has a clear picture of just how much the IRA’s energy provisions will cost American taxpayers.
Our analysis is also timely because members of Congress are debating which parts of the IRA to reform or repeal. We find that energy spending under the IRA is much higher than government estimates would indicate, up to $4.7 trillion, and faces no binding cap. The energy subsidies in the IRA could continue to climb each year through 2050.
We hope Congress will fully repeal the IRA’s energy subsidies as part of the coming budget reconciliation package. At a minimum, the IRA’s significant spending deserves scrutiny. Along those lines, we appreciate the feedback we have received on our estimates of the cost of the IRA’s energy subsidies. Here are our responses to some of the most common questions and critiques of our policy analysis.
- Why produce budget estimates when the government already does that?
The IRA is too expensive to get wrong. Legislative proposals to reform the IRA’s subsidy provisions will trigger a “budget score,” meaning an estimate of the legislation’s budget impact. The analysis underpinning the formal budget score will likely be performed by both the Joint Committee on Taxation (JCT) and the Congressional Budget Office (CBO).
Unfortunately, such analysis is essentially done in a black box. The JCT and CBO should use transparent and replicable methodology to arrive at their budget score. Whether they adopt our methodology and assumptions is less important than striving to give policymakers an accurate budget score upon which to base their votes. To put it mildly, JCT and CBO fell well short of an accurate score in their earlier efforts.
We did our own analysis to give lawmakers a glimpse into how the IRA could be scored. We made it replicable so other groups, as well as the JCT and CBO, could rethink earlier estimates. Although some lawmakers may still support the IRA even with a $4.7 trillion price tag, they should go into the debate with eyes wide open. In contrast, the original votes in support of the IRA were cast when the spending estimate was approximately $370 billion. Further, initial analyses did not make it clear that some of the IRA’s most lucrative energy subsidies will not expire for several decades.
- What exactly are the budgetary costs of the IRA?
The IRA’s energy subsidies are analogous to a fiscal time bomb, with our estimates suggesting total costs could exceed $4.7 trillion by 2050. The table below shows our estimates of the budgetary cost of the IRA under lower-bound and upper-bound assumptions, using scoring windows of 10 years and 25 years.
Originally sold as a temporary measure to drive innovation, the IRA instead entrenches permanent subsidies for mature technologies like wind and solar, even though these industries already account for over 15 percent of US electricity generation and nearly 30 percent in states like Texas and California. The IRA’s subsidies come at a steep cost, ultimately paid by taxpayers, consumers, and businesses through higher taxes, rising federal debt, or inflation.
- How do you account for the IRA’s climate benefits?
The IRA’s climate benefits derive from the Social Cost of Carbon (SCC) framework, which we view as too arbitrary to form the basis for judging public policy. However, we do address the IRA’s carbon dioxide (CO2) abatement costs in the appendix of our paper. Applying our lower-bound and upper-bound estimates of the cost of the IRA by 2050, we estimate that the CO2 abatement cost of the IRA is between $224 and $535 per ton.
Different assumptions about the cost of the IRA, its impact on CO2 emissions levels, and the social cost of CO2 would yield different results. However, based on the SCC as estimated under President Obama’s Environmental Protection Agency (about $50/ton) as well as President Biden’s (about $190/ton), our estimates show the IRA’s energy subsidies would not pass a cost-benefit test.
- How does your finding of unlimited subsidies square with budget rules?
It doesn’t. Earlier analyses must have assumed that energy subsidies like the production tax credit and investment tax credit would phase down by the end of the budget scoring window, but that is simply not correct. Instead, they phase down when the US electricity sector’s greenhouse gas emissions fall below 25 percent of 2022 levels. Such emissions reductions may never happen.
If the phase-down trigger for these subsidies had been more closely examined, we feel the IRA would not have satisfied budget reconciliation rules in the Senate because it increases the deficit beyond the original 10-year window. By our estimates, the cost of the unlimited IRA subsidies will reach $180 billion per year by 2050.
- Don’t the IRA subsidies mostly go to Republican districts?
Despite promises to help American workers and families, particularly in Republican districts, the IRA’s biggest winners are large corporations and foreign manufacturers. The production and investment tax credits mainly benefit giant utilities like NextEra Energy, which has received billions in subsidies. Stanford researchers note these subsidies come at a “high cost to US taxpayers.”
IRA subsidies can also bring associated costs, such as the need for expensive new transmission. In Texas, the IRA’s energy subsidies are driving costly transmission projects to support remote and intermittent renewables. These costs are socialized and ultimately passed on to consumers. Unfortunately, the rising cost of transmission is already impacting consumers across the country.
- What resource receives the most IRA subsidies?
We find the bulk of the IRA’s energy subsidies go to utility-scale solar photovoltaics or onshore wind energy, depending on the assumptions involved. These resources are frequently cited as the least expensive and therefore the most competitive. If that is true, the IRA wastes taxpayer dollars subsidizing energy resources that would be deployed anyway. If it’s not true, the IRA wastes taxpayer dollars by creating an inefficient industry that would not flourish in a subsidy-free setting. Authors at the Breakthrough Institute make a strong case for reforming the IRA and cutting off perpetual subsidies.
- What about the investments and jobs created by the IRA?
Supporters of the IRA tout its role in spurring new investment and job creation, but the reality is very different. Since the initial wave of manufacturing announcements following the IRA’s passage, over 40 percent of these projects—roughly $84 billion—have been delayed or outright canceled. The jobs that did materialize came with staggering costs. Each job created under the IRA costs taxpayers anywhere from $2 to $7 million—an inefficient use of public funds. Policymakers should allow the private sector to create productive jobs rather than using taxpayer dollars to create subsidized jobs.
- Will repealing the IRA lead to higher energy prices?
Repealing the IRA won’t raise your energy bill—in fact, it could lower it. Removing subsidies corrects market distortions and promotes efficient energy production. The IRA turns electricity markets into subsidy clearinghouses, where chasing government incentives overwhelms market incentives, causing inefficiencies and driving prices higher.
Market-driven pricing leads to lower long-term costs and improved efficiency in all markets, including the electricity sector. Further, even if IRA subsidies lead to lower clearing prices in wholesale electricity markets, there is no guarantee that lower wholesale prices will translate to lower retail rates because of the wholesale-retail disconnect.
- Don’t we need the IRA to offset tariffs on energy components?
Some argue that subsidies offset the impact of tariffs on renewables, but this is a misguided solution. Maintaining subsidies to counteract tariffs is simply doubling down on bad policy—two wrongs don’t make a right. Subsidies lock industries into permanent government dependence, creating inefficiencies that persist even if tariffs are removed. The solution to market distortions isn’t more distortions—it’s restoring competition to lower costs naturally.
- Does the IRA support the Trump administration’s goal of energy dominance?
No, the IRA weakens the energy industry overall. The best way to ensure a lasting era of energy dominance is to take a resource-neutral approach that allows the most efficient and cost-effective energy sources to emerge through competition. Subsidizing energy resources—even some of the most reliable ones, like nuclear power—distorts market incentives and makes the energy industry weaker and more dependent on government support. Put differently, dominant industries don’t collapse when government support is taken away.
- If foreign governments subsidize their energy industries, isn’t it necessary for the US to do the same to remain competitive?
If foreign governments decide to spend money propping up inefficient industries, the US shouldn’t follow them off the cliff. Competing on subsidies doesn’t make industries stronger—it makes them dependent on government handouts and less likely to innovate. The US leads in energy because of private-sector dynamism, not bureaucratic micromanagement. Those who endorse a “clean energy arms race” with China or the European Union fail to understand the lessons of the Cold War: long-term prosperity comes from voluntary markets operating under the rule of law, not industrial policy operating under the whims of central planners.
- Should you reduce your estimates given Trump’s bans on wind energy?
Some of our upper-bound estimates for wind energy tax credits are less realistic now that President Trump has issued a moratorium on wind energy development on federal lands and offshore areas. However, the impact of executive actions on IRA spending highlights the uncertainty surrounding total spending levels. For example, broader permitting reform or executive orders to commence construction of certain subsidized resources could increase overall IRA spending even if spending on wind-related tax credits were to fall. Further, if the IRA is still in effect when the next presidential administration takes over, executive actions against the wind industry could be repealed and the estimates of total spending by 2050 could still be on target.
Conclusion
As we emphasize in our paper, the IRA is a flawed and unsustainable policy that Congress should repeal. Delaying action only strengthens the political and economic interests tied to its subsidies, making reform even more difficult as the web of government handouts expands. At a minimum, lawmakers should equip themselves with three key findings from our report. Energy spending under the IRA is much higher than government estimates would indicate (up to $4.7 trillion), it faces no binding cap and could climb to $180 billion each year.
Cato intern Shawn Liu contributed to this article.