IRA’s Green Energy Tax Credits Lose Their Punch Because They Try to Do Too Much

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The Inflation Reduction Act (IRA) recently signed by President Biden includes more than $200 billion energy tax subsidy in the next decade. As its supporters say, it is the largest package of stimulus aimed at slowing climate change ever implemented by Congress. But it also puts America on a relatively inefficient path to clean energy.

Broadly speaking, the problem is a familiar one: While most economists prefer a stick (higher tax) to encourage alternatives by raising the price of fossil fuels, most politicians prefer a carrot-tax subsidy to encourage consumers to buy green energy. support. the product. Unfortunately, these subsidies waste money because they often go to people who would consume or produce these products anyway.

But there is another, more specific problem with some subsidies in IRAs. They are incompetent because they try to achieve too many conflicting goals at once.

many concessions

The best example could be the extension and extension of liberal tax credits for the purchase of electric vehicles. The goal is simple enough: Get more drivers into “cleaner” vehicles by giving EV buyers a tax break.

The problem is that Congress had to make up for being a Congress. Many concessions for other interests to pass the law. Instead of maximizing the environmental incentive value of the credit, lawmakers chose to meet other demands, each of which would reduce the power of the subsidy.

Credit comes with many limitations. Cars costing more than $55,000 and vans and trucks that sell for more than $80,000 are ineligible. Unmarried buyers earning $150,000 or more and married couples making $300,000 or more jointly cannot claim the credit. And because it’s non-refundable, even low-income families can’t fully benefit.

Another countervailing interest: Buy America (and its top trading partners). The bill links the credit to a series of conditions: vehicles and their batteries must be assembled in the US and certain battery components and minerals must come from approved countries. One goal of these requirements is to reduce China’s dependence on critical metals used in batteries.

Most of the law’s other green credits also come with labor requirements. EV subsidy require A certain amount of household materials and manufacturers are required to pay workers a “prevailing wage” and conduct apprenticeship programs. Similar labor rules also apply Tax credits for wind turbines and some solar panels. These rules are common in government contracts and, for many people, they serve important goals. But reducing dependence on fossil fuels is not one of them.

conflicting goals

EV credits may be the most extreme example of how these labor, commercial and environmental goals can conflict. The Alliance for Automotive Innovation estimates that 70 percent of EVs Those made today will not qualify for credit because they fail to meet these requirements. And these terms will inevitably drive up the price of any eligible EV.

Industry may eventually find acceptable sources for battery materials and build EV assembly plants in the US, but that will take years.

The new law eliminates a provision of the old credit that limited its value as a tool to fight climate change: it repeals a requirement that automakers take full credit only for selling the first 200,000 EVs. can offer. If you primarily care about reducing greenhouse gas emissions, that’s a good thing. But all these new obstacles are likely to overcome that change.

Then there’s timing. At present, consumer demand far exceeds the supply of electric vehicles. For example, the well-known shortage of computer chips is severely limiting the availability of these vehicles. Many manufacturers say that they have already sold their most popular electric vehicles Waiting list for 2022 model year and for 2023 model.

carbon tax

There is no point in government subsidies to boost demand for products that are already in short supply. But when Congress combines subsidies with inherent supply constraints like production and material requirements, it will achieve nothing more than increasing those waiting lists, increasing the pre-tax value of whatever vehicles are available, and adding to the consumer . Disappointment. There is absolutely no recipe for reducing greenhouse gas emissions.

In contrast, a carbon tax is designed to achieve only one goal: raise the price of carbon. There can be many ways of tax returned home But in any case the tax would still discourage consumption of carbon-based products by raising the relative prices of their products.

Make no mistake: It takes the Inflation Reduction Act Important step towards reducing CO2 emissions in America. But by picking up the carrot of the tax credit, it missed an opportunity to make an even more dramatic cut.

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