After all the false starts and dashed hopes of the past couple of years, I’m reluctant to count my chickens before they’re actually signed into the Oval Office. However, it appears that the Democrats have finally agreed on another important piece of legislation, the law on reducing inflation. And if it becomes law, it will be a big deal.
First, would the law actually reduce inflation? Yes, probably – or at least it would reduce inflationary pressures. This is because the increase in the expenditure of the legislation, mainly for clean energy but also for health care, would be more than offset by its fiscal provisions; therefore it would be an act of deficit reduction, which, all other things being equal, would make it disinflationary.
But you want to think of the Inflation Reduction Act as the National Interstate and Defense Highways Act of 1956, which probably strengthened national defense a bit but mainly benefited America by investing in the nation’s future. This bill would do the same, and perhaps more.
To understand why this bill inspires so much hope, it helps to understand what has changed since the Democrats’ last major effort to tackle climate change, the 2009 Waxman-Markey bill, which passed the House but died at the time. Senate.
At the heart of Waxman-Markey was a “cap and trade” system which, in practice, would work much like a carbon tax. There were and are good arguments in favor of such a system, which would give companies and individuals an incentive to reduce emissions in several ways. But politically, it was easy to paint it as a spinach-eating plan, which required sacrifices from ordinary workers.
With the Waxman-Markey bankruptcy, the Obama administration was reduced to a much more limited agenda, one based on carrots rather than sticks: tax breaks for clean energy, loan guarantees for companies that invest in renewable energies. I think it’s fair to say that most economists didn’t expect these measures to achieve much.
But a funny thing happened on the road to the climate apocalypse: there has been a revolutionary advance in renewable energy technology, probably initiated, at least in part, by those Obama-era policies. In 2009, electricity generated from wind power was even more expensive than electricity generated from burning coal, and solar power was even more expensive. But in the following decade the costs of wind energy fell by 70%, those of solar by 89%.
Add in free-falling battery prices and it has become possible to see the contours of an economy that achieves drastic reductions in carbon emissions with little or no sacrifice, using electricity generated from renewable energy, instead of burning fossil fuels, to heat. and cool our buildings, run our factories, power our cars and more.
The climate-related part of the law on reducing inflation is, for the most part, an attempt to accelerate that energy transition, mainly by offering tax credits for the adoption of low-emission technologies, including electric vehicles, but also offering incentives for less energy use in general, in particular by making buildings more energy efficient.
There is every reason to believe that these measures would have great effects. Unlike fossil fuels, which have been around for a long time, renewable energy is still a “neonatal sector” with a steep learning curve – the more we use these technologies, the better we get them. So providing incentives for clean energy now will make that energy much cheaper in the future.
The climate and the world are changing. What challenges will the future bring and how should we respond to them?
And the support for electric vehicles also helps solve the chicken and egg problem, where drivers are reluctant to switch to electric because they aren’t sure to find charging stations and companies don’t provide many charging stations because there aren’t that many electric cars yet.
The point is that while the climate and energy provisions of the Reducing Inflation Act – about $ 370 billion over the next decade – would represent only about 0.1 percent of projected gross domestic product over the same period, they could have a catalytic effect on transition energy.
And they could also transform the political economy of climate policy.
For years, environmentalists have argued that the transition to clean energy should be seen as an opportunity rather than a burden: in addition to saving the planet, the transition would create many jobs and new business opportunities. But this is a difficult point to overcome without widespread concrete examples of success. As long as serious climate policy was a proposition, not a reality, it was vulnerable to right-wing attacks that described it as a nefarious plan to undermine the American way of life.
But those attacks will become less effective once people start seeing the real-world effects of climate action (which is why the right is so frantic in trying to block this legislation). If the Democrats can pass this bill, the chances of further action in the future will increase, perhaps dramatically.
So let’s hope there aren’t any last minute hitches. The Inflation Reduction Act will not provide everything climate activists want. But if it happens, it will be an important step in saving the planet.