Modeling the impacts of the Inflation Reduction Act on emissions and inflation

Early models predict the landmark legislation’s actual effects on U.S. emissions and inflation, encapsulating an ongoing debate between environmentalists and pro-climate regulators about the future of climate policy beyond the IRA.

Design courtesy of Julian Mandler on the Persefoni design team.

Last week’s Special Edition of the Climate Chapters previewed the landmark deal reached by Senators Joe Manchin and Chuck Schumer, now called the Inflation Reduction Act. Initial estimates have now come in on the actual impact of the Act on GHG emissions, inflationary trends, and consumers that may be cause for further optimism. They also highlight an ongoing debate between environmentalists and pro-climate regulators about the efficacy of climate regulation.

Early predictions by nonprofit research group Energy Innovation contend that the Inflation Reduction Act will reduce emissions by ~37–41% by 2030, getting the U.S. within reach of its ambitious Paris Climate Agreement targets. Energy Innovation used the open-source U.S. EPS climate model, which estimates energy policy impacts using publicly available climate data, to model the predicted impact of the Inflation Reduction Act relative to the “business-as-usual” (BAU) U.S. climate scenario.

It’s important to note that U.S. emissions are already on a downward path as better technology burns energy more efficiently and as green energy gets cheaper to produce. The chart below from the Global Carbon Project, produced by Our World in Data, shows that U.S. per-capita emissions are already down from their all-time highs to 1940s levels. Looking forward, BAU scenarios have the U.S. lowering total emissions 24% from 2005 levels by 2030.

U.S. CO2 per-capita emissions are at their lowest levels since the mid-twentieth century. Source: Our World in Data based on the Global Carbon Project.

But there’s still a significant gap between the BAU emissions scenario and America’s Paris commitments, and Energy Innovation estimates that the IRA “would enable the U.S. to close 50–66% of [this] emissions gap.” The researchers model that the legislation would reduce annual U.S. emissions by 2,500–2,800 million metric tons (MMT) in 2030 compared to 2005, when emissions were about ~6,500 MMT.

Early modeling of the IRA’s impacts on U.S. GHG emissions, from nonpartisan research group Energy Innovation.

Much of the contention from environmental groups surrounding the Inflation Reduction Act has focused on its fossil fuel provisions, which would lock in oil and gas drilling on federal lands by requiring that the government hold leases for federal drilling in order to invest in solar and wind energy. However, Energy Innovation’s model estimates that these activities will only contribute ~50 MMT in U.S. emissions by 2030, meaning that for every ton of emissions put into the atmosphere by the oil and gas provisions of the bill, 24 tons will be removed.

EI’s model goes farther than quantifying emissions impacts, estimating that the IRA will also likely save 3,900 lives that would have prematurely ended from air pollution-related causes and create 1.5 million jobs by 2030. It’s just one model of the regulation’s impacts, and I think the coming weeks will witness a number of predictions regarding the massive legislative package, but it provides fuel for optimism for the climate cynics.

Early predictions on inflation and GDP impacts

While the environmental impact of the Inflation Reduction Act may be relatively clear, analysts are just beginning to parse out the economic ramifications. The Penn Wharton Budget Model estimates that the bill would reduce the federal deficit by $248 billion over the budget window. The model’s inflation impact, though, is “statistically indistinguishable from zero,” with low confidence indicators that the bill would slightly increase inflation in the short-term until 2024 and decrease it in the following years. Moody’s Analytics predicts that consumer prices will come down by only 0.03% per year.

As Axios reports, it might be the case that the bill is too small relative to GDP to cause significant macroeconomic shifts like reducing inflation, making the name of the legislation a bit of a misnomer–perhaps a more accurate name would have been the Deficit Reduction Bill. The IRA spends $43 billion a year over the next decade, a pittance compared to the U.S. average GDP of $30 trillion per year. More significant economic impacts will likely be felt at a microeconomic level, such as lower prescription drug prices and EV tax credits. Climate tech experts are predicting a resurgence of investment in the climate tech field, even in a recessionary environment.

Debates between environmentalists and pro-climate regulators extend beyond the IRA

The Inflation Reduction Act is not the only climate-focused legislation that has been met with surprising opposition from environmentalists. The California Air and Resources Board (CARB) scoping plan, which outlines a blueprint for the state to reach carbon neutrality by 2045, has become an unlikely battleground between pro-climate legislators and climate activists who say legislators aren’t going far enough. CARB’s plan proposes to phase out 91% of the state’s oil use, invest in public transportation projects, and plant hundreds of thousands of trees to recapture carbon from the atmosphere and help get the state to net-zero. The plan is an attempt to reconcile California’s ambitious climate goals with job losses in fossil fuel industries and health impacts on climate-impacted communities.

Environmentalists in California, however, have criticized the plan for falling short of its supposedly ambitious goals. Critics contend that the plan relies too heavily on carbon capture technologies instead of investing heavily in wind and solar or phasing out gas-powered vehicles. In addition, public health experts warn that the policy could actually worsen air quality in low-income, minority neighborhoods. The plan proposes to keep all of the state’s natural gas plants online and add new plants, which are disproportionately located near low-income neighborhoods.

Environmentalists say the CARB Scoping Plan could actually worsen air quality for low-income communities in California. Image credit of C. Shii on Unsplash.

The pushback to the CARB plan has found listening ears. In response to the criticism, California Governor Gavin Newsom issued a statement last week stating that CARB’s scoping plan “doesn’t go far enough or fast enough,” seemingly agreeing with environmentalist criticism of the plan. The governor is calling for an end to new gas-fired power plants and a push for renewable energy generation through offshore wind.

Environmental justice & incrementalism

To me, there are two takeaways from this debate, which encompasses the California Scoping Plan, the Inflation Reduction Act, and many more climate proposals. The first is that climate legislation must take into account environmental justice needs when drafting plans. Low-income populations and communities of color stand to suffer disproportionately from future climate change impacts and already face the brunt of climate shocks. Plans drawn up that don’t focus on these populations–like the CARB Scoping Plan–will leave behind the most climate-vulnerable. Helpfully, the Inflation Reduction Act invests $60 billion in environmental justice, including block grants to monitor and address air pollution, invest in communities disconnected by transportation development, and plant trees in urban areas. These elements of the bill will be critical to including disadvantaged communities in the United States in the climate transition.

The second takeaway is that public health impacts notwithstanding, progress tends to be incremental–and in the case of the Inflation Reduction Act, we can’t let the perfect be the enemy of the good. The IRA’s fossil fuel provisions reflect not only political realities of our time but also the need to rely on some fossil fuels in the short term to finance the renewable energy transition without exacerbating the energy crisis. The modeled impacts shown in this edition of the blog, I think, demonstrate that well-calculated compromises can yield dividends for massive legislative packages like the IRA. What remains to be seen is whether the bill’s ambitious renewable energy investments actually come to fruition.

The political battle over the Inflation Reduction Act is just beginning, and I expect to see more predictions on the bill’s impacts on consumers, the economy, and climate start to unfold in the next several months. Early indicators suggest that while the bill’s macroeconomic impact might be nebulous, its climate repercussions are monumental.

My Climate Top 5:

1. The U.S. Forest Service will plant over one billion trees over the next decade to reforest and revitalize millions of acres of land decimated by wildfires. Funding from the REPLANT Act and the Bipartisan Infrastructure Law will enable the Forest Service to expand its nursery capacity, hire more employees, and work on the 4.1 million acre backlog of land damaged by extreme weather events and pests. Wildfires this year have already consumed 5.6 million acres in the U.S. this year, which is twice as much as the same period last year.
2. A new study claims that catastrophic climate change outcomes like human extinction are “dangerously unexplored” and need to be studied by scientists. The report, submitted to PNAS, discusses the many ways climate change could drive mass extinction events and examines societies’ vulnerability to these risks. Among their findings is that in a 3C warming scenario, 2 billion people could be living in 29C average temperature regions, with disastrous side effects.
3. Ahead of the COP27 UN climate conference in November, African officials are outlining their goals for the summit, including transitioning to renewables and making high-polluting rich countries compensate for environmental damage done to poorer African countries. Africa will need a $3 trillion investment to make a full climate transition and hit emissions targets, but the continent has been given around $5 billion thus far through international climate funding.
4. Deadly flooding has killed many, destroyed towns and villages, and caused mass evacuations around the world, from South Asia and Uganda to closer to home in the Kentucky Appalachia region. Two villages in India’s Meghalaya region saw daily rainfall of 38+ inches amidst a monsoon of unprecedented strength. In Kentucky, flooding has killed more than 35 people and left many communities in the state reeling for assistance as climate change makes generational floods increasingly frequent.
5. The UN General Assembly passed a resolution recognizing the human right to a healthy environment, calling upon countries, companies and other organizations to protect the right for all humans. The resolution is the first global recognition of an environmental human right, and UN Secretary-General Antonio Guterres expressed hope that its passage will help reduce environmental injustices and empower people and communities vulnerable to climate impacts.

Flooding this month has upended towns across South Asia, like this neighborhood in Karachi. Image courtesy of Inside Climate News / Credit: Sabir Mazhar/Anadolu Agency via Getty Images.