What’s in the climate deal struck by Manchin and the Democrats, and is there a catch?
On Wednesday, Congressional Democrats and West Virginia Senator Joe Manchin struck a deal on a major climate and healthcare package that–if passed–will be the most consequential climate legislation in history. The news came as a surprise to many following Manchin’s stated opposition to any further climate legislation just two weeks ago. Today I’m bringing you a special edition of the blog digging into the massive package, why it could be the first good news on climate in a while, and why there might be a catch.
A sudden reversal
Centrist Senator Joe Manchin has long been a major opponent of the Biden administration’s expansive Build Back Better plan, partly because of its potential ability to increase inflation and partly because of West Virginia’s reliance on coal revenue. Just two weeks ago, the senator was noted as being explicitly against any bill with energy or climate provisions.
So it came as a surprise to many that yesterday, Manchin came to a deal with Congressional Democrats on a major healthcare and climate bill. The Inflation Reduction Act of 2022 invests roughly $369 billion in climate and energy projects and tax credits, with the goal of reducing U.S. GHG emissions by 40% by the year 2030. In addition, the package dedicates $64 billion to extending Affordable Care Act healthcare subsidies by 3 years. It’s a heavily pared down version of the Build Back Better plan that reflects the current inflationary environment lawmakers are operating in.
Manchin’s concerns over inflation were alleviated by the revenue-generating parts of the Inflation Reduction Act package, which would raise about $739 billion by issuing a 15% corporate minimum tax, increasing IRS tax enforcement, closing the carried interest loophole, and allowing Medicare to negotiate drug prices. The $300 billion difference between funds raised and investment on healthcare and climate projects will be dedicated towards reducing the federal deficit. For the economics angle, check out Harvard economics professor Jason Furman’s Twitter thread on the impact of this deficit reduction on inflation.
The IRA package unlocks billions for climate projects…
The climate-related projects supported by the bill were revealed last night in the bill’s full text and include investments in wind, solar, geothermal, offshore wind, hydrogen, carbon capture, and more. The bill includes large investments in tax credits to incentivize electric vehicle purchases and make homes and buildings more energy-efficient. Tax credits are introduced for efforts to reduce manufacturing-related emissions, while $60 billion will go towards companies bringing the manufacturing of solar panels, electric cars, and other climate-friendly products from overseas into the United States. Another $20 billion will support climate-friendly farming practices, and around $8 billion will support forest and coastland conservation against wildfires, deforestation, and biodiversity loss.
$60 billion is also set aside for environmental justice efforts, including investment in communities that have experienced disproportionate health impacts due to climate change and pollution. Environmental justice has been a key policy priority of climate activists for years, and it’s heartening to see EJ efforts included in the massive package.
…but the deal could also lock in further fossil fuel investment
If the deal is sounding too good to be true, that’s because there could be a catch. As part of the deal struck with Manchin, federal investments in clean energy would be contingent on oil and gas drilling on federal lands. The bill would require the Interior Department to have recently held oil and gas lease auctions in order to issue new wind and solar rights. This could reinstate a lot of drilling projects that were paused by court order in the Gulf of Mexico and other areas, potentially undermining the legislation’s climate focus and jeopardizing its 40% emissions reduction target. This is a significant reversal from the permanent ban on offshore oil drilling in the Gulf included in the Build Back Better bill.
The federal drilling clause reflects the nature of the compromise forged to write the Inflation Reduction Act package, and it will be tough for many environmentalists to stomach. Expect pushback from climate activists who have been calling on the government to stop oil and gas drilling on federal lands and shift that investment to renewable energy.
What happens now
The White House released a statement in support of the package on Wednesday, calling the “historic” Inflation Reduction Act “the action the American people have been waiting for.” The American people will likely have to wait a bit longer, because the bill will face furious opposition from Republicans in Congress this summer.
Congressional Democrats hope to push the package through the Senate in early August using the budget reconciliation process, which allows approval for budget-related rules by a simple majority instead of the usual 60 votes necessary to overcome a filibuster. This will require the approval of the Senate parliamentarian, who will need to assess whether the bill is budget-related enough to warrant passage through reconciliation.
Zooming out: why it matters
We talk a lot in this blog about the necessity of limiting global temperature change to 2 degrees Celsius. The Paris Climate Agreement, which the Biden administration rejoined last year, commits 189 countries to carbon neutrality by 2050 to reach this warming scenario target. Upon rejoining the Paris Agreement, the U.S. committed itself to reducing GHG emissions by 50% by 2030–a goal that has been looking increasingly out of reach, especially in the wake of the recent Supreme Court EPA ruling on power plant emissions.
With its ambitious target of 40% emissions reductions by 2030, the Inflation Reduction Act may help put the U.S. back on track for its climate goals. Compared to the $9 trillion annual global spend that McKinsey estimates is necessary for the world to reach net-zero and curb climate change, $369 billion is a small sum, but it’s vastly better than no action at all.
