Working Paper: NBER ID: w31267
Authors: John Bistline; Neil Mehrotra; Catherine Wolfram
Abstract: The Inflation Reduction Act (IRA) represents the largest federal response to climate change to date. We highlight the key climate provisions and assess the Act's potential economic impacts. Substantially higher investments in clean energy and electric vehicles imply that fiscal costs may be larger than projected. However, even at the high end, IRA provisions remain cost-effective. IRA has large impacts on power sector investments and electricity prices, lowering retail electricity rates and resulting in negative prices in some wholesale markets. We find small quantitative macroeconomic effects including a small decline in headline inflation, but macroeconomic conditions–particularly higher interest rates and materials costs–may have substantial negative effects on clean energy investment. We show that the subsidy approach in IRA has expansionary supply-side effects relative to a carbon tax but, in a representative-agent dynamic model, is preferable to a carbon tax only in the presence of a strong learning-by-doing externality. We also discuss the economics of the industrial policy aspects of the act as well as the distributional impacts and the possible incidence of the different tax credits in IRA.
Keywords: Inflation Reduction Act; climate change; clean energy; economic impacts; tax credits
JEL Codes: E20; L94; Q54
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| IRA provisions (H26) | substantial investments in clean energy (Q48) |
| substantial investments in clean energy (Q48) | larger fiscal costs (H69) |
| IRA provisions (H26) | lower retail electricity rates (L97) |
| IRA provisions (H26) | negative prices in some wholesale markets (D49) |
| IRA provisions (H26) | slight decline in headline inflation (E31) |
| higher interest rates and material costs (E43) | negative effects on clean energy investment (F64) |
| IRA incentives (H26) | market prices (P22) |
| IRA incentives (H26) | investment behavior (G11) |
| IRA incentives (H26) | overall economic activity (E66) |
| clean energy subsidies (Q48) | boost output (Y60) |
| clean energy subsidies (Q48) | boost investment (E22) |
| clean energy subsidies (Q48) | boost wages (J38) |
| clean energy subsidies (Q48) | reduce electricity prices (L97) |