Can Biden’s IRA work IRL?
US Democrats have long been gunning for a win, and they finally got one in recent days. After months of painstaking negotiations and internal party turmoil, the Senate passed the Inflation Reduction Act (IRA), a key component of President Joe Biden’s agenda.
This paves the way for the $700 billion legislative package, which includes massive investments in climate change mitigation, healthcare, and tax reform, to be passed by the House of Representatives and signed into law. The House begins its deliberations on Friday.
The bill took many forms in recent months in efforts to win the support of fiscally hawkish Democrats. But despite ample rewrites, many climate-related provisions managed to pass the smell test. What’s in the bill, what’s not, and how might it impact everyday Americans?
What’s in it? Although the Dems had to ditch large parts of the progressive wish list they had in the Build Back Better Act (that would have cost $2 trillion), they still have plenty of victories to celebrate in this bill. The IRA includes provisions to slash medical costs for seniors enrolled in Medicare, capping their annual costs at $2,000. It also gives the US government greater leeway to negotiate with drug companies to reduce prices, a process that will start with 10 select drugs in hopes of further expansion.
Additionally, the bill gets rid of loopholes for large corporations (making at least $1 billion in profit) that avoid paying federal taxes by claiming a range of deductions, and it enforces a minimum tax for companies that buy back their own stock in order to boost prices.
Perfect is the enemy of good. Conceding to Senator Joe Manchin, a conservative Democrat from coal-loving West Virginia, the bill also includes measures requiring the federal government to auction off federal lands for oil drilling. Some Democrats were peeved by the carve out, while others – like Senate Majority Leader Chuck Schumer, who has led the grueling negotiations – have said the bill will cut planet-heating emissions by 40% by 2030 from 2005 levels, which is ultimately a win.
🥕More carrots, fewer sticks. The bill also reflects a departure from mainstream climate change communication. Rather than maligning oil companies, large corporations, and individuals for ruining the planet, the bill incentivizes the public to ditch dirty energy because they have something to gain from it.
Consider some of the enticements. Under the bill, consumers will be entitled to up to $14,000 in rebates for installing energy efficient heating and cooling systems in their homes, as well as 30% rebates for installing solar panels.
Subsidies worth thousands of dollars will also be offered to homeowners that install other energy efficient equipment, such as electric cooktops. To be sure, while these sorts of refinements would reduce energy bills in the long run – by $1,800 a year on average, according to one climate group – families would still have to fork out a significant amount of cash to make these purchases in the first place.
What’s more, the bill includes a slate of credits to help tens of millions of Americans buy electric vehicles, including a tax break of $7,500 for new vehicles and $4,000 for used ones. The EV provision is a significant one: while governments often take a long time to provide rebates, this will be carried out at the point of sale. That’s a big deal for interested buyers, considering that Americans are now paying $54,000 on average for a new EV, compared to $44,000 for fuel-guzzling cars.
Still, analysts point out that most EVs fail to meet the bill’s requirement of having a battery made in North America and will be excluded from the program. This suggests the bill is really about boosting domestic manufacturing and mining of rare earth minerals to reduce US reliance on China.
Moreover, the bill offers a whopping $1.5 billion in incentives for oil and gas companies to slash their methane emissions. Indeed, methane emissions, one-quarter of which come from agriculture, are the biggest contributors to climate change after carbon dioxide.
What got cut? Social safety proposals, including free kindergarten and community college, as well as paid medical leave for all workers.
On the climate front, Democrats were forced to ditch the Clean Electricity Performance Program, a very expensive program that would have penalized utility companies for failing to meet clean energy targets, while giving grants to those that do.
Will the IRA actually reduce inflation? Most analyses, including from the nonpartisan Congressional Budget Office, found that this package will have “a negligible effect on inflation” in the short term, noting that other factors – like how the US Federal Reserve responds – will have the greatest impact on inflationary pressures. The CBO does estimate, however, that the bill will reduce the national deficit by more than $100 billion through 2032, which was likely key to getting wavering Dems on board.
So how soon will Americans actually feel the impact of this bill? “Probably not too soon,” says Anna Mikulska, a Eurasia group consultant specializing in climate and energy. That's largely because “much of the inflation is external to the domestic US policies and is shared across the globe,” she says, adding that “fuel prices and post-pandemic recovery are common denominators,” neither of which can be addressed through domestic policies.
Meanwhile, Clayton Allen, a director of Eurasia Group's US desk, says that while most Americans will only see benefits from the drug pricing and perhaps some EV credits in the near-term, many of the bill’s provisions are about the long game. “They are designed to spur investment on the corporate end over a longer time period,” and will likely have little impact on the US economy for some time.
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