An expensive legacy: Originally estimated to only cost about $370 billion, a new study by the Cato Institute finds that the structure of subsidies in the Inflation Reduction Act means taxpayers could be on the hook for trillions of dollars over the next 25 years.
When former President Joe Biden’s signature Inflation Reduction Act (IRA) passed in 2022, it did so along party lines with not a single Republican voting for it. At the time, a Senate one-pager summarized the law as costing taxpayers $369 billion, based on Congressional Budget Review (CBO) estimates.
A new study from the Cato Institute finds that the law could cost as much as $4.67 trillion by 2050. That’s roughly 12 times the stated cost. The study also concludes that the subsidies are undermining innovation and driving investments toward subsidy farming rather than satisfying consumer demand.
“The government should not have a hold on the economy in such a way that it can truly distort entire markets, and that’s what the Inflation Reduction Act is,” Joshua Loucks, research associate with Cato Institute and co-author of the analysis, said in a video explaining the study.
The Trump administration has been executing a series of reviews of regulations that federal agencies passed during the Biden years. Repealing some agency decisions may require congressional action. Due to the massive costs and market-impacting effects of the IRA, the study’s authors argue Congress should take a hard look at it. The law, they say, should be fully repealed, or Congress should place limitations on the subsidies, which the IRA mostly lacks.
Fact-finding endeavor
Loucks and his co-author Travis Fisher, director of energy and environmental policy studies at the Cato Institute, explained that the impetus for doing the study was the wildly varying estimates of the costs of the IRA that came out since its passage. While the CBO pegged the figure at $369 billion, Goldman Sachs estimated in May 2023 that it would be closer to $1.2 trillion. There were other estimates as well, all coming to different conclusions.
“We decided to go on our own fact-finding endeavor here, and that’s what resulted in this paper,” Loucks said.
The subsidies for the IRA come in two forms — production tax credits (PTC), which provide tax credits per unit of energy produced, or investment tax credits, which provide tax credits for various investments in carbon-free energy. Which one developers take depends on the project and their business preferences. With the ITC, the subsidies provide an infusion of cash up front, whereas the PTCs provide payouts over time.
Some of these are not capped, and others are only phased out when certain greenhouse gas emission reductions are met. Using models from the U.S. Energy Information Administration, the study shows there’s little likelihood that these reductions will be met in the next 25 years, meaning the subsidies have no meaningful end date.
The authors estimated all the ITCs and PTCs that might come from the various carbon-free eligible projects — whether they be nuclear, wind, solar, geothermal, energy storage, green manufacturing or hydrogen — and using complex models, the authors came to some overall estimates.
Over the next 10 years, according to the study, the IRA could cost taxpayers anywhere from $936 billion to $1.97 trillion. By 2050, it will cost between $2.04 trillion and $4.67 trillion.
“Stackable” subsidies
Among the IRA’s stated goals was to create domestic supply chains feeding the so-called green energy transition, so the IRA includes a manufacturing tax credit. The 45X tax credit, as it’s designated, has a sub-component for the mining of critical minerals needed to make batteries, solar panels and wind turbines. That credit has no end date, so even if greenhouse gas emissions reductions were somehow met, the production tax credits continue so long as the mine produces minerals.
“The real nightmare scenario for taxpayers is that these credits are stackable,” Loucks explained.
As an example, Loucks and Fisher propose a mining company that produces lithium. It receives PTCs for the lithium it produces. That lithium is then used in a battery storage facility, which is only eligible for the ITC. If that battery facility provided energy storage for a solar farm, the solar farm would get production or investment tax credits. Then if that solar farm was used to produce green hydrogen, the company would get another PTC for the hydrogen.
“There’s just endless ways to stack this, and that’s going to result in taxpayers paying massive amounts of the burden,” Loucks said.
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