Forget sticks, Congress embraces carrots to tackle climate change

Executive Editor

The U.S. government is on the cusp of its largest-ever embrace of carrots to tackle climate change.

Not literally carrots, of course. That would be a lot of pressure on a vegetable.

Almost every law the government has ever passed on climate change and energy policy has been to reward (give carrots to) the types of energy it wants, instead of penalizing the kinds of energy it doesn’t want (prodding it with a stick).

This reality is evident in Congress’ decadeslong, on-again-off-again approach to cleantech subsidies and comprehensive energy laws enacted in 2005 and 2007.

This carrot approach has persisted despite decades of perennial debate and failed efforts on policies that are more stick-like: carbon taxes, regulations and mandates.

The reasons why are shockingly simple.

It’s easier politically. Policies that rely on penalties generally pass costs onto consumers, and no one likes high energy costs—or the politicians presiding over them (especially in times of high inflation like today).

Equally important, subsidies increasingly look like they can be better for technological innovation and easing energy costs.

Nearly $370 billion in clean energy spending is a central pillar of the broader Inflation Reduction Act (IRA), which the House is poised to vote on as soon as this week after Senate passage last Sunday.

If enacted, the law would be the largest-ever federal investment in this area by a factor of three to four.

The legislation would create and extend numerous tax credits for several different types of technologies, including wind and solar electricity, electric vehicles, sustainable aviation fuel, carbon capture and hydrogen.

Importantly, many tax credits are extended for a decade, which would provide an unprecedented amount of certainty for an industry that otherwise has been at the whim of far shorter extensions often tied to election cycles.

The Bipartisan Policy Center has a good summary. See below for a triple-header Data Dive covering different aspects of the bill, including capital investments and consumer costs.

Subsidies have long been considered a politically easier but economically less efficient way to tackle climate change compared to a carbon price.

But economic efficiency is not necessarily politically relevant or what new technologies need.

You’re not going to change the auto industry from petroleum to electric vehicles with what amounts to a 20 cents [per gallon] gas tax. The answer to that is spending big chunks of taxpayer money.
Jason Grumet, president of the Bipartisan Policy Center, a centrist Washington, D.C. think tank

To the surprise of some economists, subsidies are also cost-effective forms of cutting power-sector emissions, according to two separate analyses by the University of Chicago, one of which was done in conjunction with Rhodium Group, a research firm.

The benefits from lower carbon emissions are roughly three to four times greater than the costs of clean energy tax credits, according to that study, released earlier this year.

Wind and solar costs have dropped and are closing the gap with electricity powered by coal and natural gas, said Michael Greenstone, co-author of that study who led the White House Council of Economic Advisers under President Obama.

“I’ve been pretty negative about subsidies,” said Greenstone, now economics professor at the University of Chicago, where he leads the school’s Energy Policy Institute. “But the costs have changed, and now some types of subsidies can deliver meaningful carbon reductions.”

The other study, released last month and covered in Cipher last week, found that subsidies actually lower electricity prices for consumers while reducing emissions about as much as a carbon tax or energy standard (the other two raised power prices).

Of course, someone must pay. In the IRA, Democrats are closing what they call tax loopholes on corporations to help pay for these subsidies.

Sticks haven’t been wholly absent from Washington climate and energy policy. One notable example is a federal ethanol mandate Congress passed in 2005 and expanded in 2007.

Traditional environmental policy has been wildly successful using sticks, mostly through Clean Air Act regulations beginning in the 1970s.

But climate change is no traditional environmental issue. It affects and is affected by virtually the entire economy.

While climate change is the largest environmental challenge of our time, its solutions must be found in new energy technologies precisely because of its omnipresence.

In negotiations last year, Congress cut the biggest stick under consideration—a Clean Electricity Performance Program, which would have imposed fees on utilities that didn’t achieve certain emission-reduction targets. A few sticks remain in the bill, including a new fee on methane, a potent greenhouse gas, charged to oil and gas companies. But such sticks pale in comparison to the $369 billion worth of carrots.

Independent analyses estimate the Inflation Reduction Act would cut U.S. emissions roughly 40% below 2005 levels by 2030, a significant way toward President Biden’s goal of at least 50% by then.

American incentives have power beyond our borders.

“What should American leadership look like in climate change? Spending money—because we can,” Grumet said.

With the U.S. pouring money into developing technologies, emerging economies, including those in Asia and Africa, will be more likely to adopt them as their costs come down.

That is impressive for carrots. But don’t forget sticks forever, Grumet says.

To sufficiently build out the massive amounts of new cleantech infrastructure, the U.S. (and world) will need to tackle climate change, and some types of sticks will likely be necessary.

He’s talking about an issue we cover a lot at Cipher: To tackle climate change, we must build a lot of things and resolve the challenges presented by NIMBYism (Not In My Backyard) and related opposition that inevitably arises.

“We may have overcome the innovation valley of death with carrots,” Grumet said. “But the only way to overcome the NIMBY valley of death is with sticks.”

In the meantime, the IRA is poised to help reduce cleantech costs further, continuing the virtuous cycle that—ideally—makes the stick ever-more tolerable (read: affordable).