After all the false starts and dashed hopes of the past two years, I’m reluctant to count my chickens before they’re actually signed in the Oval Office. Still, it looks like the Democrats have finally agreed on yet another important piece of legislation, the Inflation Reduction Act. And if it does become law it will be a big deal.
First, would the law really reduce inflation? Yes, probably – or at least it would reduce inflationary pressures. This is because the increase in spending contained in the legislation, mainly in clean energy, but also in health, would be more than offset by its fiscal provisions; then it would be an act of deficit reduction, which, all other things being equal, would make it disinflationary.
But you want to think of the Inflation Reduction Act as the National Interstate Highways and Defense Act of 1956, which probably strengthened the national defense a little, but mainly benefited the country by investing in its future. This bill would do the same, and perhaps even more.
To understand why this bill inspires such hope, it’s helpful to understand what has changed since the last major effort by Democrats to address climate change, the 2009 Waxman-Markey bill, which passed the House but died in the Senate.
The core of Waxman-Markey was a “cap and trade” system that, in practice, would have worked much like a carbon tax. There were and are good arguments for such a system, which would give companies and individuals an incentive to reduce emissions in a variety of ways. But politically it was easy to portray it as a meaningless plan that required sacrifices from ordinary workers.
With the failure of Waxman-Markey, the Obama administration was reduced to a much more limited agenda that relied on carrots rather than sticks — tax breaks for clean energy, loan guarantees for companies investing in renewable energy. I think it’s fair to say that most economists didn’t expect these measures to accomplish much.
But something funny happened on the way to the climate apocalypse: there was revolutionary progress in renewable energy technology, likely driven, at least in part, by these Obama-era policies. In 2009, electricity generated by wind power was still more expensive than electricity generated by burning coal, and solar power was even more expensive. But over the next decade, wind energy costs dropped by 70%, solar costs by 89%.
Adding to this the drop in battery prices, it became possible to see the contours of an economy that achieves drastic reductions in carbon emissions with little or no sacrifice, using electricity generated by renewable energy –instead of burning fossil fuels– to heat and cool our buildings, run our factories, run our cars, and much more.
The climate part of the Inflation Reduction Act is largely an attempt to accelerate this energy transition, primarily by offering tax credits for the adoption of low-emission technologies, including electric vehicles, but also encouraging less energy use in general. , above all by making buildings more energy efficient.
There is every reason to believe that these measures would have great effects. Unlike fossil fuels, which have been around for a long time, renewable energy is still a “infant industry” with a steep learning curve: the more we use these technologies, the better we take advantage of them. So providing incentives for clean energy now will make that energy much cheaper in the future.
And support for electric vehicles also helps solve a chicken-and-egg problem, where drivers are reluctant to use electricity because they’re not sure they’ll find charging stations, and companies don’t offer many charging stations because they don’t yet. there are so many electric cars.
The point is that while the climate and energy provisions of the Inflation Reduction Act – about $370 billion over the next decade – are only about 0.1% of projected Gross Domestic Product over the same period, they could have an effect. catalyst on the energy transition. And they can also transform the political economy of climate policies.
For years, environmentalists have argued that the transition to clean energy should be seen as an opportunity rather than a burden — that in addition to saving the planet, the transition would create many jobs and new business opportunities. But this is a difficult point to explain without concrete and widespread examples of success. While serious climate policy was a proposal rather than a reality, it was vulnerable to attacks by rightists who painted it as a nefarious plan to undermine the American way of life.
But these attacks will become less effective once people start to see the real-world effects of climate action (which is why the right is so frantic trying to block this legislation). If Democrats can pass this bill, the chances for further action in the future will increase, perhaps sharply.
So let’s hope there are no last-minute problems. The Inflation Reduction Act will not deliver everything climate activists want. But if that happens, it will be a big step towards saving the planet.
Translated by Luiz Roberto M. Gonçalves
