Ted Nordhaus and Alex Trembath of the Breakthrough Institute
published a fascinating article recently about the opportunities, challenges,
and potential pitfalls of implementing the Inflation Reduction Act (IRA) enacted
one year ago. They bring forth sound arguments based on past policies and a keen
understanding of technological limitations and practical realities.
The key point
of the article is that the Biden administration could be making some
significant and unnecessary mistakes in implementing the IRA by making mandates
to speed up the decarbonization process at a pace faster than technology,
supply chains, consumers, regulators, and property owners can keep up with. As
the title suggests technological optimism is different than technocratic
optimism. While we may be optimistic about promising new technologies, we had
best not get ahead of ourselves and try to mandate emissions reductions before
those technologies mature and become economical, which takes time and likely
cost overruns on first-of-a-kind projects. The mandates are based on modeling. Modeling
is based on assumptions. Some of those assumptions may well be wrong, especially
ones about the time it takes to thoroughly vet, improve, mature, and deploy the
technologies involved. I think it is likely that the culture of hype around
renewable energy technologies and capabilities is a factor in these overly
optimistic model assumptions. The authors see the proposed mandates as aspirational
and akin to central planning.
The authors note that clean energy subsidization has largely worked and has been widely popular. They also note that Democrats didn’t pay a price for the bipartisan infrastructure bill or the Inflation Reduction Act, even though there are calls to amend and repeal certain parts of it. They suggest that a carbon tax or stronger mandates would be risky enough to make the Dems pay a price. The following statement sums up the risk: “Progressive technocratic hubris, driven by overreliance on energy system models, an uncritical fetishization of industrial policy, and an unwillingness to fully account for the implications of political polarization and divided government, risks undermining much of what the IRA could accomplish.” Challenges to mandates from the Supreme Court and Congress could derail progress already made and future progress towards steady decarbonization. They suggest that we should embrace the bottom-up technological approach already immanent in the IRA without adding top-down approaches like mandates and executive action. The authors instead recommend focusing on cost reductions and technological performance improvements.
The authors
note that modeling has been predicated on expanding long-distance power
transmission capacity at a rate more than double the historical rate. Another
assumption is that wind and solar will continue to drop in price as it has in
the past, except in the past few years when it has actually increased a bit. Other
ways the models may prove overly optimistic include the effects of supply
chains, siting, and value deflation. Solar is most susceptible to value
deflation as has occurred in California where too much solar generation during
the day has decreased the value of that generation.
They also note
challenges with EV rollouts: adoption has been slow despite tax credits, it has
mostly benefited wealthy buyers buying luxury cars like Teslas, charging
infrastructure is lagging, and battery costs have been rising rather than
dropping as before (countering Elon Musk's predictions). EV’s made up 6% of new
car sales in 2022. The expectation that they will make up 60% in 2030 seems quite
ambitious. The authors argue that mandates based on this post-IRA modeling is simply
not necessary. The best course of action is to just let the technologies mature
with government assisted market-based approaches. Automakers are being coerced
to quickly ramp up manufacture of more EVs and with new mandates for big
increases on fuel economy that leaves them little choice. But consumers have
thus far not been ‘gung-ho’ about EVs, and it doesn’t look like that is going
to happen real soon. Automakers are already losing money on EV manufacture and
becoming dependent on government subsidies.
Development of
the so-called hydrogen economy is another technology where aspirations are
likely ahead of reality. Converting natural gas power plants to switch to
hydrogen co-firing is certainly a possibility but not in a short time frame. Mandating
it is not needed. Many issues need to be worked out before it can even happen
on a significant scale. Even the EPA expects that only 1.5% of gas-fired plants
will be hydrogen co-fired by 2040. The authors note as a caution that in the
past the biomass and ethanol industries devolved into rent-seeking ventures so
this is something to look out for with other new technologies.
If a
Republican administration comes back to power the whole decarbonization pace
will very likely be scaled back, perhaps more than is prudent. Executive action
and budget reconciliation work both ways, depending on who is in power. The
most enduring type of decarbonization policies will be bipartisan, sensible, and
reasonable. The challenges of decarbonization are significant and mandating
beyond those challenges is not a prudent or pragmatic approach. The authors
summarize these challenges as supply chain scale up, geopolitics, big changes
in consumer behavior, siting issues, permit reform, technological improvements
and cost reductions.
The authors
state five principles that they think should inform climate policy. The first
one is:
1. Regulatory reform will accelerate U.S. decarbonization to a far greater degree than new emissions regulations. The idea is that reform of existing regulations on permitting, siting, and transmission will do as much or more than mandated emissions reductions that will seems draconian to many. Biden administration proposed power plant and aggressive vehicle mpg regs threaten to become widely unpopular and potentially expensive for consumers and businesses.
2. Technology innovation should lead emissions regulation. This is quite sensible since mandating beyond technological capabilities is simply not sensible. While the carrots of tax credits and subsidization have been popular and successful the sticks of mandates and limits have not and that is not likely to change. Furthermore:
3. Subsidies are for innovation, not emissions reduction. The authors give the examples of early shale gas subsidization that helped to support its later development and maturation and early nuclear subsidization that got the industry going. They note that simple mandates and subsidies for more solar and wind do not address enabling technologies and policies like permit and siting reform, energy storage deployment, grid integration, and transmission buildout and upgrades. They risk overbuilding and potentially stranding wind and solar generation. They note that subsidies drive innovation and early-stage commercialization.
4. Industrial policy and emissions policy are not the same thing. Here they point out as an example that pragmatic decarbonization policies will likely be more costly in the near-term which will necessarily slow implementation: “Foregoing Chinese supply chains and critical minerals will inevitably increase the cost of polysilicon solar panels, batteries, and electric vehicles in the short term. Requirements to use union labor and direct benefits to marginalized communities will increase the time and transaction cost associated with deploying critical low carbon infrastructure.” Aggressive mandates and timelines are simply not feasible and will result in problems that are not necessary and may jeopardize the very things they hope to accelerate.
5. Quiet climate
policy will trump climate ambition. This statement is basically a recap
or a result of the previous ones. How much money will be spent over the next
decade implementing the IRA is dependent on all the things mentioned above. How
much is spent is “entirely dependent on whether the IRA tax credits survive
subsequent administrations and Congresses, and whether the necessary
technological developments, supply chains, infrastructure, and market demand
actually materialize over the next decade such that firms are able to fully
utilize the IRA tax credits.” Basically, they are saying that the quiet or
less aggressive policies that are at a pace with technology maturation and have
bipartisan support are simply more durable and likely to endure.
This is a great article and should be widely read as it promotes a pragmatic approach to decarbonization that has the best chance of success and steady rollout. Kudos to the authors.
Addendum: Another recent Breakthrough Institute article addresses the downsides of the EPA’s proposed power plant rule, arguing sensibly for a less aggressive approach and one that favors reforms of existing regulations over new emissions reduction mandates. Below is a graph from that article showing much greater emissions reductions from expanding transmission lines at a pace that is actually feasible over emissions reduction that would come from the EPA’s rule alone.
References:
On the
Difference Between Techno and Technocratic Optimism: The Inflation Reduction
Act at One. Ted Nordhaus and Alex Trembath. The Breakthrough Institute. July 31,
2023. On
the Difference Between Techno and… | The Breakthrough Institute
Deregulating
Clean Energy Is More Important Than Regulating Carbon Emissions: An Analysis of
the EPA’s Power Plant Regulation Proposal. Juzel Lloyd, Alex Trembath, and
Seaver Wang. Breakthrough Institute. July 25, 2023. Deregulating
Clean Energy Is More… | The Breakthrough Institute
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