After 30 years of failed attempts to enact bold climate legislation, the U.S. entered a new era when President Joe Biden signed the Inflation Reduction Act on Tuesday. The surprise deal for the first time gives the country a pathway to cut its emissions in line with the Paris Agreement. “This bill is the biggest step forward on climate, ever,” Biden said.
Now, the fight begins to fill in the gaps.
The specifics of the law’s climate provisions are a reflection of 30 years of trial and error. It avoids taxes on emissions, which have drawn ire from some in the business community in the past, and instead relies on carrots that incentivize companies to decarbonize. To keep activists on board, it includes tens of billions of dollars in environmental justice provisions to invest in vulnerable communities. And it sidesteps the thorny problem of how to slow the fossil fuel industry, an interest group that holds sway with members of both parties. In short, it sets an ambitious direction for the future of U.S. climate policy and provides incentives to get there, but leaves many of the details to be determined.
Many factors will play into shaping that future. Above all, the market will respond to the Inflation Reduction Act, spurring the repricing of various technologies and pushing the U.S. to use cleaner ways to power its homes, cars, and factories. Which technologies win out in the market will depend in large part on the vagaries of the economy, from fossil fuel prices to economic growth. Investors, too, will shape which technologies thrive. But the market won’t be the only force determining how the Inflation Reduction Act ends up working. The next chapter of the climate fight will also involve a tug of war between industry, activists, and policymakers all gunning for their preferred approaches to cut emissions and deal with the social ramifications of the energy transition.
We know the law will reduce emissions, but we don’t know by exactly how much. We know that clean energy will receive a boost, but we don’t know which companies or which technologies will end up thriving. And we know that the social ills caused by climate change have finally received due attention, but we don’t know whether the law’s justice-oriented provisions will spur enough change for the impacted communities.
“If you’re a solar developer or a utility, or in an industry looking to become more efficient and competitive globally, all of that now is aligned with the direction of travel,” says Jesse Jenkins, who leads the REPEAT project at Princeton University which analyzes the U.S. energy system. “How does that work out in reality? I’m very excited to conduct this experiment and find out in 10 years.”
Right now the legislators, activists, business leaders, academics, and policy wonks who made the Inflation Reduction Act a reality are enjoying a moment of celebration at a hard fought victory. But soon those same groups will need to begin waging the next battles set up by the law: pushing for stronger environmental justice provisions, haggling over which companies should get federal support, and debating how to handle the staying power of fossil fuels.
Best and worst case scenarios
While signing the Inflation Reduction Act is a major step forward in the climate fight, there’s a wide range of possible outcomes ahead.
The clear consensus among economic modelers is that the law will cut emissions significantly, but it remains unclear by exactly how much. An analysis from the Rhodium Group, one of a handful of non-partisan firms that has publicly released modeling on the emissions implications, shows it will lead to somewhere between a 32% and 42% reduction in U.S. emissions by 2030 when compared to 2005 levels. That’s a significant improvement: without it, U.S. emissions were expected to fall between 24% and 35% in the same time period. That brings the Biden Administration within striking distance of its goal of slashing emissions by half in that time.
The difference between the best-case and worst-case emissions scenarios can be boiled down to the market. In a low-emissions scenario, high fossil fuel prices will encourage companies to look for alternatives like wind and solar while those alternatives will quickly become cheaper. On the other hand, a sustained period with cheap fossil fuels would hinder rapid decarbonization.
The market, too, will play a significant role determining which clean technologies take off. The Inflation Reduction Act deliberately takes what is often called a “technology neutral” approach. Beginning in 2025, any method of generating electricity that does not emit carbon would qualify for a zero-emissions tax incentive. It’s safe to assume that will mean a lot more wind and solar power than without the incentive. But it could also mean a continuation of more hotly contested power sources like nuclear and fossil fuels, provided that power producers capture the carbon.
How investors read these signals—a combination of the incentives in the law and the costs of various energy sources—and then deploy their capital will in large part determine both how much we decarbonize as well which technologies we use to get there. The race to develop the new clean technologies has already begun, and it’s safe to expect the cash will continue to flow. “The set of incentives out there has changed,” says Karen Karniol-Tambour, chief investment officer for sustainability at Bridgewater. “That just makes anything in the space more competitive—and that’s a great thing.”
But even the best economic modeler would acknowledge that while models give a hint of the potential future, they can’t predict it. Beyond the economics, a variety of factors will determine what the future of the U.S. decarbonization effort looks like. Even if the economics align, state and local officials in some recalcitrant red areas will have to overcome ideological skepticism to approve new clean energy power plants—and shut down dirty polluting ones. Companies that want to use the incentives for low-emissions fossil fuels will have to address activist opposition, which has already succeeded in shutting or slowing pipelines and other fossil fuel infrastructure. And companies will have to face the myriad political hurdles to, for example, build a domestic supply chain for electric vehicles to get the full credit—a requirement in the law that no electric vehicles currently satisfy.
And, while the market is theoretically good at propelling the most cost-effective technologies, it doesn’t always do a great job of accounting for the social ramifications of that process. Historically, that’s especially been the case for communities of color that have borne the brunt of environmental hazards, from refineries built in backyards to pipelines that pass by schools. The Inflation Reduction Act contains $60 billion to advance environmental justice priorities in the form of grants to these communities, but activists argue the provisions are insufficient and take particular issue with the measures that allow the fossil fuel industry a continued place in the energy mix.
For this reason, as companies look to take advantage of the incentives, the fight over the future of fossil fuels will only grow as activists take on new pipelines, export terminals, and refineries. “We can stop the build out,” says Jane Kleeb, founder of Bold Nebraska, a group that fights fossil fuel pipelines. “It’s going to take all the legal avenues that we currently have on the ground.”
Fighting fossil fuels on the ground is a high-profile way for activists to ramp up the climate fight, but it is far from the only front that’s likely to see renewed interest. The science suggests that even with the Inflation Reduction Act, a large gap remains to stave off the worst effects of climate change.
“Now that this legislation has passed, one of the most dangerous outcomes would be if people threw up their hands and said ‘mission accomplished, we’re done,'” says Jean Su, a senior attorney at the Center for Biological Diversity. So far, it seems safe to say that few are doing that.
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