A Turning Point for U.S. Climate Policy?

TL/DR: The Inflation Reduction Act and the Democrats’ unprecedented investment into clean energy may actually be big and broad enough to help usher in a new post-partisan era on climate policy. An early test may be how the parties negotiate permitting reform.

While there are a lot of divergent analyses of the Inflation Reduction Act, one thing everyone can agree on is that it’s BIG. Not as big as some wanted, but still the biggest investment in clean energy in the history of the United States – or ever, anywhere.

Let that sink in for a second. 

The Energy Security and Climate Change title of the bill alone carries a $369 billion price tag. To put that in context, the American Recovery and Reinvestment Act signed into law by President Obama in 2009 provided about $107 billion (adjusted for inflation) in clean energy investments and tax incentives. That bill had a major and catalytic effect on the clean energy industry and helped unlock significant private investment in the clean energy sector. It played a major role in helping the industry mature to where it is today, just fourteen years later. 

We’re about to spend 3x that amount this time around. 

$369 billion is a truckload of money by any comparison. The entire federal highway system cost $128 billion. The Apollo 11 moon landing was only $2.7 billion. Heck, we might even be able to afford a Mars landing for the kind of money the IRA is throwing around.  

So yes, this is not just a lot of money, it’s a historic investment in a sector that Lot Sixteen has been squarely focused on since day one.  

Evolution in the U.S. Climate Debate

What is as notable, but less discussed, than the price tag is the approach Congress has taken. In the thirty-odd years climate change has been on the agenda, a variety of different approaches from global agreements to cap-and-trade to putting a price on carbon have come and gone. As the political dynamics in both parties (but particularly the GOP) continued to change, the approach Congress has taken on climate change has been… a wild ride.

First, the U.S. played the global game when President George H.W. Bush signed the 1992 U.N. Framework Convention on Climate Change declaring, “The United States fully intends to be the world’s pre-eminent leader in protecting the global environment.”  

A year later, in 1993, the Clinton Administration took another approach in the form of a BTU tax, the centerpiece of President Bill Clinton's budget proposal. Intended to raise revenue to close the federal deficit – and save energy – the proposal would have levied a tax on energy sources based on their heat content – measured in British thermal units (BTU). “We support the energy tax not simply as a revenue raiser, and not even primarily as a revenue raiser,” explained then-Council of Economic Advisers Chairman Laura D'Andrea Tyson. “It is primarily an energy conservation measure,” she said. Environmental activists cheered but Congress blanched. House Republicans had a field day with the legislation when it came to the floor, labeling it a “Big Tax on you.” Senate Democrats headed off a vote on the measure, which was blamed for a GOP rout in the midterm elections the following year, when Democrats lost 54 seats and the majority. 

The episode represented an early lesson in the perils of legislating on energy prices for Democrats, who complained that they’d been “BTU’d” — or screwed by the Clinton White House. 

A few years after Clinton’s BTU proposal went belly up, the Senate in 1997 pulled the plug on the international protocol approach to addressing climate change. Senator Robert Byrd (D-WV) sponsored a resolution that said the United States should not enter into any international climate agreement that did not include comparable emissions commitments by developing countries or that “would result in serious harm to the economy of the United States…” The so-called Byrd-Hagel resolution passed 95-0, and the Kyoto Protocol was never ratified by the Senate and the era when America would even cooperate, never mind lead, global efforts to address climate change was dead.

Enter cap-and-trade. In 2003, six years after Byrd shut the door on Kyoto and a decade after the BTU tax failure, Sens. John McCain (R-AZ) and Joe Lieberman (D-CT) introduced an economy-wide cap-and-trade program. The market-based mechanism took root and spread through Congress, with competing versions of McCain-Lieberman emerging in the ensuing years as the debate evolved but it primarily became a Democratic policy priority, with just a handful of congressional Republicans engaging in the debate. 

In 2009 — after the Great Recession — hope ran high in Washington that we could “Repower America” with massive spending on clean energy. With Democrats firmly in charge of the House and Senate, newly minted President Obama quickly pushed the American Recovery and Reinvestment Act into law. 

But the second phase of the legislative plan – enacting cap-and-trade legislation — ran into trouble. The economy-wide cap-and-trade system, authored by Reps. Henry Waxman (D-CA) and Ed Markey (D-MA), narrowly passed the House of Representatives but that was its high-water mark. The Senate never took up Waxman-Markey and the Obama Administration decided to invest its remaining political capital on healthcare. Cap-and-trade had come and gone — once again leaving House Democrats feeling BTU’d and out of power in the next Congress.  

A flurry of other climate policies — including carbon taxes and a national clean energy standard — emerged in the ensuing years but all were doomed to failure by divided government and rising partisanship on Capitol Hill.  

When Democrats emerged in control of Congress and the White House in 2021, they quickly set their sights on the budget reconciliation process as a means to enact the Biden Administration’s agenda along party-lines (reconciliation bills can pass the Senate by a simple majority but are limited in scope by strict rules that prevent extraneous matters from being included).

With a 50-50 Senate, rising inflation and a hangover from spending trillions on the Covid pandemic, it proved harder than expected. Reconciliation passed the House during the first session but was declared dead by the Chair of the Energy and Natural Resources Committee in the Senate, Sen. Joe Manchin (D-WV). Months of backdoor negotiations with Manchin eventually produced the IRA, which included record climate spending along with tax and prescription drug reform, but otherwise eschewed the sweeping agenda proposed in the early days of the Biden Administration.

The climate centerpiece of the bill is the clean energy title, which extends and expands the tax code for crucial clean energy incentives and finally provides the policy certainty that the energy sector has clamored for for years. Notably, the bill also converts many of these incentives to a technology-neutral posture in the coming years — capitalizing on an idea that has growing bipartisan appeal and rebuts past political arguments over “picking winners and losers.”

A Post-Partisan Era on Climate? 

We think the likelihood is that attempts to repeal this bill, like the GOP tried for years to do with Obamacare, are unlikely. That’s mostly thanks to the avalanche of federal funding that will wash over states and districts across the United States, including many red ones. And from a policy perspective, there is a lot of energy-related substance in this bill for Republicans to support. Tax incentives for carbon capture and storage, small scale nuclear reactors, clean hydrogen and serious efforts to on-shore manufacturing for things like solar panels and battery technology are all policies that Republicans have embraced in recent years as climate solutions.  

The bill also requires the Biden Administration to open more federal lands and waters to oil and gas leasing, while tying the development of wind and solar on public lands to ensuring these leases happen. The reality of Manchin insisting on an all-of-the-above approach to climate policy might be significant enough to produce a post-partisan approach to climate policy. It would be perhaps the bill’s greatest benefit if we’re right.

One big potential upcoming test of this idea will be permitting reform. It’s the caboose on the IRA freight train, but Manchin’s permitting reform proposal will be on-deck when Congress returns after Labor Day.  

With growing awareness of the role that critical mineral supply chains and federal land use could impact clean energy development, and with Republicans in Congress likely to control the House of Representatives, it could be a fruitful time for bipartisan permitting reform. A bigger problem may exist among progressives who are already saying they have concerns about anything that could help the oil and gas industry.

Time will tell, but Congress’ own evolution on how to address climate combined with the historic levels of investment this legislation will unleash could be the force that finally breaks climate gridlock.  

For the future of our economy, and the health of the planet, we hope we’re right.