The Inflation Reduction Act Falls Short On Emissions Regulation

By Leonard Hyman & William Tilles - Aug 25, 2022

• The inflation reduction act gives the EPA the authority to regulate greenhouse gas emissions.
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• Projections show that decarbonization of the US electric sector alone will cost over $4 trillion.
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• The electric sector will have to more than double capital spending starting literally tomorrow if it intends to reach decarbonization within 20 years.

When, early this year, the U.S. Supreme Court of the United States (SCOTUS)  throttled the Environmental Protection Agency’s (EPA) authority to reduce carbon emissions on the grounds that Congress should pass a law specifically addressing the problem, we imagine that lobbyists who worked for the electric utility industry, so assiduously skilled in delaying any climate action, took the cynical advice offered by the Financial Times’ resident PR expert, Rutherford Hall. He advised clients to “position fossil fuel stuff as concern about global energy security. Keep stressing the commitment to your long-term green goals even as you slide away from them.” (Financial Times, 21 August 2022, “Can I go back to being an uncaring boss yet?”) Of course, our utility executives pushed the need for a carbon bridge to the future driven by base load, gas-fired power plants— a supposedly “reasonable” glide path to lower CO2 emissions yet nothing that would cause disruption to a monopoly's business. But the idea, no doubt, was to remain plausibly “green” while stalling as long as possible.   

The brilliantly misnamed Inflation Reduction Act (IRA), however, specifically gives the EPA the authority to regulate greenhouse gas emissions. It also provides a raft of subsidies, loans, and tax breaks (several hundred billion dollars over 10 years) to hasten and enable the reduction of greenhouse gas emissions. However, projections show that decarbonization of the US electric sector alone will cost over $4 trillion. To us, that means the electric sector will have to more than double capital spending starting literally tomorrow if it intends to reach decarbonization within 20 years. The recently passed IRA won’t pay for this job, but it will pay to develop new technology, some of which will work, and it will encourage more demand for electricity (via increased penetration of electric vehicles, as an example). It might also lead to some spectacularly unsuccessful loans, too. But keep in mind the old bank loan officer maxim: if you don’t have any bad loans, you haven’t made enough loans.  

So, let’s look at the IRA act’s impact on the ability of the EPA to regulate greenhouse gases (GHGs). In terms of regulatory or statutory enhancements, Congress did amend the Clean Air Act (specifically section 135) to specifically affirm the EPA’s authority to regulate GHGs like CO2. And this probably strengthens the agency’s regulatory authority in the future. But the IRA did nothing to reverse the impact of the recent Supreme Court decision in W.Va vs EPA. The high court stated the EPA lacked authority to require a broad, economy-wide shift to cleaner sources of power generation. Thus far there has been no change to this ruling. And the EPA received no new authority to regulate power plant-specific emissions.

We view the above as the “Manchin compromise”. Senator Manchin, an ardent coal advocate and Democrat from W. Va, ultimately supported a bill to name a problem - greenhouse gases - while providing little enforcement authority for the EPA with respect to coal-fired power plants, ensuring the status quo for a bit longer. No conventional big coal-fired plant in West Virginia has gone into service since 1980, and there is no rush to build more. So it looks like a wait as the plants age out, and produce a lot of carbon dioxide in the meantime. 

The industry was counting on a slow slide into decarbonization, set for a date beyond the retirement of its current top executives and it might still get its wish, but we don’t think that schedule will hold, because servicing the demands caused by the implementation of IRA will look too much like the next big thing to ignore.

By Leonard Hyman and William Tilles for Oilprice.com