Economic Implications of the Climate Provisions of the Inflation Reduction Act

John Bistline, Neil Mehrotra and Catherine Wolfram

No 31267, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The Inflation Reduction Act (IRA) represents the largest federal response to climate change to date. We highlight the key climate provisions and assess the Act's potential economic impacts. Substantially higher investments in clean energy and electric vehicles imply that fiscal costs may be larger than projected. However, even at the high end, IRA provisions remain cost-effective. IRA has large impacts on power sector investments and electricity prices, lowering retail electricity rates and resulting in negative prices in some wholesale markets. We find small quantitative macroeconomic effects including a small decline in headline inflation, but macroeconomic conditions–particularly higher interest rates and materials costs–may have substantial negative effects on clean energy investment. We show that the subsidy approach in IRA has expansionary supply-side effects relative to a carbon tax but, in a representative-agent dynamic model, is preferable to a carbon tax only in the presence of a strong learning-by-doing externality. We also discuss the economics of the industrial policy aspects of the act as well as the distributional impacts and the possible incidence of the different tax credits in IRA.

JEL-codes: E20 L94 Q54 (search for similar items in EconPapers)
Date: 2023-05
New Economics Papers: this item is included in nep-ene, nep-env and nep-reg
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Citations: View citations in EconPapers (14)

Published as John E. T. Bistline & Neil R. Mehrotra & Catherine Wolfram, 2023. "Economic Implications of the Climate Provisions of the Inflation Reduction Act," Brookings Papers on Economic Activity, vol 2023(1), pages 77-182.

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Journal Article: Economic Implications of the Climate Provisions of the Inflation Reduction Act (2023)
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