Climate change recently was pushed to the back burner by a host of more immediate concerns – gas prices, inflation, recession, crime, illegal immigration – and by a realization that the geopolitical and economic settlement following WW II is in tatters. But climate policy is once again a hot topic in the United States, and by extension, in other countries.
Final details are being negotiated at this writing, but the senate has approved the Inflation Reduction Act (IRA), 51-50, with the vice president the tie-breaker, and the House will almost certainly do so on Friday. The effect on inflation will be “statistically indistinguishable from zero” through 2031 estimates the Penn-Wharton Model, three one-hundredths of one per cent on average over ten years according to Moody’s Analytica.
Schumer, Manchin, Sinema agree
It is a product of two sets of intra-party negotiations. The first came in protracted negotiations between senate majority leader Chuck Schumer, and senator Joe Manchin. Manchin found the President’s massive tax-and-spend, Build Back Better (BBB) bill too rich for the good of the nation, and denied Schumer the go-ahead vote he needed. Manchin, a Democrat in a state, West Virginia, that went 68.5 percent for Republican Trump, baulked at the estimated $2-5 trillion cost and BBB’s hostility to the coal, oil and gas producing industry that is the backbone of West Virginia’s economy.
The second was between Schumer, with a placated Manchin riding shotgun, and Krystin Sinema, who had problems with the tax provisions of the Schumer-Manchin deal, problems that Schumer resolved.
The resulting legislation represents a compromise between three parties with interests in the bill’s passage – no compromise with Republicans was attempted in light of signals from the minority that not a single Republican senator would vote for the bill. The compromises were intra-party.
It is arguable that those compromises, which have resulted in a bill that provides support for both fossil fuels and green initiatives, just might represent as sensible an energy and climate policy as can be wrung from a bitterly divided congress, with some members who believe that fossil fuels remain key to economic growth, and others who believe their continued use will “bake this planet,” to quote the President.
Something For Everyone
As Zero Mostel’s character, Polonius, characterizes Stephen Sondheim’s Funny Thing Happened On The Way To The Forum, in this bill “There’s something for everyone, something appealing, something appalling”.
There’s something for Biden’s Left: $64 billion for Medicare, a cap on drug prices, higher taxes on “the ultra-wealthy,” a tax on buybacks, and $124 billion for the tax man to tighten enforcement, primarily on anyone earning more than $200,000.
There’s something for the green lobby:
- means-tested subsidies for efficient appliances and specified electric vehicles,
- billions for tax credits to finance the development of wind and solar energy, and
- batteries to store energy when the wind don’t blow and the sun don’t shine, causing power shortages and rationing in states that rely heavily on renewable sources, California being the prime example,
- subsidies for carbon-capture and hydrogen projects.
The subsidies and tax credits are cemented into law for a decade, rather than extended for a short period, providing investors with hitherto absent certainty. Score one for wind and sun.
There’s something for the oil industry. The Department of the Interior is to grant oil companies permits to drill on two million acres of federal lands and 60 million acres offshore – every year for the next ten, with wind and solar projects’ access to federal lands contingent on the honoring of promised access to oil and gas companies.
There’s something for the nuclear industry — a per-kilowatt hour production tax credit to prevent the closing of nuclear plants.
There’s something for Manchin. He gets Schumer’s promise (perhaps as in lyricist Hal David’s “promises, promises you knew you’d never keep”) to ease permitting and allow the completion of a natural gas pipeline that will bring West Virginia gas to market, and special tax credits for facilities that locate in his coal-mining home state.
There’s something for Sinema. She gets continued favored tax treatment for her rich private equity donors, saving them $14 billion, continued accelerated depreciation for some manufacturers, some water for arid Arizona, and a one per cent tax on stock buybacks, the latter predicted to have no effect on the volume of such buybacks. Estimated total effect: some taxes down $55 billion, others up $74 billion.
There’s something for Schumer. Desperate for some accomplishment to parade before voters in the upcoming mid-term elections, a mere 92 days away, he got something Democrats can flaunt to distract attention from the failures of the Biden administration and the President’s low approval ratings.
Cutting Emissions
The administration estimates that the climate and energy provisions will reduce greenhouse-gas emissions by 40 per cent by 2030, not quite as much of a reduction as Biden wanted, but with a bit of help from local and state governments, the 50 per cent target he had set, and his goal of a 50 per cent reduction below 2005 levels by 2050 seem within reach. The return of America to the emissions-reduction wars will also encourage other countries to take similar steps reckons Dan Lashof of the World Resources Institute. That would involve seeing more of John Kerry, but no deal is perfect.
Government, Not Markets, To Pick Winners And Losers
Despite some market-friendly features such as trading in tax credits, the combined effect of the chips and climate bills is to replace markets with men and women, price signals with bureaucratic mandates influenced by lobbyists who have raked in $20 million from chips makers this year so far. The bureaucrats with no skin in the game will decide which technologies to finance, especially among newer chips – pick winners, in the jargon of the trade. The Commerce Department “will choose which companies qualify for the money,” according to the New York Times.
The economy that is emerging is far different from the one that relied on risk-taking innovators and upward-striving workers to produce a world-leading economy. Make no mistake: these are changes in the American capitalist model that cannot be erased at the next election. Brian Deese, Biden’s chief economic advisor, says, “The question really needs to move from why do we pursue an industrial strategy to how do we pursue one.” That strategy includes Biden’s favorite gifts to trade unions: significantly higher payments to firms that use union labor, most of which are located in Democrat-run states.
It’s Not For Nothing That We Tinker With Capitalism
In return for this gutting of the market system we have a system of allocating capital and resource that just might end reliance on China for chips and other products important to national security at a time when an increasingly belligerent Xi Jinping and an increasingly potent People’s Liberation Army seem ready to test American resolve to stand with Taiwan.
We also might get a less carbon-intensive economy, a model for others so that the climate stops heating. And that without an interim transition characterized by major economic dislocations due to a shortage of fossil fuels.
Life Is Trade-Offs
The great economist Thomas Sowell has written, “There are no solutions. Only trade-offs.” We are trading off some of the efficiencies of market capitalism, and the freedom associated with that system, for hoped-for greater national security and a cooler planet. That might be a reasonable trade-off for America to make. Or not.