Abstract:
“Inframarginal Investments with Clean Energy Subsidies: Evidence from the Inflation Reduction Act”
John Bistline* (EPRI) and Asa Watten (EPRI)
Governments use subsidies to accelerate the adoption of clean energy technologies, reduce emissions, and drive innovation. However, there is concern that these subsidies could reward firms and households that would have adopted these technologies anyway. This analysis examines the extent of “inframarginal” investments for power sector tax credits, which were renewed and expanded with the U.S. Inflation Reduction Act (IRA) of 2022. Using retrospective empirical analysis and a comparison of multiple prospective energy system models, we find that a considerable share of wind and solar capacity additions in the U.S. may have occurred without subsidies. We estimate that a third of wind capacity additions and half of solar additions are inframarginal in U.S. states without renewable portfolio standards (in contrast to states with binding mandates, where all subsidies are inframarginal). The model comparison suggests that 28-72% of future clean electricity investments would likely occur without IRA incentives. Analyses that assume all subsidized projects are additional underestimate the actual cost of tax credits by a factor of two. While this inframarginal participation raises the cost of reducing emissions, the estimated abatement cost remains below many estimates of the social cost of carbon.
*Denotes presenter