The IRS will need help to avoid unintended adverse effects in implementing the provisions of the Clean Energy Inflation Mitigation Act.
The Biden administration is pursuing a two-pronged strategy to mitigate climate change. On the one hand, it tries to minimize the role of fossil fuels in the transport sector by encouraging people to switch to electric vehicles. On the other hand, it aims to minimize the role of fossil fuels in power generation by encouraging power generation companies to switch from carbon-emitting fossil fuels to carbon-free sources such as solar and wind.
Both parts of this two-part strategy must be implemented simultaneously and aggressively to have the desired impact on the rapidly changing climate. But the successful implementation of this plan faces many serious obstacles. Ultimately, one of these stems from the fact that people who use fossil fuels, directly or indirectly, have no incentive to use zero-carbon sources because they do not bear the cost of the emissions caused by their use of fossil fuels.
The Biden administration’s efforts to implement recent legislation to overcome this obstacle have the potential to create serious antitrust problems. To minimize the risk of this unintended adverse effect, the Administration must take steps to draft clear regulations to implement the recently enacted Inflation Reduction Act (IRA).
Economists largely agree that the most efficient and effective way to overcome the lack of incentives for consumers to use carbon-free energy sources is to use either a carbon tax or a cap-and-trade system to capture those , which are responsible for carbon emissions, to bear the costs of these emissions. However, politicians are not prepared to introduce a system for pricing CO2 emissions. Nor is the public willing to pay for the resulting large increases in the cost of gasoline, other petroleum products, electricity, and the many products and services that depend on these energy sources.
The Biden administration convinced the US Congress to implement a second-best solution through the IRA by including provisions in this new law that heavily subsidize electric vehicles and zero-carbon power sources. However, these provisions can create significant antitrust issues because of the location of the commodities needed to implement the Biden administration’s climate protection plan and the multi-tiered production and distribution chain of those commodities.
Clean energy technologies such as electric cars, solar and wind power are far more mineral intensive than fossil fuel technologies. To meet the Biden administration’s climate goals, the United States must significantly increase mining and production of 11 key minerals. The increases required are enormous. For example, the demand for graphite, cobalt and lithium must increase by 500 percent.
The United States accounts for only a small portion of the mining and production of the minerals required for the transition to carbon-free energy sources. The main sources are in China, Brazil, Mozambique, Congo, Russia, Vietnam, Australia, Chile and Argentina. The combination of converting raw materials into usable forms and distributing them to the United States depends on a complicated distribution chain currently dominated by Chinese companies. These uncomfortable realities do not sit well with the IRA’s climate change provisions.
In order to persuade Congress and the public to support the IRA’s large clean energy subsidies, President Joseph R. Biden had to characterize the clean energy transition as the source of many new high-paying jobs in the United States.
Consistent with this characterization, Congress has included three sets of eligibility conditions for each of the many subsidies in the IRA. First, a subsidy recipient must meet legal conditions that require every contractor and subcontractor to pay the applicable wage. Second, a recipient must maintain education and training programs. Finally, a recipient must certify that every product, service, and component it produces or sells has a certain minimum percentage of domestic content embedded in its total cost, including mining costs. Additionally, no product component may be sourced from a “foreign company of concern,” a regulation targeting the many components of clean energy equipment that are sourced from Chinese companies.
The severity of each condition varies depending on the product or service to be subsidized and the timing of the applicant’s manufacture or sale of the product or service. Because the new subsidies are contained in amendments to the Internal Revenue Code, the Internal Revenue Service (IRS) is responsible for making, interpreting, and enforcing the rules that determine eligibility for the subsidies. This task is extraordinarily difficult given the many conflicting goals that the subsidies seek to achieve and the fact that most of the cost of the raw materials required to implement the transition from fossil fuels to clean energy is bound to be found elsewhere countries will accrue.
The clean energy provisions of the IRA may have the unintended adverse effect of creating a clean energy market dominated by just a few large companies with prohibitively large shares of the relevant markets for the products and services potentially eligible for the generous subsidies the IRs come into question. With the IRS designing, interpreting, and enforcing rules that are complicated and difficult to comply with, few large corporations are likely to have the expertise to obtain the subsidies needed to enter markets for clean energy products or services are. The IRS can mitigate these unintended adverse effects of the IRA by designing, interpreting, and enforcing rules that are relatively easy to understand and easy to implement.
The IRS needs help in developing, interpreting and implementing regulations that meet IRA eligibility requirements and minimize the risk of inadvertently creating an overly concentrated market for clean energy goods and services. The Federal Trade Commission (FTC) and the Antitrust Division of the US Department of Justice should take action to provide this support.
The United States has experienced and overcome problems of this type in the recent past. The Affordable Care Act (ACA) included provisions that encouraged the creation of Accountable Care Organizations (ACOs) – large organizations that have the potential to improve the quality of healthcare and reduce the cost of healthcare by leveraging economies of scale and scale that are potentially available in the process of health service delivery. The FTC and the Justice Department’s Antitrust Division were rightly concerned that the IRS might inadvertently create unduly concentrated healthcare markets through the rules it issued and interpreted to implement the ACO’s ACO provisions. Both the FTC and the Antitrust Division reduced this risk by assisting the IRS and other agencies in developing and interpreting the regulations necessary to implement the ACA’s ACO provisions.
The FTC and Antitrust Division should commit to playing a similar role in helping the IRS draft and interpret rules to implement the IRA’s clean energy regulations. In this way, the Biden administration can reduce the risk that these regulations will have the unintended adverse effect of creating overly concentrated markets for the provision of clean energy products and services.