Financial Benefits of IRA’s GHG Reductions and Historic Levels of Federal Climate Spending

Key takeaways:

1. The United States Office of Management and Budget found that cumulative climate-related benefits from the Inflation Reduction Act will range between a cumulative $0.7 and $1.9 trillion through 2050, and those benefits are likely understated. This is the first published estimate of avoided climate-related social costs from legislation.
2. Between the passage of the Inflation Reduction Act, CHIPS and Science Act, and the Infrastructure Investment and Jobs Act, annual real federal spending on climate and clean energy over the next decade will likely be at least 3.5 times its level in the period from 2009 to 2017, and 15 times its levels in the 90s and early 2000s. Each of the bills focuses on a different part of the S-Curve of technological adoption.

OMB Analysis – Social Benefits of IRA

• The White House briefing room today released an PR regarding the Office of Management and Budget’s analysis quantifying how the Inflation Reduction Act (IRA) would help avoid the social and economic damages of climate change. This is notable because this is the first published estimate of avoided climate-related social costs resulting from a piece of legislation. They find, “Over the long-term, the Inflation Reduction Act will help avoid billions of dollars that the Federal Government might otherwise expect to transfer to households and businesses for programs like crop insurance, health insurance, and fire suppression due to climate change.” (PR) New OMB Analysis: The Inflation Reduction Act Will Significantly Cut the Social Costs of Climate Change.
• The analysis document details their methodology. The framework estimates the social impact the IRA would have by applying the interim social cost of GHGs (SC-GHG/SC-CO2) to the expected IRA emission reduction models produced by several organizations (Princeton University’s Rapid Energy Policy Evaluation and Analysis Toolkit, Rhodium Group, and Energy Innovation). To cover the widest range of possible impacts, the analysis highlighted potential impacts using the highest and lowest emissions scenarios of the three models. This analysis uses unrounded interim SC-GHG annual values from 2023 to 2050, discounted to present 2022 values using a 2.5% discount rate, then applies those values to the GHG reduction estimates from the three models. OMB Analysis: The Social Benefits of the Inflation Reduction Act’s Greenhouse Gas Emission (GHG) Reductions.
• Results of the OMB analysis found that cumulative climate-related benefits from the Inflation Reduction Act will range between $0.7 and $1.9 trillion through 2050. These social benefits of the IRA reflect the mitigation of a number of harmful climate impacts reflected in the SC-GHG, including negative health impacts (e.g., premature death), reducing property damage from sea level rise and natural disasters, and reducing costs related to increasing temperatures. The OMB notes that they think the interim social cost of carbon estimates are ‘significantly underestimated’ because they do not account for many important climate damage categories because of limitations around assumptions regarding damages. These results also do not capture benefits that passing the IRA will have on other sectors of the economy outside of the impacts that the bill will have on GHG emissions.
• This new analysis builds on efforts from earlier this year in April 2022, the OMB produced a report which found that climate change could lead to an annual Federal revenue loss at the end of the century of 7.1 percent, which in today’s dollars would equal $2 trillion per year. The analysis also found that the Federal Government could spend between an additional $25 billion to $128 billion annually on just six types of Federal expenditures: coastal disaster relief, flood insurance, crop insurance, healthcare insurance, wildland fire suppression, and flooding at Federal facilities. Additionally, the OMB and the Council of Economic Advisers released a white paper that outlined how better modeling of the broader economic impacts of climate change can help to quantify economic and fiscal impacts of climate change and climate action.
  • 4/4/22 PR: Quantifying Risks to the Federal Budget from Climate Change
    • Assessment: Federal Budget Exposure to Climate Risks [Enclosed PDF]
    • Assessment: Long-Term Budget Outlook [Enclosed PDF]
  • OMB Whitepaper: Climate Risk Exposure – An Assessment of the Federal Government’s Financial Risks to Climate Change [Enclosed PDF]
  • Council of Economic Advisers/OMB Whitepaper: Climate-related Macroeconomic Risks and Opportunities [Enclosed PDF]

I’d argue the analysis should’ve also presented a sensitivity for savings relative to the $ value used for SC-CO2 given the wide range of values which depends on discount rate used as shown by Figure 2 (below) in the Technical Support Document by the White House that was shared.

I’d argue any economic or climate (let alone one that integrates both) model output based on projections out to 2050 should show a range of values given the uncertainty associated with the underlying assumptions: socioeconomic (how quickly does the economy grow), how quickly the climate will respond to rising CO2, how to best quantify benefits and damages, and how to use discounting to value future benefits and costs in today’s money. This is further complicated by the fact certain climate damages that are hard to quantify/unaccounted for but occurring and causing damage (e.g., ocean acidification), models have previously not allowed damages to alter rate of GDP growth (rather calculate how much GDP is cut by climate impacts), and the fact that climate impacts are non-linear (e.g., SCC should trend lower if emissions are tightly controlled whereas higher if not). In reality, you can justify any value for SCC and that uncertainty is why some would argue it’s a pointless exercise but as Carbon Brief bluntly puts it, “the SCC could well be the worst way to value CO2 – except for all the other ways to do it” as policymakers need some mechanism to weigh the pros and cons of potential legislation to drive decarbonization. Nonetheless, I think it’s important to understand how regulators think about and frame future legislation as it will have numerous impacts on government spending, inflation, and economics for companies that provide solutions.

While trying to identify a range of SCC values and how they’ve trended over time to better frame the $78 used outside of the White House technical documents, I found the below pieces and sharing.

• Richard S.J. Tol (who developed the FUND model – one of the 3 popular IAMs popularly historically used to assess SCC) published a recent paper on 8/4/22 – Estimates of the social cost of carbon have increased over time.
  • “In the last 10 years, estimates of the social cost of carbon have increased From $33/tC to $146/tC for a high discount rate and from $446/tC to $1925/tC for a low discount rate”
    • “All together, the upward trend in Figure 1 is partly because analysts have used lower discount rates but also because higher-quality studies have become more pessimistic about climate change”
  • “The social cost of carbon depends on many things, including the total economic impact of climate change, potential tipping points, the scenarios for population, economy and emissions, changes in vulnerability and relative prices with development, the rate of degradation of carbon dioxide from the atmosphere, the rate and level of global warming, the discount rate, the distribution of impacts and inequity aversion, and the uncertainties about impacts and risk aversion. The estimates used here—5,905 estimates in 207 papers, published before 2022—make different assumptions about all these matter”

• From a NBER paper on The Economics of Immense Risk, Urgent Action and Radical Change: Towards New Approaches to the Economics of Climate Change
  • A meta-analysis by Wang et al. (2019) found that studies using IAMs to estimate the SCC have produced values ranging from -13.36 $/tCO2 to 2386.91$/tCO2”
    • [However], “the problem of lack of robustness cannot be solved by conducting a meta-analysis and producing a central value. For instance, many SCC estimates in the literature do not take into account extreme values, do not reflect the latest climate science, and do not incorporate distributive effects; if ‘good’ and ‘bad’ studies are not appropriately weighted, a meta-analysis will not produce a result relevant for policy analysis, which clearly should take into account risk, distributive effects, and market failures”
• Of note, these theoretical SCC estimates differ from the carbon prices governments are using around the world, as evidenced by current global carbon prices (and note most schemes don’t cover the vast majority share of emissions) but something to monitor over time. World Bank’s State and Trends of Carbon Pricing 2022

rmi―historic levels of federal climate spending

• On a related note, I thought this analysis and chart below from RMI visually depicted the historic increase in federal climate spending as a result of the passage of the Inflation Reduction Act, CHIPS and Science Act, and the Infrastructure Investment and Jobs Act. It also highlights how each of the bills spurs Federal spending on climate in different ways. Congress’s Climate Triple Whammy: Innovation, Investment, and Industrial Policy.
• Annual real federal spending on climate and clean energy over the next decade will likely be at least 3.5 times its level in the period from 2009 to 2017, and 15 times its levels in the 90s and early 00s, as the figure below illustrates

• “In a sense, the CHIPS and Science Act is the “brains” of the operation, dedicating billions toward the cutting edge research and development needed to accelerate innovation in emerging clean energy technologies. The Infrastructure Investment and Jobs Act is the “backbone,” providing much of the infrastructure these technologies need to scale at speed. Finally, the IRA is the “engine,” driving investment growth through demand-pull measures that provide the security for these technologies to reach market maturity.”