Jesse Jenkins: Oh God, this sucks.
Meyer: And let’s start there. Hi, I’m Robinson Meyer, the founding executive editor of Heatmap News.
Jenkins: And I’m Jesse Jenkins, a professor of Energy Systems Engineering at Princeton University.
Meyer: And you are listening to SHIFT KEY, Heatmap’s weekly podcast on decarbonization and the shift away from fossil fuels. On this week’s show, we are looking at what the House budget bill will mean for the energy transition, the U.S. energy economy, and the emissions profile. You know, last week, while we were recording SHIFT KEY, as you may have heard, House Ways and Means Committee released its first crack at the text for its big partisan reconciliation bill, the big piece of legislation that this Republican Congress wants to do that includes really taking a sledgehammer to a ton of parts of the Inflation Reduction Act. Since then, the House Ways and Means Committee has voted yes on that proposal. We are recording this on the afternoon of Monday, May 19th. Last night, the House Budget Committee also voted yes on the proposal.
So in the next few days, this House budget bill will move to the floor, and I should say we don’t know exactly what policies are going to be in it when it gets there, but today on this show, we want to give you some tools for thinking about what the options are — first of all, for the final bill. And second of all, what that will mean in the real world. What will that mean for the energy economy? And to do it, we have one of the best guests I can think of to help us do that, and that guest is my very own co-host, Jesse Jenkins.
So Jesse, as some of you may know, runs the REPEAT project at Princeton University, which does exactly this kind of rapid energy policy analysis that looks at what policies under consideration might mean for the energy economy. And he has, we have today, Jesse’s new and at the time we’re recording this, exclusive new findings on just the different set of options that could result from the House Republican bill, and that’s what we’re going to talk about today. So Jesse, welcome to SHIFT KEY.
Jenkins: It’s great to be back, Rob. So yeah, I’m excited and a bit terrified to share the results from this round of modeling from the REPEAT project, which, as Rob mentioned, we’ve been running since all the way back in 2021 as an effort to try to keep tabs on changes in federal energy and climate policy, and to use our energy system modeling tools to try to put a quantitative spin on what those changes might entail for the U.S. energy transition, for greenhouse gas emissions, for energy costs across the country, and those kinds of major salient points.
We did this, of course, all throughout the development of the Democrats’ budget bill, which became the Inflation Reduction Act in 2021 and 2022, assessed also the impacts of federal regulations that were completed over time by the Biden administration before the end of Biden’s term. And now, of course, we’re looking at what happens if and when the Trump administration and the congressional Republicans start to dismantle that existing policy framework that was established as of the end of last year.
Meyer: So I think maybe the best place to start is the way this works, right? The way that modeling like this works is you look at a number of scenarios, look at a number of assessments of what could happen. And I want to get into those assessments in a second. But first I want to ask, on the whole, we may not know exactly what House Republicans are going to do and what Republicans in Congress are going to do especially, but, like, when you look at the set of possibilities encapsulated by the Republican bill, what does this mean for the energy system and for the climate? Is it good?
Jenkins: Uh, no, it is not good. And I wish I had some silver linings to pull out here, but they are non-existent — or few and far between, if there are any we can find. Dismantling the current policy trajectory would result in a substantial increase in greenhouse gas emissions, on the order of half a gigaton, 500 million tons, by 2030, rising to over a billion metric tons, or a gigaton by 2035.
And at the same time it would, of course, slow the energy transition. So less deployment of clean electricity technologies, a slower uptake of electric vehicles, and other impacts across the economy. And all that also translates to higher energy costs for Americans, for households, for businesses as we do two things. One is we remove tax credits and subsidies that are currently lowering the cost of investing in all of this new infrastructure, whether it’s new power generation or storage or new vehicles for fleets or households.
So those subsidies shift some costs out of household and business budgets right onto the federal tax code. And by slowing down measures like energy efficiency, electrification, EVs, measures that reduce fossil energy consumption, we’re also likely to see fossil fuel prices go up as demand rises. So relative to a world where we’re reducing demand for these fuels, if we slow down that process and we consume more fossil fuels overall, that’s also going to translate through the law of supply and demand into higher costs for Americans.
So that’s, I think, the top line: Higher emissions, slow down — although not halt — the energy transition, and higher energy costs for most Americans and for our businesses around the country. It’s not quite our frozen policy scenario from the beginning of January, 2021. But not surprisingly, a scenario where we dismantle the entirety of the Biden-era policy apparatus does revert us pretty close to where we would be if those laws had not passed. Not entirely. There’s some momentum that will continue. But a full repeal scenario, which is maybe where the House is trending, would mean that we’re going to see half-a-gigaton-scale increase in emissions from our current trajectory in 2030, and about a gigaton or more in 2035.
Meyer: I realize that there’s a tendency for numbers, especially gigatons, these numbers attached to giant units, to slide by and kind of be like, Oh, that’s a number. But that is staggering. U.S. energy emissions are about five gigatons. I think global energy emissions are 38 gigatons …
Jenkins: Yeah, close to 40. Exactly.
Meyer: This is a sizable increase compared to baseline in carbon emissions.
Jenkins: I mean, yeah, it is huge. It leaves us pretty comparable to current emissions levels in 2035, if we see a full repeal of all of the regulations and tax credits and spending that are on the books now. Emissions actually go up in the near term as demand growth per electricity exceeds our ability to add new renewables in a repeal scenario. And so there’s an increase in the near term in emissions that actually takes us back towards 2022 levels, and then a slow decline at a similar trajectory that we saw really in the pre-Inflation Reduction Act, which is less than 1% per year decline in U.S. emissions.
In contrast, if we stayed on the current policy trajectory, we would close about half of the distance between that benchmark, the repeal scenario, and where we would want to be if we’re on track to net zero greenhouse gas emissions, which would be even deeper reductions than we’re currently on track for. So if you’re concerned about climate change, we should be accelerating, not decelerating, the transition, and this bill is slamming on the brakes.
Meyer: So you’ve referenced a few times, the way that you conduct this study, right, is you look at a number of scenarios. And so can you give us a sense, what scenarios did you look at to try to just begin to get a handle on what these different policies could do? And based off the text that’s out there, the Republican proposal that’s out there, which scenario are we closest to?
Jenkins: Yeah. So we have a continued policy scenario that assumes continuation of the full suite of policies in place at the beginning of January, 2025, legislative and executive. So the full suite of measures implemented by the Biden administration and the Democratic Congress through the infrastructure law and the Inflation Reduction Act. Then we have an executive-repeal-only scenario, and so that scenario contemplates the Trump administration repealing all of the EPA greenhouse gas emissions regulations — that’s on power, on transportation, and on oil and gas methane pollution, as well as DOE efficiency standards and Department of Transportation fuel economy standards, and rescinding all unspent grant funding at the executive agencies.
And of course, we’ve seen those types of actions already from the Trump administration. They’ve not completed the rescission of those rules because it takes a bit of time to work through the administrative process of repealing existing regulation, but they have made very clear their intention to roll back all of those regulatory policies as soon as they’re able to. And they, as we’ve talked about in the past on the show, are going far beyond what we expected in terms of trying to block spending of not just unobligated funds that hadn’t been awarded to recipients yet, but even grant funding that’s going out to recipients under existing contracts. They’re also doing everything they can to roll that money back. So I’d say that scenario is our current path. We’re on the executive-repeal-only scenario.
And then the remaining question is, what happens in the legislature? What happens in the House and Senate as they craft this budget bill — that was our subject last week — that may, or is likely to, further repeal incentives for clean electricity, for electric vehicles, for energy efficiency, for nuclear power, for hydrogen, et cetera. All of the measures on the tax code to support the energy transition and support the development of a cleaner energy infrastructure — all those could be repealed as well.
And so we also have a full repeal scenario, which would basically include the end of all tax credits established by the IRA at the end of this calendar year. So beginning, you know, January 1, 2026 — no more credits. And unfortunately, it looks like that might be the direction we’re trending in the House bill, as well.
Meyer: That feels like the one we’re moving close to.
Jenkins: Yeah, so we didn’t model exactly every piece of detail in the House bill. We haven’t done that yet. We will, once the House passes something final. If it’s necessary, it may look exactly like the repeal scenario. We’ll see. We saw in the draft we discussed last week that there were a few credits that had a few more years of life in them, but the details are important. The clean electricity tax credits, for example, under the House Ways and Means Committee bill that passed out of committee on Sunday, does allow a few more years of deployment of carbon-free electricity technologies through 2028. If they’re placed in service by 2028, they could still claim the clean electricity tax credit, so that is a little bit better than the full repeal scenario we look at.
But we’ve also heard from Representative Chip Roy, who led efforts to block the budget committee vote over the weekend, that in order to extract further reductions in spending, that we can expect further reductions in the subsidies for clean electricity, thanks to his and his conservative budget hawk caucus efforts to further constrain spending in the House bill.
Meyer: Yeah,and I was going to say, I don’t want to delve into … There’s a lot of tea leaf reading you can do right now, especially around the gap between what House Freedom Caucus members say that they want out of this bill and what House IRA Caucus folks say they want out of this bill. And the gap has only grown. Especially the gap between that and then what senators say they will accept, all of which has contributed to a very confusing information environment.
Jenkins: Bottom line, full repeal is awfully darn close to what the House is trying to do.
Meyer: Exactly. I think we’re so much closer to a full repeal than people would have been willing to bet earlier this year.
Jenkins: Yeah, it’s a lot worse than I expected it to be, because I of course, posited that the economic constituencies out there that are benefiting from these current policies would be more effective at mounting an opposition. And at least at this point in the House side, that doesn’t seem to be the case. You know, just contrast the way that the budget hawks were willing to basically say, “We’re going to hold this bill hostage if we don’t get our way.”
Well, look, they got their way, whereas the House Republicans who have spoken up in the past in public in support of a more tapered or surgical approach to amending the clean electricity credits and others. You know, they wrote a nice letter to the Speaker saying, “Pretty please. We’d like you to do this, if you don’t mind.” But when push comes to shove, none of them seem to be willing to stand up and demand the changes they want to see.
It would only take four of them, or six of them, right? Only take a small cadre of that 21 to be willing to say, “Look, this is really bad for my constituents, and I don’t want to see it. Can we strip this stuff out and work on a bill that we can all support?” But they’re not willing to go to bat at that level, given the challenging politics they face within their own party and the backlash they’re likely to face from President Trump and whatever else that’s just keeping them afraid to actually stick their necks out here.
Meyer: Let’s get into some of the sector-by-sector findings. I think the biggest one, in terms of where we see the biggest emission cuts from the Inflation Reduction Act, is in the power sector. It’s where we have these big, powerful, tech-neutral tax credits that in the law as written and in the law as enacted, are meant to stay on the books for a really long time. They’re meant to stay on the books basically until we decarbonize the power sector, and certainly for decades. That changes in the House Republican proposal — under the best version of the proposal that we have right now, there are rumored worse versions out there, but in the version of the text we have, these tax credits start phasing out in 2029 and they’re gone entirely by the early 2030s.
In your assessment, what does it do to the emissions impact of the electricity sector? And then what does it do in terms of even just what kind of resources are generating electricity for us?
Jenkins: Yeah. So there’s two really big wedges that we see in our modeling scenarios that are differences from repeal efforts. The first is the executive action to repeal the EPA power plant regulations, which have no impact through 2030 because they have very little impact in the early years, because they don’t come into effect until the early 2030s. But by 2035, they have a substantial impact on the power sector, effectively eliminating coal from the portfolio, and further constraining the role of natural gas — although in some weird ways, that actually drive more gas capacity on the grid, even though the power plants are used less because of restrictions on how often the new capacity can run.
That is a big factor. In 2035, that’s the biggest single policy change probably we see in terms of moving the emissions needle, is repeal of the 111(d) standards. Those increase emissions in 2035 by just shy of half a gigaton. But then it all compounds with the repeal of the clean electricity or tech-neutral tax credits, which add another 300 or so million metric tons of emissions by 2035, with a growing impact from 2028 on. So it does start to bite even in 2030 with about 100 million tons more emissions then — this is all round numbers — but growing to something like 300 million tons, even on top of the EPA repeal. So those two together are the biggest chunk of the emissions increase, but there are some other substantial ones in the mix as well.
Meyer: You mentioned this earlier, but I thought one of the most interesting findings in your report was that in almost any scenario, emissions from the power sector actually, and emissions across the economy, increase slightly over the next few years. And I think that’s all driven by stuff in the power sector. Why is that happening, number one? And number two, what happens — let’s say just between now and 2028, or between now and 2030 — in the power sector, in these different scenarios?
Jenkins: So in the near term, we basically, and this is the longer term story indeed, is that we are, we have a race in the power sector between growing demand for electricity and growing shares of clean electricity. If you look at what’s getting built in the United States, it is mostly wind, solar, and batteries. That’s the vast majority of the capacity that’s come online over the last couple of years, and it’s also the vast majority of what is expected to come online over the next couple of years. But because of, particularly, delays and challenges in interconnecting wind power, we’re seeing deployment rates for wind really lag quite substantially. Even the record rates that we’ve seen in the U.S. in the past, where we built about 15 gigawatts of wind per year in 2020, 2021.
Right now we’re running at seven or eight gigawatts a year of deployment, and under continued policies, we expect that to accelerate back towards and beyond that record rate over time. But it’s constrained by our ability to interconnect wind resources to the grid, to get them permitted, to expand transmission into the areas where we need to tap the best wind resources. And in a full repeal scenario, that pace just never hits the accelerator. So it continues to bump along at a few gigawatts per year.
Solar, under a current policy scenario, does grow quite substantially, continuing to set new record growth rates, as we’ve seen each year over the last several years. Solar is a lot easier to cite, faster to complete projects, less dependent on existing grid infrastructure or expansion of existing grid infrastructure to connect. And so we see in a continued policies case that eventually that pace of growth from solar and wind outpaces the increase in demand for electricity. But it doesn’t do so in the full repeal scenario. We do still see a bit more wind and solar built in 2025, 2026, but then the pace collapses, and the growth of demand swamps the additions of new supply.
And so what that means is the power sector leans more in the near term on coal, existing coal fired power plants, than we would otherwise see. And, of course, coal is highly emissions-intensive, and so not even, not very large changes in the amount of coal in the energy mix have a huge impact on our total emissions.
Meyer: Did you see this study that came out over the weekend that was like, recessions, which have previously been thought to have this big public mortality effect, now seem to be life expectancy-improving on the margin, entirely accounted for by the air pollution effects?
Jenkins: I didn’t see that!
Meyer: Fewer people drive and there’s less power use during recessions, and that makes air pollution go down, and that means actually people live longer, even though there’s a lot of public health impacts from the economic effects of recessions, which are unemployment and underemployment.
Jenkins: I mean, I think as Americans, we just routinely underestimate the continued mortality and morbidity impacts, public health impacts, of air pollution in the country. Yes, it’s gotten way better than it was in the past, thanks to regulations like the ones the Trump administration is currently trying to undo. But it’s still bad, particularly in the most heavily populated parts of the country, whether that’s Southern California or where I live here in New Jersey. So yeah, where you got a lot of people driving around and burning power, turns out to be not so good for our health, and there’s a lot more progress we could make on that front if we could accelerate the growth of clean electricity.
Meyer: So one argument that I’ve heard from more IRA-skeptical folks is that if we’re building so much solar and batteries especially, if wind and solar and batteries are the easiest technologies to add to the grid right now, why should we be spending money to subsidize them, given that they seem to be winning on their own as is? Why is that important, either from an economic standpoint, and also, why is it a good use of public funds?
Jenkins: Yeah, it’s a great question. And I should be clear, we do see continued deployment of wind and solar, even in a policy repeal scenario, and storage as well, just at a much slower pace. There are parts of the country where wind and solar are subsidy-independent, where they can just beat out natural gas plants and existing coal on the margins, on economics alone. But that is a restricted portion of the country, and if we want to be able to deploy these American energy resources broadly, all across the country, then we need to do something to value the contributions they’re making to the country. That includes clean air, that includes emissions reductions, that includes lower energy costs, and our ability to keep up with rapid demand growth. It includes economic benefits in a wide range of districts, from employment and local tax revenue and spending.
We have historically subsidized lots of energy technologies. We continue to offer long term subsidies for oil and gas production, lower per unit rates than we provide for wind and solar, but large in aggregate. The question is, do you want to taper these things out over time? That could make sense, but ending them precipitously, especially after they were just extended, it’s a whipsaw kind of effect, right? Any large changes in policy are bad for business, because it means projects that looked like they were going to move forward because of the current policy environment — thought they had visibility to be completed, to get financing, to line up long lead time items, et cetera — are going to have the rug pulled out from them.
So this is where this kind of discussion about where exactly the House and/or Senate bills land in terms of phase-out of these credits, I think is really important. Maybe they don’t need to run ’till 2040 but if you don’t, if you sunset them very rapidly — say by the end of this year — then there’s lots of projects that are already pretty well under development that will no longer be able to claim those credits and may no longer be financially solvent. That creates stranded costs on costs, and projects that get scrapped, companies that go bankrupt, lay people off, et cetera. And so the smoother way to do that would be to have some longer-term runway in which projects can commence construction and lock in the kind of tax credit that they’re eligible for, and move to completion, even as you step down the level over time. That’s where I thought they were headed, but it looks like they may be headed in the opposite direction under the current House discussion.
Meyer: Let’s finish up with a few more sectors. So in transportation, it looks like your results for all scenarios, there’s a reduction in emissions, but the size of that reduction changes a lot based on which policies we happen to follow. What stuck out to you there?
Jenkins: Yeah, that’s right, and we should remember that U.S. transportation emissions peaked a long time ago, and they have been falling since, I think, around 2006, which is when U.S. emissions as a whole peaked, actually. And that’s because of an increase in fuel efficiency over time, right? That increase in energy efficiency in the transportation sector has been enough to offset the growth in vehicle-miles-traveled that we’re seeing across both personal vehicles and freight on private vehicles.
That trend continues under current policies, we see continued growth of hybrid electric vehicles, for example, which are on quite a tear lately, as increasing their market share. And we see continued growth of electric vehicles, because they are still attractive vehicles for many consumers out there across the country, and increasingly more so as their costs fall. But just like in the power sector, that pace drops dramatically, and so we basically see about a 40% reduction in annual sales of electric vehicles by 2030. Cumulatively between now and 2030, it’s something like 8 million less electric vehicles on the roads of the United States, and that does have a measurable impact on total gasoline consumption and therefore emissions and energy costs.
It’s, in some ways, it’s sort of wild. It’s kind of a backdoor gas tax. You know, if you remove these incentives to improve the efficiency of the U.S. fleet and to electrify the U.S. fleet and shift away from gasoline and diesel fuel, you’re going to see a much higher demand for gasoline and diesel, and higher demand translates to higher prices at the pump. You wouldn’t see House Republicans caught dead voting for a gas tax, right? But actually, by removing these subsidies for electric vehicles, that’s effectively what they’re doing to everybody else. By increasing the total consumption of gasoline quite substantially, we’re going to be paying higher prices at the pump across the country.
Meyer: In a world where we’re selling 8 million fewer EVs, what does that do to the EV factories and battery factories and critical mineral supply chains that are being supposedly built all around the country at this moment? And that also supposedly at least on the critical mineral side, the Trump administration is quite keen to expand?
Jenkins: It’s decimating for that whole effort to build out a U.S. battery supply chain. I mean, we are seeing right now a huge amount of investment in projects that are not yet complete to manufacture batteries, to build battery components, upstream projects like mines and processing of critical minerals and components for batteries and, of course, final vehicle assembly. We find that if we look upstream, the current pipeline of both electric vehicle assembly and battery manufacturing capacity is pretty on track to meet where demand would be if we didn’t repeal these scenarios, these policies.
Meyer: So we’ve invested for a non-repeal.
Jenkins: Yeah, the market was anticipating a continuation of policies. It started developing manufacturing plants and making investments and planning investments in accordance to that. If we repeal the tax credits for EVs immediately, or by 2030 even, what we’re doing is making those vehicles more expensive. That means they’re going to sell less of them. If they sell less of them, they of course need to manufacture and assemble less vehicles. And then that permeates all the way up the supply chain, which means less demand for vehicles, for batteries and for critical minerals and for components as well.
And so what we find is that if we do see that contraction in demand for electric vehicles, about 40%, even if the U.S. maintains the same market share as it does today, in terms of assembly of cells and vehicles, that would basically render most all of the planned capacity additions in vehicle assembly redundant. We have enough already under construction, with a couple more, that we would not need any additional capacity. It’s even worse on the battery side, we would have more than enough capacity from projects that are complete by the end of this year to meet the expected demand in that scenario.
And there’s reason to believe that that market share, that U.S. market share, won’t remain the same. It’s likely to fall as well, because the 30D tax credit, that’s the personal vehicle tax credit, is part of an overall strategy to basically onshore and friendshore this supply chain. And so it has a set of requirements that to get the full vehicle subsidy, you have to source, you have to assemble the vehicle in North America, you have to source battery components and assemble those in North America, and the materials that go into them have to come from North America or from our former Free Trade Agreement partners.
So that was sort of the demand side pull that was driving a lot of incentives to produce these in the U.S. There’s also a direct subsidy, 45X, that’s also on the chopping block in the House bill, that was directly subsidizing battery manufacturing in the U.S. And those two together have driven the battery boom that we’re seeing right now, which, by the way, is massive in Georgia and North Carolina and South Carolina and Tennessee and Kentucky and a number of other Republican states.
If you remove either one of those, the supply-side push from 45X, the advanced manufacturing subsidy, or this sort of demand pull that you get from 30D, it’s likely that U.S. market share would fall. And in that case, we’re going to see not only all currently unfinished projects be redundant, likely scrapped, but we’re also going to see, we would have a large amount of over-capacity already operating, and that means that factories would be idled or have to be repurposed to build internal combustion cars. Investments that were just made in new product lines and new assembly lines and robotics and everything else would be wasted. It would really be quite disastrous for the battery boom.
So yeah, I guess I should have put that in my top-line. In addition to increasing energy costs and emissions, it will decimate the U.S. battery manufacturing sector, which is just starting to explode across the country, in mostly Republican districts.
Meyer: How sensitive are your models to oil prices? Because I think one thing we’ve seen in other models is like, well, there’s actually a lot of year-to-year variation in what emissions do based on how high fuel prices get. Like, when you look at your scenarios, is there a way that, say, maybe the parts of the IRA stay on the books, but fuel gets cheaper? Or parts of the IRA go off the books, but fuel gets really expensive? What’s the relationship between fuel prices and emissions in your model?
Jenkins: No, that’s a great question. I should say that’s an area where our particular suite of models is not the strongest. That’s one of our limitations, is that we don’t include a general equilibrium market effect for fuel prices as a function of demand. And so when we calculate, for example, the increase in energy expenditures that we see under repeal, that doesn’t account for a further increase you would see from increased gasoline prices and natural gas prices.
So that is something that the Rhodium Group, who uses the NEMS model — that’s the same model that the U.S. Energy Information Administration uses — and is much better designed to capture these oil and gas supply chain dynamics, I’d say much less well designed to capture electricity sector transition dynamics, which is why we don’t use it. But it is good, in particular at this, which is capturing oil and gas supply chain impacts. What they find is that under a full repeal scenario, by 2035, it would amount to a 1% to 5% increase in retail motor gasoline prices across the country. So that’s like a $0.05 to $0.15 per gallon increase in the cost of gasoline. So it’s like a gas tax of $0.05 to $0.15, right? You get pollution and less exports of oil. Yeah, not great.
And I can’t imagine Chip Roy, again, or his friends voting for a $0.15 gas tax, but that’s effectively what it would do. We would also see an increase in the cost of natural gas by about 2% to 7% in their estimates that natural gas cost drives up the cost of industrial energy expenditures by on the order of $10 billion per year. So it’s making our businesses less competitive, our industries in the global landscape. It would increase industrial electricity rates by 7% to 12% in 2035 and of course, it would also increase our household costs as well. Our estimates from REPEAT Project, even without accounting for that bump in prices, just the fact that we’re shifting costs off of the tax base and back onto household energy budgets, and that we’re going to see more consumption of fuel overall because of less EVs and less heat pumps and less energy efficiency, et cetera, we estimate that total annual expenditures on energy across the U.S. go up by $25 billion In 2030 and by over $50 billion in 2035.
So you’re right, though, to point out that while there is this increase in household costs and reduced competitiveness of American industries and higher cost of gasoline, all that might have a countervailing impact on emissions. That means, all else equal, just considering that change alone, EVs are slightly more attractive when gasoline costs 15 cents more, I just don’t think that’s likely to be as salient to consumers as losing a $7,500 tax credit, which drops the cost of a new vehicle by 25%, or drops the cost of a lease almost in half, because of the way that the tax credits enter into leases.
Meyer: Totally. Though I do feel like one thing we still really don’t understand in the current car and oil market together as linked, is how much if we were to see a 2007 or 2006 oil price surge, which doesn’t seem to be in the cards at this particular moment, but I guess could be if enough supply got lost, and whatever. How much there’s, like, now a ceiling on oil, because consumers can just be like, “Well, screw OPEC, you know, I’m gonna go buy an EV!”
Jenkins: Yeah, that’s true, although it is a slow impact on total consumption, because vehicle turnover is small, like, we only sell, what, 15 million vehicles a year, and we have a fleet of 300 million. And so it does take time for these impacts to mount. That’s why we don’t see any substantial impacts on energy prices in, say, 2026 or 2027, it mounts over time as those 8 million additional EVs that would otherwise have been on the road by 2035 are not there, or by 2030 are not there. So it’s these cumulative impacts over time that will help constrain energy costs.
For an individual household, you can opt out of oil whenever you want. That’s good. So you know, if oil prices go up and you want to say, “I’m done paying at the pump, I’m going to go buy an EV,” that helps you. But in terms of the overall economy, it’s not as quick a transition as we’d like, which is why having long term policy certainty and driving this transition over time would probably be a good idea.
We talked about this a bit with Ellen Hughes-Cromwick when she was on to talk about the impacts of tariffs on the automotive sector. She’s the former chief economist at Ford Motor Company and a Department of Commerce official. She noted that the future of the automotive sector is electric, whether you like it or not. Whether you’re MAGA or not! And the reason we can say that with confidence is that you already look in the U.S. market at what’s growing in terms of vehicle segments, and what’s shrinking. What’s shrinking is conventional internal combustion engine vehicles, and what’s growing are hybrids, plug-in hybrids and EVs.
Beyond that, if the future of automotive is autonomous vehicles, which anybody who’s ridden a Waymo in San Francisco recently, of which Rob and I are both part — we should have an episode on this. So there’s a reason that all of those Waymos are running on Jaguar EVs, not because they’re Jaguars, but because they’re EVs. You can’t have the kind of sensors and compute power that you need onboard a fully autonomous vehicle without an electric vehicle platform.
There’s a reason that Ford launched its BlueCruise, hands-off, hands-free driving that I have in my Mustang Mach-E, for the Mustang Mach-E, in the Ford F-150 Lightning first, because they have the power onboard to power these devices. So if you think long-term about the future of the sector, and you think the two big growth trends globally, right, are electrification and autonomous vehicles, and that those two go hand in hand, because even if you don’t care about the electrification part from an emissions perspective, or oil reduction, or whatever, you just like the autonomous vehicle part, you need electric vehicles.
And you start to see why the current industrial policy that we have in place to support this transition for our automakers is so important to their future. You rip all that away, and we could very well be left with a set of failing automakers who are able to produce large SUVs and trucks that run on internal combustion engines the way they always have, and therefore have a shrinking share of a North America or U.S.-only market at their disposal, having seeded all of the growth markets around the world and their ability to keep up in autonomous vehicles. And that’s just, like, disastrous right? To see that kind of outcome.
So I just, what I hate about this whole debate is how it’s all about “owning the libs,” right, and unwinding any of Biden’s achievements, right? And all that ends up doing is seeding all of these industries to others. You want to own the libs? Great, well, now we just lost nuclear power, we lost EVs, we lost autonomous vehicles, and we’ll probably lose AI too, because we can’t keep up with the demand growth.
Meyer: Well, but it’s incoherent. I mean, this is what’s kind of flummoxing me, is that the day one Donald Trump executive order declared the lack of energy resources in the country, specifically the lack of electricity, but also the lack of critical mineral capacity, to be national emergencies. And we see a huge focus from the Trump administration, at least so far, in trying to shore up critical mineral resources. Now, has that been unified with their trade policy? No, not at all. But they talk about the importance of critical minerals, and how improving and increasing critical mineral extraction and refining is so crucial to the long-term wellbeing of the country.
There’s three industries that produce downstream demand for critical minerals, right? They’re EVs, they’re wind turbines — because you need the magnets for rare earths in the wind turbines — and they’re electronics, consumer electronics. Well, they’re destroying the EV industry. They’re really obliterating the wind industry. They want nothing to do with the wind industry. One thing we see in the House Ways and Means proposal is that they phase out the subsidies for producing wind equipment way earlier than they phase out anything else.
Jenkins: Right, almost immediately.
Meyer: Almost immediately! And then there is basically no serious interest in developing a downstream consumer electronics market. I mean, we have the CHIPS Act, right, but there’s no—
Jenkins: Well, the tariffs! The tariffs are going to bring it all back, Rob.
Meyer: We’ve already relented on tariffs. And even with the tariffs set at 164%, even then, it seemed like we were unlikely to fully decouple from the Chinese electronic manufacturing industry. And also, by the way, you produce a rival to the Chinese electronic manufacturing industry. Number one, it would be unlikely to happen here. But number two, if you wanted to do it here, you pursue a set of policies meant to create an American Shenzhen in like Houston or something. You wouldn’t do it through tariffs and minerals — it’s a bizarre way to do it. Anyway, and you’d need more workers, but not gonna get into that.
So it’s just this bizarre, incoherent policy, right, of like, “We want critical minerals. We need critical minerals. Biden was failing the country by ignoring critical minerals,” while destroying any place where demand for those minerals would come from in the economy, which means there’s no economic impetus to produce them in the first place! But anyway, I repeat myself. There’s one more place I want to talk about, which is when you look at the, in your modeling about what IRA repeal would look like, it looks like a lot of the emissions impacts are coming from, let’s say, like a category that’s neither power nor transportation. It’s buildings, but it’s also kind of a wild card.
It seems like a huge amount of emissions increases, or at least a lack of emissions reductions, comes from the non-CO2 greenhouse gas category. So like, what’s driving the rest of the increase or lack of decrease that we’re seeing here?
Jenkins: Yeah, that big shift is from the repeal of the EPA methane regulations on oil and gas. This was a huge low-hanging fruit for cost effective emissions reductions. Methane, as I’m sure most of our listeners know, is a very potent greenhouse gas. It causes a lot more warming, pound for pound, than CO2, even though it lives in the atmosphere for a shorter period of time, so it has a more immediate impact on temperatures. But you know—
Meyer: Most of the warming we’re seeing right now is from methane, I believe.
Jenkins: Right, because of its immediate impact, exactly. And so we leak a lot of methane from across the oil and gas supply chain, a lot more than we need to, using best practices and cost-effective techniques that are already available to the industry. The large players in the oil and gas industry supported the EPA methane regulations and the fee that the Inflation Reduction Act established on methane pollution from the oil and gas sector. So there’s this one-two combo of a fee on, or really a carbon fee, a methane fee on emissions in the oil and gas supply chain, and a set of regulations that would require their reductions. There were some grant funding as well for those who wanted to access it to tackle emissions. So the major players in the sector were perfectly happy with this. They saw it as very cost-effective. When you avoid leaking methane, you have more methane, a.k.a. natural gas, to sell to the market. So it’s very cost-effective and very achievable. And again, just because it happened under Biden and regulation equals bad under any context, they’re moving to repeal both the methane fee and the EPA regulations. Ballpark, that leads to an increase of about 100 million metric tons of emissions of carbon dioxide-equivalent emissions in 2030 and about 70 million tons in 2035.
So that’s a big chunk, right? 100 million tons is, you know, in a 5000 ton, or 5 billion ton total, is a lot. There are also impacts in industry and residential sectors from reduced energy efficiency and in industry from reductions in carbon capture and hydrogen deployment, which would just again be totally decimated by these repeals. It’s unlikely we’d see any deployment in those sectors if those credits phase out soon.
Meyer: One thing that’s interesting to me about your results is that electricity demand under your modeling, if I’m reading the charts right, and at the time I’m reading this, there’s no report yet. There’s only the charts. And so—
Jenkins: Your graph comprehension skills are being put to the test.
Meyer: I know, exactly. One thing that stuck out to me is that in the scenario where the IRA stays on the books, in 2035, electricity demand is higher than it would be if repeal happens, but electricity costs are lower. And that’s because the IRA works to both increase demand for electricity via electrification of home appliances and electrification of transportation, while at the same time working to get more electricity supply on the market via the tech-neutral tax credits, winds and solar, batteries, et cetera, et cetera.
And so in 2035, in a world where you repeal the IRA, there’s this kind of counterintuitive combination of the U.S. power grid is both smaller, it’s delivering less electricity, and—
Jenkins: It’s bigger than it is today.
Meyer: It’s smaller than it is in the counterfactual, and electricity is also more expensive. It’s a real testament, I think, to the importance of policy that works to increase supply as much as possible in order to lower costs across the economy, which is what the IRA does.
Jenkins: Yeah. I mean, we are sitting here at this moment where we’re coming out of a period of flat demand for electricity, right? It’s been basically stagnant since 2005. Into a period of accelerating growth. In our scenario, or scenarios, including even the repeal side, we’re seeing demand growing at a sustained rate of over 2.5% per year, and under current policies, it could be as high as 3.7% per year. We haven’t seen rates like that since the 1970s or 60s. That’s enough to grow electricity demand anywhere from about a third to half again, current levels by 2035. So the growth is coming, and it’s coming whether or not the IRA credits persist.
What the current policy environment is trying to do, as you said, is to try to rapidly expand our supply of electricity. And the fastest way to do that, the best way to do that under current environments, is with wind, solar and batteries. They’re, you know, again, 98% of what is in the queue, or what’s been built recently. We will add some new gas capacity, I’m sure, to keep up with some of that demand growth. But as your reporting has shown, Rob, there’s just a limit to the amount of new gas turbines that the OEMs are willing to build, and it is not at all sufficient to keep up with demand growth.
So in a world where we do anything to impede the growth of renewables and storage, which is exactly what completely blowing up the current tax credit environment would do, we’re going to simply see demand growth start to outstrip supply increases. And anytime that happens, energy costs go up along with emissions, because we’re going to be reliant. The only slack we have then in the system is to lean into existing power plants that are underutilized. That mostly means coal-fired power plants that are currently not being used much and will ramp back up to fill the slack. So, higher emissions, higher prices for everyone, and less ability to power data center demand growth and everything else that’s coming.
Meyer: One thing that sticks out to me is that in 2022 when the IRA was passed, and you can correct me here, but my memory is that we didn’t foresee this bulge in electricity demand growth coming.
Jenkins: Well, we didn’t foresee the data center part of the story, which is big. I mean, we’ve successively updated our REPEAT analyses over the last couple of years to try to factor in the latest estimates, which, of course, have a nice error bar around them as well, of data center demand growth. We did have a large growth in electricity demand just due to electrification already, when we were modeling the IRA’s impacts in 2022. But since 2022 what we’ve seen is an accelerated growth in manufacturing. A lot of the Battery Belt stuff we talked about, right? All those are tens of megawatt-scale electricity consumers for the most part. And we now have all these tens to hundreds of megawatts, even gigawatt-scale data centers, popping up across the country.
So that adds in another one percentage point a year, or something like that, of growth on top of what was already a 2% to 3% per year story, just from electrification. And just to put things into scale, it is important to note that while data centers are big, our estimates on the order of 250 to 400 terawatt hours, or billion kilowatt hours of additional consumption per year in 2030 and 2035, so 250 billion kilowatt hours in 2030, 400, say, in round numbers in 2035. Electric vehicle growth combined, both medium and heavy and light-duty vehicles, are likely to be 400 to 500 terawatt hours, or billion kilowatt hours in 2035. So on the same order of magnitude as data centers, and that’s including in the repeal scenario, right, where we see a slower but still real increase in the amount of electric vehicles on U.S. roads.
Meyer: Well, I guess this is my question, though, in some ways, the IRA seems very well-timed in retrospect. Sometimes you look back at a law and you’re like, you know, at the time that law was passed, the economy was already kind of, through some automatic process that we don’t really understand, like, dealing with the issue, or the global economy was reshuffling in a way that was becoming less of an issue. The IRA was the opposite of that. It was actually really well-timed and anticipated in a way that I don’t think even the bill authors realized necessarily at the time. The coming surge in electricity demand, especially from data centers. And so it was discussed as a climate bill and an economic development bill, but it has really become essential to the AI story. It’s in some ways a more important law now than it was when it was passed. And I think people might be overlooking that. I do wonder, you know—
Jenkins: I think they are overlooking that, and who needs to go in and tell them that right now and help them understand that, are all of the data center and AI companies. They know better than anybody that the ability to add new electricity supply and connect to the grid fast enough is part of the story of their ability to compete in a global race to develop and shape and ultimately control this next generation of technology.
Oh, look at China, where there is absolutely no constraint on their ability to add renewables at the pace needed, right? And if we are in an environment where we’re slowing down our pace of electricity demand growth, it will absolutely impede our competitiveness in the AI race. And I think that’s a message that policymakers on the Hill need to hear very quickly, or they’re about to make a very counterproductive intervention in the market.
Meyer: Yeah. I mean, I had one more question here, which is, let’s say there’s another bulk of data center activity, or, I don’t know, some other big new source of electricity demand that comes online in the 2030s, like this could all potentially be even worse, right? We’re modeling the technologies that we understand and the economic impulses that we understand, but the further this gets out in time, the more potential draws of energy there are, right, that we don’t even anticipate today.
Jenkins: Absolutely. It’s a good example of the limits of our crystal ball, right? Here’s this huge meta-trend that kind of snuck up on a lot of us, even those closely analyzing the power sector. I’m sure there were people anticipating this in 2021, 2022 but it was definitely not part of the conversation around these bills on the Hill. It was not the primary focus. Whereas today, it’s all about AI, right? Everybody’s talking about data centers everywhere I go.
Meyer: And then one last thing, which is, when we talk about electricity prices going up for consumers, I just want to draw out exactly why that would happen.
Jenkins: Yep.
Meyer: And make sure I understand correctly here what’s happening. Because electricity markets are unusual markets. They don’t work exactly like how people necessarily think. So, the idea here is that, if I’m a developer, the existence of these tax credits, or the fact that these tax credits are as potent as they are, I’m able to transfer them to other companies, maybe get 90 or 90 cents on the dollar of every tax credit I claim, as opposed to how it used to be, which was 80 to 85 cents on the dollar, right? That’s bringing, that’s allowing more projects to pencil out. And so I’m able to build that extra 10% of projects. There’s a number of projects, so to speak, that I can now build, that I didn’t used to be able to build, that didn’t make financial sense.
Jenkins: Yeah, a lot more than 10%. It’s probably more like 100% more projects, roughly, yeah.
Meyer: And so that means a lot more new capacity is coming onto the grid, and then it’s being dispatched in power auctions — largely, there’s some, obviously not in vertically integrated monopolies — but in most of the country, it’s being dispatched in power auctions, either when the sun is up and it has a zero marginal cost, or the batteries are activating when it makes sense economically. And that is through the existence of more supply on the market, and the greater amount of supply on the market that was brought onto the market by the existence of these tax credits lowering costs, which means that the cost effect of repealing the IRA actually grows over time, as we continue to lose the supply and the cheap electricity that would have once helped the economy. Is that all correct?
Jenkins: That’s exactly right. We estimate that average household energy costs would increase in 2030 by about $110 to $180 per household for the average household. But that grows to like $275 to $400 per year by 2035. And a big part of that is the increase in electricity price differences. There’s really three effects here, I think that are important to call out. One is the one you’re talking about, which is just more supply in the electricity sector means lower electricity costs, all else equal. And that’s a big lever, because it isn’t just a 10% increase in deployment. It’s more like a doubling of the amount of new wind and solar and batteries that we can bring onto the grid in a cost-effective manner.
The second issue is that there are subsidies here, which are basically transfers of cost out of your pocketbook as a household or a business and onto the federal tax code. Now, somebody’s got to pay for that cost eventually, maybe it’s going to the deficit. But the way the Inflation Reduction Act tried to pay for that was by increasing corporate minimum taxes, by expanding IRS enforcement, by reducing the cost of prescription drug purchases for Medicare, Medicaid, right? So it’s trying to raise revenues in a pretty progressive way, right? In a fair way, I would argue, to try to pay for these costs of subsidies that ended up lowering pocketbook expenses for all Americans, right, across the country. That’s the part of the name, the Inflation Reduction part of it was it was driving down costs, both through this supply effect and the direct transfer of subsidies.
And then the third effect is that a lot of what we’re talking about, whether it’s EVs or heat pumps or industrial efficiency, is substitution of upfront capital costs for reduced fuel use. Right? I’m paying more for a more efficient heat pump, or I’m paying more for an electric vehicle than an internal combustion car at the lot, or I’m paying more for an efficient boiler in my industrial process. All of that is upfront cost that then, over time, reduces the amount of fuel we consume across the economy. And that also, that reduction in demand, in addition to the supply on the power side also drives down consumption. And so when you roll that back, we see higher consumption of fossil fuels — gasoline, diesel, natural gas, coal — which is going to drive up their cost too.
So it’s really those three effects. It’s the increased supply. You’re slowing down the addition of supply in the power sector. You’re increasing consumption, in households and businesses and industry, of fossil fuels. And you’re removing taxpayer subsidies that are taking money out of household pockets, putting on the tax code. You’re reversing that, you’re putting them right back in your household pocketbook. So you have to spend more on your vehicle. You have to spend more to heat your home. You have to spend more to weatherize your house, whatever it is.
Meyer: Man.
Jenkins: So of those three effects, right — this is where it’s tricky when we talk about an average household impact because if you’re a recipient of those subsidies directly — like you bought an EV and you got a subsidy, right, whether a new or used one, or you’re a business that got the funding — that transfer goes directly to you on some of those purchases. And so there, it’s less about the average household. It’s more about households who adopt these technologies and benefit from that capital subsidy by reducing the cost of purchase versus those who don’t.
But if we’re talking about the other two effects, the effect of more electricity supply and less fuel consumption, those effects benefit everybody by lowering prices for all Americans, not just those who buy the EV, right? So there’s 8 million less EVs on the road. That means more expenses for the people who would have otherwise bought those 8 million EVs, but it also means 15 cents more at the gas pump for all Americans. And that adds up when you start to multiply that by 360 million people, or whatever it is.
Meyer: You know, it’s funny, Jesse, what I was going to say is that between this tax bill, which is just going to blow up the deficit even more than it’s already been, and the fact that rates are creeping higher, this recent debt downgrade of the U.S., and the fact that renewable energy benefits so much, either from, as you were saying, or electrification benefits either from these higher upfront costs that then get you lower energy costs over time, or from installing a solar project that has a high upfront cost and then zero marginal operating costs, you can see the return of deficit hawk Democratic politics on the horizon. You can see President Ossoff promoting his five years to a balanced budget. You know, 2028 to 2032, I don’t know. I just feel like it’s coming.
Jenkins: The deficit is not a trivial thing. It is an important challenge that needs to be addressed. The question is, how do we want to address that? Do we want to address that by repealing subsidies that are expanding electricity supply, helping power American industries and data centers, lowering costs for households and businesses, et cetera, lowering emissions, lowering air pollution. Or we could increase tax cuts or make permanent tax cuts for very wealthy people in corporations, either. One of those has a very small impact on the deficit, right, the total score that they’re saving from the IRA repeal is on the order of $500 billion over 10 years, whereas the total budgetary impact of making the tax cuts for corporations and individuals permanent is something like four and a half trillion dollars over 10 years. So you know, nine times bigger.
Meyer: From Climate Hawk to Deficit Hawk: The College Educated Millennial Story, coming soon, to Pelican Books. You heard it here first. Okay, we’re going to take a break, and then we’re going to come back with Upshift/Downshift right after this.
Every week. Jesse Jenkins, my co-host, and I like to find one piece of news that has really caught our attention and that is either making us feel more upbeat about the energy transition that week or more downbeat. Now, of course, as you might guess, if it’s making us feel more upbeat, it is an Upshift. If it’s making us feel more downbeat, it’s a Downshift. Jesse Jenkins, what do you have for us today?
Jenkins: Well, since we’ve been delivering a lot of Downshifts in our main segments here, I keep trying to look out for important Upshifts. And there’s not too many more important than what happens to greenhouse gas emissions in China, the world’s largest emitter. Back in December, we had Lauri Myllyvirta on to talk about the big structural shifts that might be happening in China’s economy that contribute to a potential peak in emissions years ahead of their schedule. The Chinese national goal is to have their emissions peak by 2030. It looks like it’s possible that over the last 12 months that peak has arrived, at least for now, we’ll see if it is sustained and if it can turn into a downturn.
But data is now out for the first quarter of 2025 that finds that China’s total CO2 emissions are down 1.6% year on year for that first quarter. And over the last 12 months, trailing through end of March, emissions are down by a full 1% relative to the previous 12 months. Back in December, I think when we recorded that episode, it aired early after the new year. We were still at this point where we weren’t quite sure, you know, are emissions going to be up or flat or down a little bit? It looks like they, in fact, are down. Couple major drivers there, the most important of which is just that power sector clean electricity additions are now fast enough to outpace demand growth, right?
It’s the same race that we were just talking about for the U.S., where the fate of the tech-neutral clean electricity tax credits will play a big role in which pulls ahead: demand or clean electricity. Historically, China’s been setting record growth rates for wind and solar, year after year, but it’s not been quite enough to keep up with their massive increases in electricity demand. Until now, where we’ve actually seen emissions from the power sector fall by somewhere on the order of 40 million tons per year — not a huge shift, but enough to drop total emissions down across the country and offset small increases in the other sectors, like chemicals and metallurgy, steel production, iron steel production, in particular.
This is exactly the kind of trend that we need to see for China to turn emissions around, is that the growth of clean electricity, wind and solar and nuclear and others, need to outpace their growth in electricity demand and other structural changes across the economy, like the slowdown in the construction sector, which also contributed, we saw a decline in cement related emissions over the last 12 months. Those are also helping contribute to declining emissions and are offsetting the growth in emissions in petrochemicals, plastic production, et cetera, and in metallurgy, iron and steel in particular.
Meyer: It’s so funny, because I think that big question of, “Is there going to be a major economy that sees clean energy supply exceed the growth in demand?” was actually, like, a major question last year. People asked that question about the United States. They asked about Europe. We’ve seen other economies achieve it, but there’s been this question of, does clean energy just ultimately add to supply, or does it start to bite into fossil supply over time? And for China, the milestone is just huge, arguably the biggest news event to happen so far this year, right?
Jenkins: It’s one of the most important shifts out there, so we’ll keep a close eye on it. But for now, it’s trending in the right direction, which is at least a bit of comfort given the way things are trending here at home. So Rob, what do you have for us this week?
Meyer: Well, I have a downshift for us. So last week, when we were going over the parts of the House Republican Ways and Means Committee proposal that effectively guts the IRA, we left one part not really discussed, and this was the foreign entities of concern clause. As folks who’ve been following the IRA for a long time will remember, there’s always been a foreign entities of concern clause attached to some parts of the IRA. It was attached specifically to the $7,500 tax credit for buying a personal EV. And the way that clause worked was basically that over time to qualify for this tax credit, automakers and battery makers had to raise the amount of non-Chinese source materials in their battery or car.
And this was meant to slowly encourage, slowly but confidently encourage battery part makers, critical mineral refiners, critical mineral mines, to shift or build new facilities outside of Chinese control. That it would gradually friendshore the EV supply chain. It was not instant. It was like, this is a long term impetus to build a parallel supply chain, because right now, China, or Chinese-controlled entities control some vast amount, I think, more than 80% of almost every supply chain that feeds into modern EVs. And if you’re an American policy maker, this would seem suboptimal.
The Republican proposal to reform or change or essentially gut the IRA, retains a foreign entity of concern clause, but it changes it so substantially that it’s almost not worth calling it by the same policy. So what this clause does, and the clause is attached to almost every tax credit in the IRA, including, I should add, to the carbon capture tax credit, to the personal EV tax credit, to the tech-neutral tax credit, every tax credit except to the biofuel, the ethanol tax credit—
Jenkins: As usual, ethanol gets its way.
Meyer: —Has a new foreign entity of concern clause, and what it says is that the tax credit cannot flow to a Chinese company. It can’t flow to a company that is majority or partially-controlled by someone with connections to China. And crucially, that it can’t — and this is where it really matters — that it can’t receive material support from a Chinese-linked entity. Now you may think that sounds very reasonable, right? We don’t want material support coming to these American energy projects. But what they mean by material support is material. Like, any kind of material.
Jenkins: Stuff. Cement or electrical wire or anything.
Meyer: The way the law is written, is that any part, in my reading and the reading of folks I’ve talked to, any part, any component, any piece of equipment, no matter how insubstantial, if it is found to be linked or come from China or was made by a Chinese-controlled company, automatically disqualifies the entire project from receiving the tax credit.
So what that means is that, let’s say you have some steel in a steel frame for solar panels that was made in a Chinese foundry — whole project loses qualification. Let’s say that there’s like a gram of graphite that, through the global market, has worked its way into your battery supply chain — whole vehicle loses qualification. Let’s say that there’s a little copper in a wire that you use to power a direct air capture product, and that copper has come from a Chinese mind somewhere — your whole project, again, loses the tax credit. So in effect, what this new clause does is it says, if there is any Chinese part, even if it’s one little bolt, and yes, the law is written to fully countenance the idea that it could be really, really insubstantial, one little bolt of Chinese source material in your project disqualifies it entirely from receiving a tax credit.
And the issue is that lots of parts that do not reflect, like, best-in-class technology, that are just kind of commodity parts on the market, intermingle in the global market. And right now there’s no way for energy developers or construction companies to know when they’re buying something that it comes from China or that it comes from Europe or that it comes from Southeast Asia. It’s totally unclear. You don’t really—
Jenkins: It’s impossible to verify this.
Meyer: Yeah, exactly. And so what this FEOC clause would mean is, number one, it would render many of these tax credits totally unworkable. And in fact, we’ve seen House Republican moderates already say that they need these, they want this particular clause to be changed in an eventual final version of the law. We’ll see if they succeed. But even Republican House moderates are saying this is totally unworkable. What the FEOC does is it basically, I think, kills these tax credits because—
Jenkins: It’s a poison pill.
Meyer: It’s a poison pill, and it’s meant to make, what’s going to have to happen is that the Treasury Department is going to have to go in and rewrite tax guidance for this new statutory text. And I would bet that by the time the Treasury Department finally gets around to writing that text, we’ll have hit the sunset deadlines for these tax credits, and these tax credits will have been effectively killed. And so you’ll hear sunset dates. You’ll hear, “Oh, House Republicans extended this date to 2028, it was supposed to be in 2033 and now companies can only claim until 2028 or 2029 or 2030.” And you might think, well, 2029 is an election away. Maybe there’ll be a different Congress by then, and they’ll repeal this law, and they’ll send the tax credits again. But what is actually going to happen is that between now and 2028, at least, the tax credit will not be, will not exist, it will not be usable, because the FEOC clauses are such a poison pill. Now, maybe they’ll change this. Maybe they’ll put in some safe harbor clauses, maybe some texts that they’ve put in there that ambiguously could be a safe harbor clause. Today they’ll clear it up so that it becomes clear if you’re using a Chinese-made bolt or a Chinese made washer that, like, you don’t lose tens of millions of dollars of tax credit support for your nuclear plant, for instance.
But as of today, my read of this clause is that it is a major, major poison pill, and that, to me, is a big old Downshift.
Jenkins: Yeah, I think it’s a huge downshift, Rob. Whether they resolve this to clarify that a few bolts or whatever don’t count or not, the simple idea of material assistance, materials of any sort, right, in your supply chain pushes this clause and the effort to sort of excise China so far back up the supply chain to the third tier of suppliers of whatever, that it will always be impossible to verify that, right? That you’re ever in compliance with that, because you would have to have provenance for every single part in the entire supply chain. And that’s just not feasible. This debate came up when the original FEOC rules were written. Where do we draw the line? How far up can we go to balance the legitimate interest in trying to build a China-resilient or China-independent supply chain and the need to actually make these tax credits usable and bankable?
And the reality is, if a project developer is going to the bank, right? Literally, a bank, to get debt finance for a project that they’re going to build 18 months from now, or 36 months from now, or whatever in the future. They don’t even know where all the parts are coming from yet when they’re going to the bank. And if the bankers have no confidence that you’re going to be able to demonstrate with 100% assurance your compliance with the tax credits, they will heavily, if not entirely, discount the value of those tax credits when figuring out your project economics. So they might say, “Well, there’s an upside scenario where you happen to qualify, and then our returns are great,” but they’re not going to loan on that scenario, right? They’re not going to factor it in. And if your project economics don’t work without the tax credit, they won’t loan to you. And so this is called bankability. If the tax credits are not bankable, which means they’re not certain at the time that you go in to finance a project. They’re just useless.
And that’s the key thing we have to watch out for, if there’s an opportunity to make any nuanced changes to the statute here is whatever they do, whatever the policy objective is, it needs to actually be usable, or it just amounts to a poison pill like you said.
Meyer: Yeah. Well, on that happy note, and in today’s happy episode, we will leave you. SHIFT KEY is a production of heat map news. Our editors are Nico Lauricella and Jillian Goodman. Audio production and engineering is by Nick Woodbury and Jacob Lambert. Our music is by Adam Cromwell. Thank you so much for listening and see you next week.
