The Biden Climate Law’s Carrots Are About to Become Sticks

The Biden administration’s climate policy has entered an aggressive new phase. For the first time since the president took office, the star of the show isn’t Congress, the Department of Energy, or any other economic agency. It’s the good old Environmental Protection Agency.

The EPA is back.

Over the past few weeks, the EPA has unveiled an ambitious set of proposals that could remake the country’s transportation and power sectors. One proposal could cut toxic air pollution and greenhouse gases from cars, trucks, vans, and other vehicles by 2032. Another will restrict the amount of mercury and arsenic that coal-fired power plants can release.

But the most important new rule could come as soon as next week, when the agency is expected to propose slashing greenhouse gas pollution from new and existing power plants. That proposal — which will likely rank among the bluntest and most pugnacious climate protections ever issued by the EPA — will likely require coal and natural-gas plants to capture a large share of carbon emissions from their smoke stacks, preventing it from ever reaching the atmosphere.

If finalized and enforced, those rules should help accomplish Biden’s goal of generating 80% of the country’s electricity with zero-carbon sources by 2030, part of his broader vision of halving climate pollution by that year. The Intergovernmental Panel on Climate Change has said that every country must cut carbon pollution in half by 2030 in order for the world to hit the 1.5-degree goal.

The EPA’s reawakening heralds a broader shift in President Joe Biden’s climate policy. Since January 2021, much of his administration’s efforts have been focused on dangling new carrots in front of industry to entice decarbonization. Biden sometimes took a conciliatory approach to energy issues to win the support of Senator Joe Manchin, and the president has a major climate law — the Inflation Reduction Act — to show for it. Now, as his administration begins to implement that law, it has also picked up a big stick to crack down on unabated fossil fuels.

If you’ve hungered for a more punitive approach to the Biden administration’s climate policy, in other words, then you’re about to get it. But remember to thank the law that made it possible: the Inflation Reduction Act itself.

Although it has gone little acknowledged, the IRA is essential to Biden’s regulatory policy. Without the IRA’s generous subsidies, the EPA couldn’t adopt such aggressive rules to fight fossil fuels. In at least one case, the EPA actually needed the IRA to pass before it could issue its power-plant regulations, so that the climate law could underwrite the carbon-capture technology that the rules are expected to require.

This fact is essential to understanding the next 18 months of American climate policy — and it should prompt at least a modest reconsideration of the IRA.

Why is the IRA so important? It’s because of, well, the rules that rule how the federal government makes rules. Call them the meta-rules — the set of executive orders, court decisions, and informal precedent that constrain how agencies like the EPA can issue new regulations.

Since the 1970s, federal agencies like the EPA have had to consider a proposed rule’s costs and benefits before they can issue it. This is a technocratic and persnickety undertaking, conducted with Excel spreadsheets and groaning economic models, in which staff try to add up all of a rule’s costs to society and all of its benefits.

In the clean-car rules, these sums can rise into the tens of billions. To name a few categories: The cost of repairing EVs is $24 billion, while the benefits of reducing particulate pollution in the air are as high as $34 billion.

But this exercise is important, because it effectively determines how aggressive a proposed rule can be. If a rule’s costs exceed its benefits to society, then it’s too ambitious, at least under current law. Only proposals that make society richer in dollar terms are allowed to become law. (According to the EPA’s math, the clean-car rule’s benefits exceed its costs by more than $1 trillion.)

Here’s the key, though: These analyses only look at a rule’s direct costs, which means any status quo policies — and every existing federal program that makes it cheaper to follow the rule — are taken for granted. So the IRA’s hundreds of billions of dollars in tax credits function effectively as “free money” in these analyses, allowing the EPA to adopt much more aggressive rules than it otherwise would.

This has a modest effect on the EPA’s proposed rules for cars and trucks, but it’s expected to be transformative for the forthcoming power plant rules. One of the IRA’s most controversial tax credits, for instance, pays power plants and other factories $85 for each ton of carbon pollution that they capture from their smokestacks and pump into the ground. At best, that might seem like a way to pay oil and gas companies for a form of greenwashing; at worst, it might look like a subsidy for fossil-fuel extraction.

But when coupled with an EPA limit on the amount of carbon that power plants can release into the atmosphere, it becomes revolutionary. The new rule will reportedly require some form of carbon-capture technology on existing and new fossil-fuel-burning power plants. Thanks to the IRA, the EPA can essentially ignore the first $85 a ton of regulatory costs that the rule places on companies.

These new “aggressive regulations would not have been possible without the IRA,” Leah Stokes, a political-science professor at the University of California, Santa Barbara, told me.

“It is totally a function of the IRA that they’re able to do this. They’re able to make arguments with 45Q, for example, that carbon capture and storage is a viable technology,” she added, referring to the carbon-capture subsidy by its section of the tax code.

Some climate experts expect that these rules will ultimately discourage new fossil-fuel plants from getting built, even if carbon-capture technology becomes cheaper, simply because it will be cheaper and easier to build solar, wind, or nuclear plants.

The IRA is important as well because the EPA is so limited in what kind of restrictions it can impose on power plants in the first place. Last year, the Supreme Court ruled that the agency could not fight climate change by creating a national market for carbon pollution under the Clean Air Act, but that it could issue technology-by-technology guidelines.

That fact should prompt a popular rethink of the IRA. Since the law passed last summer, a common line of criticism has focused on its magnanimity: that it mostly uses subsidies, and not new taxes or mandates, to decarbonize the economy. The IRA uses “carrots without sticks,” critics have written, subsidizing some of the technological investments that fossil-fuel companies were already planning on making.

This was never quite true. The IRA by itself included a few new taxes, including a fee on methane leaks from fossil-fuel infrastructure that was meant to go hand-in-hand with new EPA rules. (House Republicans have sought to repeal that tax in their new budget proposal.) But the IRA was also never meant to stand on its own, and many of its authors knew that by making clean energy cheap, it would make future climate regulations cheaper. In other words, Biden’s climate policy never entailed only a never-ending booze cruise of green subsidies, as some global commentators have alleged over the past eight months. Instead, it required adopting a politically sensitive sequence of policies: first, a reconciliation bill to subsidize the good; then, a regulatory revival to penalize the bad.

Of course, the sharply conservative Supreme Court must allow Biden to actually carry out the second half of that agenda. But if it does, then we’ll discover something new about donkey carts: The sweeter the carrots, the harder you can whack with the stick.