Beyond Clean Energy: The Financial Incidence and Health Effects of the IRA

The Inflation Reduction Act of 2022 (IRA), signed into law by President Biden on the August 16, 2022, will affect household budgets and wellbeing in several ways. The law contains provisions to promote clean energy technologies, facilitate domestic energy production, and address global warming, along with health care and tax provisions. In light of the legislation’s title, a key question is how the energy and climate provisions will affect energy prices and household expenditures. The effects of the monumental legislation also derive from its provisions to raise revenue as well as bring about changes in environmental and public health. The effects will vary across different types of households, distinguished by their consumption of electricity and other goods, their levels and sources of income, and where they live.We employ three models in tandem to examine the effects of the IRA’s tax provisions focused on grid-connected electricity generation. We do not address the green bank, tax credits targeting low-income and tribal communities, or home energy investments. First, we deploy RFF’s Haiku Electricity Model to project investment in the electricity sector and changes in emissions and electricity retail rates. We model a range of potential scenarios that account for variability in future fuel prices and changes in electricity demand that would arise from faster electrification. We ran additional scenarios varying capital costs of renewables and combining sensitivities. These results were not informative to the scope of this report but did confirm the robustness of the results that we display. Second , we use RFF’s Social Welfare Incidence Model to estimate the financial impacts of changes in expenditures and taxes for households distinguished by household-specific expenditure patterns and levels and sources of income. Third, we map associated reductions in emissions of sulfur dioxide (SO2) and nitrogen oxides (NOX) from Haiku into the EASIUR atmospheric transport model to estimate their effect on concentrations of fine particulate matter (PM2.5), the primary atmospheric pollutant affecting human health. We estimate these changes at the county level and compare to demographic characteristics of affected counties.We find the distributional impact of the modeled cost reductions and tax changes are uniformly progressive. We estimate a reduction of 7.3 percent in electricity prices over the next decade in our central case compared to 2022 modeled electricity prices. EIA’s September 2022 Short Term Energy Outlook estimates 2022 average retail electricity price to be approximately 12.06 cents per kWh, slightly higher than our model’s estimate of 11.91 cents per kWh for 2022. Because low-income households spend a larger share of their income on electricity than high-income households, these savings provide the greatest benefit as a percentage of household income to lower-income households. Electricity bill savings result from the investment in clean energy technologies supported in part by tax incentives funded by [HC3] [KP4] an increase in corporate income taxes. The tax increases fall most heavily on households earning capital income, which are typically higher-income households. We observe a net shift in costs from consumers to taxpayers that is strongly progressive.Rapidly decarbonizing the electricity sector is a critical element of the Biden administration’s efforts to achieve a 40 percent reduction in US greenhouse gas emissions by 2030. This is, in part, because such decarbonization enables electrification and emissions reductions in other parts of the economy, including transportation and buildings. The reduction in electricity prices can be expected to accelerate electrification of other parts of the economy, further advancing climate policy goals. We find that IRA-driven CO2 emissions reductions in the electricity sector can be achieved at an average cost that is below estimates of the social cost of carbon. All emissions are reported in metric tons. Power sector CO2 emissions reductions are also accompanied by substantial improvements in air quality resulting from reductions in SO2 and NOX, reducing the negative effects of power generation on air quality by nearly half. The benefits accrue broadly across racial, ethnic, and income groups.Our findings indicate that the IRA’s pocket-book effects are progressive across income groups and that its air quality benefits will be distributed widely across the population. The IRA is likely to have the most substantial effects of any federal policy on environmental outcomes, and specifically climate change, since the Clean Air Act of 1970.