## Emissions Reduction, Fiscal Costs, and Macro Effects: A Model-based Assessment of IRA Climate Measures and Complementary Policies ## Source details **Canonical URL:** [Emissions Reduction, Fiscal Costs, and Macro Effects: A Model-based Assessment of IRA Climate Measures and Complementary Policies](https://www.imf.org/-/media/files/publications/wp/2024/english/wpiea2024024-print-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/wp/2024/english/wpiea2024024-print-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/wp/2024/english/wpiea2024024-print-pdf.pdf.json) --- ### Modeled EV and charging subsidies - Clean Vehicle Credit: - Modeled as a subsidy starting at 7.5 percent of the EV retail price and reaching 15 percent by 2030. - Assumes an average EV price of roughly US$50,000 and an increasing share of manufacturers fulfilling domestic content requirements. - Alternative Fuel Refueling Property Credit (Section 13404): - Statutory credit: 30 percent of installation costs through 2032; capped at US$1,000 for residences and at US$30,000 for businesses; only equipment in low-income or rural areas qualifies. - For businesses, subsidy rate is reduced to 6 percent if certain wage and apprenticeship requirements are not fulfilled. - Modeled as a 20 percent subsidy rate (rule-of-thumb capture of requirements and caps), with assumed elasticity of charging station supply with respect to costs of 0.67. - Translates into a subsidy-induced expansion of the charging network by 13.4 percent, introduced as an exogenous scaling of endogenous charging station density. ### Other modeled measures and calibrations - Carbon Capture and Sequestration Tax Credit (45Q): - Tax credit: $50 to $85 per ton of captured emissions by industrial facilities and power plants. - Calibration: mid-point of existing studies implies induced CCUS reduces industrial emissions by 15 MMT CO2e annually by 2030. - Fiscal costs: use CBO (2022) estimates scaled gradually to be 40 percent higher by 2030, yielding a cumulative fiscal cost of around 0.015 percent of GDP. - Residential energy efficiency measures (Sections 25C, 25D, HOMES): - Modeled as a positive productivity shock on household natural gas and oil heating bundle. - Calibrated to a decline in home heating emissions by 33 MMT by the end of the decade. - Fiscal costs modeled as government consumption amount to roughly 0.02% of GDP annually. - Agriculture and waste measures (Sections 21001, 21002, 22001, 22002, 22004, 23001, 23002, 23003): - Introduced in a stylized fashion; induced decline in emissions of 113 MMT by 2030. - Costs assumed in line with initial CBO estimates; bulk are capped grants, reducing fiscal uncertainty. ### Simulation results — overview and key statistics - Presentation framework: - Three-step presentation: (1) lump-sum funding, no permitting delays; (2) lump-sum funding, permitting delays persist (4.5 years average authorization for power infrastructure); (3) funding via higher corporate income taxes. - Exercise 1 (No permitting delays, lump-sum funding): - Electricity mix: share of renewables increases by around 19 percentage points by 2030 (at the expense of gas and coal). - EV uptake: share of EVs in newly purchased cars increases by slightly less than 5 percentage points upon introduction of Clean Vehicle Credit and rises to 19 percent by 2030; average car lifetime assumed 8 years. - Charging density: more than doubles by 2030 following Alternative Fuel Refueling Property Credit deployment. - Aggregate macro: output increases by close to 0.25 percent by the end of the decade. - Fiscal costs: - Total modeled measures: about 0.1 percent of GDP in 2022, rising to about 0.4 percent of GDP towards the end of the decade. - Applying cost shares to October 2023 WEO nominal GDP projections and cumulating through 2030 yields undiscounted total costs of about $700 billion for modeled measures. - Adding IRA climate measures not modeled (mostly fixed grants and loans about $120 billion per CBO, 2022) raises total costs to $820 billion through 2030. - Comparison: initial CBO/JCT estimate about $350 billion over this period; 2023 JCT update yields $590 billion (2022-30). - Main cost drivers: New Advanced Manufacturing Production Tax Credit, renewable electricity generation subsidy, and EV subsidy. - Emissions: - Modeled subset reduces total annual GHG emissions by about 710 MMT of CO2e by the end of the decade, corresponding to a cumulative decline of roughly 3,300 MMT. - Baseline (without IRA) assumed reduction between 2005 and 2030 is 27 percent; mitigation target is 50-52 percent over this period, leaving a gap of about 1,600 MMT annual excess emissions by 2030 (roughly 24 percent of 2005 emissions). - IRA-induced reduction closes slightly less than half the gap; an additional 800 MMT reduction would be needed to reach the target. - Emissions in the rest of the world increase mildly by about 100 MMT (due to lower global fossil fuel prices and weaker U.S. demand). - Fiscal abatement cost metric: - Ratio of cumulative fiscal costs over cumulative emission reductions: about $400/tCO2 in 2022, declines to $185/tCO2 in 2029, and settles at $50/tCO2 in the long run. - Uses a plausible SCC of $185/tCO2 for comparison. - Interpretation: by end of decade, social value of IRA emission reductions outweighs fiscal cost; results are a lower bound as model abstracts from learning-by-doing cost declines. - Exercise 2 (Permitting delays persist, lump-sum funding): - Permitting delays (4.5 years average) mute and delay renewable investment surge; electricity price decline is smaller; output increase by 2030 is milder. - EV pickup less pronounced; delayed electricity decarbonization dampens EV emission reduction benefits. - Fiscal costs are smaller because permitting delays constrain take-up of uncapped power sector measures and slow capacity buildup. - Overall reduction in 2030 annual emissions: slightly over 500 MMT, roughly 2/3 of mitigation impact when permitting reform occurs in 2023. - Emphasis: overcoming permitting delays is crucial to unlock full IRA potential. - Exercise 3 (No permitting delays, corporate income tax funding): - Funding via higher corporate income taxes offsets some output gains from more abundant electricity due to distortionary effects on firm profits. - Impact on GDP and inflation remains modest in absolute terms; climate-related measures have vanishingly small impact on output and inflation under this funding assumption. - Baseline for remainder of paper corresponds to Exercise 3. ### Comparative and supplementary findings - GMMET simulations comparison: - Box 2: GMMET simulations show IRA energy and climate measures cut emissions by an additional 11 percent of 2005 emissions by 2030. - Adding IRA-induced cuts to other studies’ no-policy baselines yields around a 38 percent decline of 2005 emissions by 2030, close to other literature estimates (~40 percent decline). - Model limitations: - GMMET does not feature warming damages; cost-benefit judgment uses fiscal abatement costs compared to SCC. - Motor fuel tax revenue loss from declining conventional car share is not captured; a rough approximation yields a loss on the order of 0.01 percent of GDP by 2030 (neglected in simulations). - Current GMMET version abstracts from technological progress via learning-by-doing; results are likely a lower bound on benefits. ### Beyond the IRA — regulatory measures to close remaining gap (non-fiscal) - Regulation to curb electricity generation from coal: - Rationale: coal emissions per kWh are more than twice those of gas; IRA reduces coal but coal share still estimated at about 15 percent of the 2030 electricity mix. - Modeled policy: feebate-like tax on coal-generated electricity with revenues used to subsidize other technologies; when added to IRA, coal's electricity share declines by about one percentage point per year. - Regulation to curb methane emissions from oil and gas: - 2022 emissions from oil and gas production amounted to nearly 400 MMT of CO2e. - IEA assessment: roughly three quarters of these emissions can be abated with currently available technologies at minimal costs—about US$7 and US$5 per tCO2e for gas and oil respectively. - Expresses feasible abatement costs as a share of market value of total oil and gas annual output (using average prices from 2017 to 2021); for gas production, IEA assesses 180 MMT CO2e (about 73 percent of sector total) can be abated for about 1.2 percent of the sector’s output value. - For oil production, abating 121 MMT of CO2e (about 76% of total emissions) is deemed feasible and would cost around 0.2% of the sector’s output value. - Despite low abatement costs and industry pledges, actual reductions in methane emissions have been negligible relative to their potential. - MERP and limitations: - The Inflation Reduction Act (IRA) includes the Methane Emissions Reduction Program (MERP) with an emissions charge that could make abatement economical for many producers, but the final draft substantially weakens likely effectiveness by restricting scope through high reporting thresholds, high emission thresholds (exempting facilities if emissions as a share of sales are below the threshold), and aggregation rules across company sites. - Energy Innovation (2022) estimate for MERP: emission reduction by the end of the decade of 29 MMT CO2e—just below 10 percent of the decline that the IEA deems possible with existing technologies at minimal costs. - Study scenario: - Investigates a regulatory scenario forcing oil and gas industries to abate about ¾ of total methane emissions (the maximum deemed feasible with existing technologies). - Abatement costs from the IEA’s 2023 Methane Tracker are introduced as productivity declines of the specific sector. ### Macroeconomic impacts of IRA and complementary regulations (GMMET simulations) - Core macro result: - When implemented in GMMET, climate-related IRA measures curb GHG emissions while macroeconomic implications are of negligible magnitude; output and inflation remain virtually unchanged. - Emissions and energy mix outcomes under IRA (GMMET): - Total emissions decline by about 720 MMT (mostly driven by renewables and EV uptake). - Renewables share: an almost 20 percentage point rise in the share of renewables. - Electric vehicle sales share: increase by close to 15 percentage points. - Fiscal costs through 2030: - Total fiscal costs estimated at $700 billion (another $120 billion of direct spending is not modelled). - Welfare implication: - Fiscal costs per ton of mitigated GHG emission will decline below the social cost of carbon in nearly five years, suggesting the climate-related measures are welfare-improving (GMMET does not model welfare directly). - Importance of permitting: - Cutting energy-related permitting delays is crucial: if permitting delays persisted until 2030, IRA-induced emission reduction would be roughly a third smaller. ### Effects of complementary regulatory measures (coal and methane regulations) - Coal regulation assumed: gradual reduction in coal use in electricity generation by roughly 1 percent of the electricity mix per year. - Methane regulation assumed: mitigation of the bulk of methane emissions from oil and gas production (~¾ of total emissions). - Combined impact when IRA is complemented by these regulations (differences relative to standalone-IRA): - Methane regulation productivity decline in oil and gas extraction is negligible; no significant macro impact beyond emission reductions (assumed fully phased-in by 2026). - Coal regulation further dampens investment in coal power plants and strengthens the rise in renewables and gas investment. - Electricity mix: - Coal share declines by about 14 percentage points by 2030 under the complementary regulations, as opposed to roughly 7 percentage points under the standalone-IRA. - Electricity generation and price dynamics: - Initial phase: disinvestment from coal causes electricity generation volume to decline and price to rise. - From 2026 onwards: IRA-induced surge in renewables capacity raises generation volume and lowers price by the end of the decade. - Short-term macro effects: small reduction in output and slight upward pressure on inflation; overall macroeconomic impact virtually unchanged. - Emissions outcomes: - Complementary regulatory measures matter greatly for total emissions: total emissions would be reduced by close to 1300 MMT in total, shrinking the post-IRA gap to the mitigation target to about 300 MMT. - Under the combined scenario, the gap to the U.S. objective of halving GHG emissions between 2005 and 2030 is substantially narrowed—coming close to bridging that gap—at very low macroeconomic costs. ### Summary conclusions - The IRA is effective in GMMET at curbing GHG emissions while having negligible macroeconomic costs even when funded by higher corporate income taxes. - The simulated IRA covers only roughly half of the U.S. implementation gap between GHG mitigation targets and tangible action by 2030. - Complementary regulatory measures—gradual coal phase-down and near-complete methane abatement in oil and gas—could produce sizable additional emission reductions and come close to meeting the stated mitigation objective at very low macroeconomic cost. - Addressing permitting delays is essential to fully realizing the IRA’s emission-reduction potential. *Source: IMF Working Papers, "Emissions Reduction, Fiscal Costs, and Macro Effects: A Model-based Assessment of IRA Climate Measures and Complementary Policies" (wpiea2024024-print-pdf).* ### 7.5 percent of the EV retail price and reaching 15 percent by 2030. This pattern reflects an assumed ### wpiea2024024-print-pdf - 7.5 percent of the EV retail price and reaching 15 percent by 2030. This pattern reflects an assumed ### Modeled EV and charging subsidies - Clean Vehicle Credit: modeled as a subsidy starting at 7.5 percent of the EV retail price and reaching 15 percent by 2030; assumes an average EV price of roughly US$50,000 and an increasing share of manufacturers fulfilling domestic content requirements. - Alternative Fuel Refueling Property Credit (Section 13404): - Statutory credit: 30 percent of installation costs through 2032; capped at US$1,000 for residences and at US$30,000 for businesses; only equipment in low-income or rural areas qualifies. - For businesses, subsidy rate is reduced to 6 percent if certain wage and apprenticeship requirements are not fulfilled. - Modeled as a 20 percent subsidy rate (rule-of-thumb capture of requirements and caps), with assumed elasticity of charging station supply with respect to costs of 0.67 (per Cole et al., 2023). - Translates into a subsidy-induced expansion of the charging network by 13.4 percent, introduced as an exogenous scaling of endogenous charging station density. ### Other modeled measures and calibrations - Carbon Capture and Sequestration Tax Credit (45Q): - Tax credit: $50 to $85 per ton of captured emissions by industrial facilities and power plants. - Calibration: mid-point of existing studies implies induced CCUS reduces industrial emissions by 15 MMT CO2e annually by 2030. - Fiscal costs: use CBO (2022) estimates scaled gradually to be 40 percent higher by 2030, yielding a cumulative fiscal cost of around 0.015 percent of GDP. - Residential energy efficiency measures (Sections 25C, 25D, HOMES): - Modeled as a positive productivity shock on household natural gas and oil heating bundle. - Calibrated to a decline in home heating emissions by 33 MMT by the end of the decade (per Mahajan et al., 2022). - Fiscal costs modeled as government consumption amount to roughly 0.02% of GDP annually (informed by initial CBO estimates). - Agriculture and waste measures (Sections 21001, 21002, 22001, 22002, 22004, 23001, 23002, 23003): - Introduced in a stylized fashion due to model limitations; induced decline in emissions of 113 MMT by 2030 (per Mahajan et al., 2022). - Costs assumed in line with initial CBO estimates; bulk are capped grants, reducing fiscal uncertainty. ### Simulation results — overview and key statistics - Three-step presentation: (1) lump-sum funding, no permitting delays; (2) lump-sum funding, permitting delays persist (4.5 years average authorization for power infrastructure); (3) funding via higher corporate income taxes. - Exercise 1 (No permitting delays, lump-sum funding): - Electricity mix: share of renewables increases by around 19 percentage points by 2030 (at the expense of gas and coal). - EV uptake: share of EVs in newly purchased cars increases by slightly less than 5 percentage points upon introduction of Clean Vehicle Credit and rises to 19 percent by 2030; average car lifetime assumed 8 years. - Charging density: more than doubles by 2030 following Alternative Fuel Refueling Property Credit deployment. - Aggregate macro: output increases by close to 0.25 percent by the end of the decade. - Fiscal costs: - Total modeled measures: about 0.1 percent of GDP in 2022, rising to about 0.4 percent of GDP towards the end of the decade. - Applying cost shares to October 2023 WEO nominal GDP projections and cumulating through 2030 yields undiscounted total costs of about $700 billion for modeled measures. - Adding IRA climate measures not modeled (mostly fixed grants and loans about $120 billion per CBO, 2022) raises total costs to $820 billion through 2030. - Comparison: initial CBO/JCT estimate about $350 billion over this period; 2023 JCT update yields $590 billion (2022-30). - Main cost drivers: New Advanced Manufacturing Production Tax Credit, renewable electricity generation subsidy, and EV subsidy. - Emissions: - Modeled subset reduces total annual GHG emissions by about 710 MMT of CO2e by the end of the decade, corresponding to a cumulative decline of roughly 3,300 MMT. - Baseline (without IRA) assumed reduction between 2005 and 2030 is 27 percent; mitigation target is 50-52 percent over this period, leaving a gap of about 1,600 MMT annual excess emissions by 2030 (roughly 24 percent of 2005 emissions). - IRA-induced reduction closes slightly less than half the gap; an additional 800 MMT reduction would be needed to reach the target. - Emissions in the rest of the world increase mildly by about 100 MMT (due to lower global fossil fuel prices and weaker U.S. demand). - Fiscal abatement cost metric: - Ratio of cumulative fiscal costs over cumulative emission reductions: about $400/tCO2 in 2022, declines to $185/tCO2 in 2029, and settles at $50/tCO2 in the long run. - Uses a plausible SCC of $185/tCO2 (Rennert et al., 2022) for comparison. - Interpretation: by end of decade, social value of IRA emission reductions outweighs fiscal cost; results are a lower bound as model abstracts from learning-by-doing cost declines. - Exercise 2 (Permitting delays persist, lump-sum funding): - Permitting delays (4.5 years average) mute and delay renewable investment surge; electricity price decline is smaller; output increase by 2030 is milder. - EV pickup less pronounced; delayed electricity decarbonization dampens EV emission reduction benefits. - Fiscal costs are smaller because permitting delays constrain take-up of uncapped power sector measures and slow capacity buildup (also affecting production tax credit volumes). - Overall reduction in 2030 annual emissions: slightly over 500 MMT, roughly 2/3 of mitigation impact when permitting reform occurs in 2023. - Emphasis: overcoming permitting delays is crucial to unlock full IRA potential. - Exercise 3 (No permitting delays, corporate income tax funding): - Funding via higher corporate income taxes offsets some output gains from more abundant electricity due to distortionary effects on firm profits. - Impact on GDP and inflation remains modest in absolute terms; climate-related measures have vanishingly small impact on output and inflation under this funding assumption. - Baseline for remainder of paper corresponds to Exercise 3. ### Comparative and supplementary findings - Box 2 comparison: GMMET simulations show IRA energy and climate measures cut emissions by an additional 11 percent of 2005 emissions by 2030. Adding IRA-induced cuts to other studies’ no-policy baselines yields around a 38 percent decline of 2005 emissions by 2030, close to other literature estimates (~40 percent decline). - Model limitations noted: - GMMET does not feature warming damages; cost-benefit judgment uses fiscal abatement costs compared to SCC. - Motor fuel tax revenue loss from declining conventional car share is not captured; a rough approximation yields a loss on the order of 0.01 percent of GDP by 2030 (neglected in simulations). - Current GMMET version abstracts from technological progress via learning-by-doing; results are likely a lower bound on benefits. ### Beyond the IRA — regulatory measures to close remaining gap (non-fiscal) - Regulation to curb electricity generation from coal: - Rationale: coal emissions per kWh are more than twice those of gas; IRA reduces coal but coal share still estimated at about 15 percent of the 2030 electricity mix. - Modeled policy: feebate-like tax on coal-generated electricity with revenues used to subsidize other technologies; when added to IRA, coal's electricity share declines by about one percentage point per year. - Regulation to curb methane emissions from oil and gas: - 2022 emissions from oil and gas production amounted to nearly 400 MMT of CO2e (IEA, 2023). - IEA assessment: roughly three quarters of these emissions can be abated with currently available technologies at minimal costs—about US$7 and US$5 per tCO2e for gas and oil respectively (IEA, 2023). - Expresses feasible abatement costs as a share of market value of total oil and gas annual output (using average prices from 2017 to 2021); for gas production, IEA assesses 180 MMT CO2e (about 73 percent of sector total) can be abated for about [text continues in source]. *International Monetary Fund — IMF Working Paper: Emissions Reduction, Fiscal Costs, and Macro Effects: A Model-based Assessment of IRA Climate Measures and Complementary Policies* ### 1.2 percent of the sector’s output value. For oil production, abating 121 MMT of CO2e (about 76% of total ### Emissions Reduction, Fiscal Costs, and Macro Effects: A Model-based Assessment of IRA Climate Measures and Complementary Policies ### Methane abatement in oil and gas; MERP and observed outcomes - Abating 121 MMT of CO2e (about 76% of total emissions) for oil production is deemed feasible and would cost around 0.2% of the sector’s output value. - The sector’s output value impact referenced elsewhere is 1.2 percent of the sector’s output value. - Despite low abatement costs and industry pledges, actual reductions in methane emissions have been negligible relative to their potential. - The Inflation Reduction Act (IRA) includes the Methane Emissions Reduction Program (MERP) with an emissions charge that could make abatement economical for many producers, but: - The final draft substantially weakens the likely effectiveness by restricting scope through high reporting thresholds, high emission thresholds (exempting facilities if emissions as a share of sales are below the threshold), and aggregation rules across company sites. - Energy Innovation (2022) estimate for MERP: emission reduction by the end of the decade of 29 MMT CO2e—just below 10 percent of the decline that the IEA deems possible with existing technologies at minimal costs. - The study investigates a regulatory scenario forcing oil and gas industries to abate about ¾ of total methane emissions (the maximum deemed feasible with existing technologies). Abatement costs from the IEA’s 2023 Methane Tracker are introduced as productivity declines of the specific sector. ### Macroeconomic impacts of IRA and complementary regulations (GMMET simulations) - Core macro result: - When implemented in GMMET, the climate-related IRA measures curb GHG emissions while macroeconomic implications are of negligible magnitude; output and inflation remain virtually unchanged. - Emissions and energy mix outcomes under IRA (GMMET): - Total emissions decline by about 720 MMT (mostly driven by renewables and EV uptake). - Renewables share: an almost 20 percentage point rise in the share of renewables. - Electric vehicle sales share: increase by close to 15 percentage points. - Fiscal costs through 2030: - Total fiscal costs estimated at $700 billion (another $120 billion of direct spending is not modelled). - Welfare implication (back-of-the-envelope): - Fiscal costs per ton of mitigated GHG emission will decline below the social cost of carbon in nearly five years, suggesting the climate-related measures are welfare-improving (GMMET does not model welfare directly). - Importance of permitting: - Cutting energy-related permitting delays is crucial: if permitting delays persisted until 2030, IRA-induced emission reduction would be roughly a third smaller. ### Effects of complementary regulatory measures (coal and methane regulations) - Coal regulation assumed: gradual reduction in coal use in electricity generation by roughly 1 percent of the electricity mix per year. - Methane regulation assumed: mitigation of the bulk of methane emissions from oil and gas production (~¾ of total emissions). - Combined impact when IRA is complemented by these regulations (summary of differences relative to standalone-IRA): - Methane regulation productivity decline in oil and gas extraction is negligible; no significant macro impact beyond emission reductions (assumed fully phased-in by 2026). - Coal regulation further dampens investment in coal power plants and strengthens the rise in renewables and gas investment. - Electricity mix: - Coal share declines by about 14 percentage points by 2030 under the complementary regulations, as opposed to roughly 7 percentage points under the standalone-IRA. - Electricity generation and price dynamics: - Initial phase: disinvestment from coal causes electricity generation volume to decline and price to rise. - From 2026 onwards: IRA-induced surge in renewables capacity raises generation volume and lowers price by the end of the decade. - Short-term macro effects: small reduction in output and slight upward pressure on inflation; overall macroeconomic impact virtually unchanged. - Emissions outcomes: - Complementary regulatory measures matter greatly for total emissions: total emissions would be reduced by close to 1300 MMT in total, shrinking the post-IRA gap to the mitigation target to about 300 MMT. - Under the combined scenario, the gap to the U.S. objective of halving GHG emissions between 2005 and 2030 is substantially narrowed—coming close to bridging that gap—at very low macroeconomic costs. ### Summary conclusions - The IRA is effective in GMMET at curbing GHG emissions while having negligible macroeconomic costs even when funded by higher corporate income taxes. - The simulated IRA covers only roughly half of the U.S. implementation gap between GHG mitigation targets and tangible action by 2030. - Complementary regulatory measures—gradual coal phase-down and near-complete methane abatement in oil and gas—could produce sizable additional emission reductions and come close to meeting the stated mitigation objective at very low macroeconomic cost. - Addressing permitting delays is essential to fully realizing the IRA’s emission-reduction potential. *Source: IMF Working Papers, "Emissions Reduction, Fiscal Costs, and Macro Effects: A Model-based Assessment of IRA Climate Measures and Complementary Policies" (wpiea2024024-print-pdf).* --- _Source: https://www.imf.org/-/media/files/publications/wp/2024/english/wpiea2024024-print-pdf.pdf_