Instead of taking a regulatory or “stick” approach to address many issues within the Inflation Reduction Act (IRA), legislators specifically chose to use subsidies or “carrots.”
But that hasn’t stopped the Environmental Protection Agency (EPA) from using IRA subsidies as a way to justify recent rules, such as the proposed power plant rule and its vehicle tailpipe rule. The tailpipe rule relies in part on IRA subsidies promoting electric vehicle (EV) technology to justify standards that will push more EVs into the vehicle fleet.
The former rule best illustrates some of the improper uses of subsidies in rulemakings. In the proposed power plant rule, the agency used a tax credit that incentivizes the use of carbon capture and storage (CCS), the 45Q tax credit, to help justify the rule’s heavy-handed CCS requirements.
Specifically, the agency used the IRA’s expanded use of the 45Q tax credit to unrealistically claim that CCS is a technology that is the “best system of emission reduction” that has been “adequately demonstrated,” as required under the Clean Air Act.
Plus, when the agency considered the costs of using CCS, it assumed that the only relevant costs to be considered were the costs to regulated parties. It then deemed those costs to be reasonable because the 45Q tax credits help offset the compliance costs. But the applicable Clean Air Act section, 111(a)(1), requires costs to be considered broadly and not limited to the costs to regulated parties. In other words, the agency needed to consider the costs of the 45Q tax credits.
So why does any of this matter?
1) The agency shouldn’t ignore congressional intent. When Congress extended the 45Q tax credit under the IRA, it chose to use it as a carrot to incentivize the use of CCS for power plants, not as a way to provide the EPA justification to kill off power plants through regulation.
Congress was not using it to enable the EPA to set emission standards that are so stringent (90-percent carbon capture) that power plants cannot afford to meet them, or that are not achievable unless there is a nationwide network of carbon dioxide (CO2) pipelines and storage sites that do not yet exist and may never be built.
In their joint comments on the power plant rule, four of the country’s Independent System Operators (ISOs) expressed their concern with the rule’s reliance on the successful development of CCS technology (and hydrogen co-firing), stating that it, “overstates the commercial viability of CCS and hydrogen co-firing today and ignores the cost and practicalities of developing new supporting infrastructure within the time frames projected.”
They also argued that, “…proceeding with these requirements could place the reliability of the electric grid in jeopardy. In short, hope is not an acceptable strategy.”
Senator Joe Manchin (D-WV) who played a pivotal role in the passage of the IRA recently touted the expansion of the 45Q tax credit, explaining, “The law enhanced the 45Q tax credit for carbon capture, utilization and storage—worth about $3 billion—to spur investment in power plants and industrial facilities fueled by coal and natural gas.”
It is doubtful that Senator Manchin and legislators who wanted to expand the 45Q credit also wanted to make it possible for the EPA to use this subsidy as a way to kill off power plants by making them economically uncompetitive or technologically infeasible.
They wanted to create incentives for power plants to make it possible for them to use CCS. They didn’t want to spend billions of dollars to incentivize power plants to use a technology they would never use, in large part because the power plants would no longer exist.
In fact, just three days before he voted for the IRA, Senator Manchin wrote a letter to the president of the West Virginia Coal Association in which he touted the benefits that these specific subsidies would have for his state’s coal plants, “The reality is I specifically ensured that the Inflation Reduction Act provides incentives that would benefit coal. That includes increasing the value of the 45Q CCUS tax credit…”
And even more powerful, Senator Manchin stated in the letter, “First off, let me assure you that I have not wavered in my advocacy for innovation over elimination.”
Yet the EPA is using the 45Q tax credit to justify elimination, contrary to what Senator Manchin intended.
2) The mere existence of subsidies doesn’t demonstrate anything. The assumption that expanding subsidies makes a technology more feasible is unreasonable. Spending money doesn’t necessarily mean that an unproven technology will somehow become viable, especially on a commercial scale. In fact, the government’s expansion of subsidies is further evidence that the specific technology is not ready for prime time.
The EPA shouldn’t conflate spending taxpayer money to develop a nascent technology with the certainty that the technology will materialize at grid scale by a set date in the near future, if it materializes at all. The power plant rule’s unrealistic assumptions could have severe consequences, such as forcing the closure of a large portion of our baseload power infrastructure.
3) There is an improper assumption that the subsidies will continue to exist. Just because a subsidy exists today doesn’t mean it will exist tomorrow, even if it has been authorized. Congress can always repeal subsidies, and on controversial issues such as those in the IRA, the chances of repeal or reductions are very real.
The EPA is not necessarily acting unreasonably to acknowledge the existence of subsidies in a regulatory analysis. However, it is acting unreasonably when it ignores obvious Congressional intent, assumes too much about the effect of subsidies, or simply assumes the continued existence of subsidies. And when it is using subsidies inconsistent with the plain language of a statute, as the EPA did when improperly excluding subsidies from the consideration of costs in the proposed power plant rule, then it certainly is acting unreasonably.
While prohibitions on the EPA considering any subsidies may be warranted, in the interim, Congress should prohibit the EPA from using IRA subsidies to justify any requirements of a rule, including rules that have already been proposed.
At a minimum, the existence of IRA subsidies to promote technologies shouldn’t be used by the EPA as a basis to set new and unrealistic technological requirements in rules. In the past, Congress addressed the EPA’s abuse of subsidies in setting technological requirements in rules. Section 402 of the Energy Policy Act of 2005, which has since expired, created a prohibition to address this type of abuse. Therefore, taking comparable action now would hardly be novel.
In general, legislators should address the EPA’s misapplication of the IRA subsidies. This is a policy reform that should get wide support, including from legislators who supported the expansion of the 45Q tax credit in the IRA.
After all, if these legislators really want the tax credit to be about innovation and not elimination, then they need to block the EPA from using the 45Q tax credit as a way to kill off power plants.