Bhile the existence of a climate crisis is increasingly recognized, the widely debated solutions to address it – carbon taxes and the carbon market – have simply failed to take hold on a scale that allows to solve the problem.
The Inflation Reduction Act (IRA), the law on the reduction of inflation signed by US President Joe Biden on August 16, promotes a green transformation according to an approach completely opposite to those which have failed. If this approach were followed by other countries, the world could perhaps escape the worst of global warming! Here’s why.
$369 billion over ten years
First, this law is voted… whereas the carbon market and the carbon tax have never been adopted at the national level in the United States. Admittedly, it narrowly passed the Senate, 51 votes to 50, on August 7. But the vote in the House of Representatives on August 12 was a foregone conclusion.
By signing the law four days later, Joe Biden launched the largest green transformation investment in US history: $369 billion over ten years, long enough to make the energy transformation irreversible. Princeton researchers estimated that this amount of federal money would trigger $3.5 trillion (about as much in euros) in energy infrastructure investment by 2032 (” Preliminary Report: The Climate and Energy Impact of the Inflation Reduction Act of 2022 »August 2022, Princeton University Zero Lab).
Second, the law implements the basic principle of most business management practices, positive incentive. Indeed, it largely rewards what we want, rather than punishing what we don’t want. It’s the exact opposite of a carbon tax, which punishes what we don’t want, hoping that investment money will go to what we want.
The main financial tool is the tax credit: it is a deduction, dollar for dollar, on the final tax calculation. The deduction often corresponds to half of the investment costs for a wide range of renewable energies. If the investor’s initial tax bill is less than the tax credit, he can sell some or all of it to someone who can use it.
Social justice
Third, the law responds to the problem of social justice, which the carbon tax had neglected, in France, generating the revolt of the “yellow vests”. It directly targets low-income people: $4,000 reduction or tax credit for a used electric car provided it costs less than $25,000 (so there is no tax credit for high-end Teslas). And, among other things, a tax credit of 30% of the investment costs for modernizing the heating and for the geothermal air conditioning of middle and lower class housing.
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