Abstract
In 2022, the United States enacted the Inflation Reduction Act (“IRA”), which President Biden touted as the most significant action the U.S. Congress has ever taken on clean energy and climate change. It is the primary governmental effort taken to date in furtherance of the United States’s commitments to reduce greenhouse gas emissions (“GHGs”) under the Paris Climate Agreement. The primary tools used by the IRA are tax incentives, implemented through changes to the Tax Code that expand existing tax credits and, in some cases, create new ones. An additional important feature of the IRA is the introduction of a transferability mechanism for many of the tax credits. Of course, the IRA tax credits do not operate in a vacuum but are instead part of a larger pre-existing (and continuously evolving) regulatory framework. Thus, the IRA introduced a series of tax “carrots” focused on lowering the cost of investment in GHG reducing technologies against a background of regulatory “sticks.” However, only very limited and sporadic attempts at using tax “sticks”, such as a carbon tax, have ever caught on in the United States, despite the fact that numerous economists and policy makers believe such tools may be necessary to meaningfully reduce GHG emissions. Early evidence suggests that the environmentally-related tax credits of the IRA will be effective in reducing emissions to an extent—indicating that such tax incentives can be an effective policy tool. However, this paper also acknowledges that they are blunt instruments, drawing on prior work addressing the efficacy of the various policy tools at the disposal of national governments for addressing climate change. Employing the traditional tax policy criteria, the paper will then attempt to systematically evaluate the key IRA tax credits, focusing on a number of design features of specific tax incentive provisions. This analysis reveals the ways in which legislators attempted to draw on prior lessons related to tax incentives to improve efficacy, but it will also tend to show inherent shortcomings in the IRA’s approach. This paper thus aims to provide a full contextual picture for the use and design of tax credits in the IRA, in order to provide a framework for a more nuanced discussion of the deployment of tax credits in furtherance of U.S. climate policy going forward.
Recommended Citation
Genevieve A. Tokić, Environmental Tax Incentives: Lessons from the U.S. Inflation Reduction Act (So Far), 43 Pace Envtl. L. Rev. 57 (2025)Available at: https://digitalcommons.pace.edu/pelr/vol43/iss1/13