What if the Inflation Reduction Act were repealed?

How effectively is IRS and Treasury guidance enabling investment?

The 2022 Inflation Reduction Act (IRA) provides an estimated USD 670 billion in federal government spending and tax breaks to scale-up domestic clean-energy production and manufacturing, reduce healthcare costs and increase tax revenues.

Two-thirds of IRA funds come in the form of tax credits that will flow through the Internal Revenue Service (IRS). While the IRA provides outlines for the types of projects that are eligible for tax credits (e.g. clean-energy projects) it does not always stipulate the exact requirements (e.g. what qualifies as ‘clean’). Therefore, the private sector has withheld some green investments until Treasury and IRS released guidance clarifying the eligibility of projects and products, credit stacking and bonuses. This guidance trickled out during 2023 and a large tranche of key specifications was released in December 2023. It is summarised below.¹

• Final guidance. Final implementation guidance has been issued for a handful of tax credits (25E, 45L, 48C), largely building on other guidance, as several of these credits are either pre-existing or relate to other credits
• Proposed guidance. Proposed guidance now exists for most key credits, including clean hydrogen and sustainable aviation fuel (SAF), as well as for what constitutes a foreign entity of concern (FEOC) for EVs and domestic content requirements for clean-energy projects. As a result, policy uncertainty on issues like EV eligibility and clean hydrogen is finally clearing, providing more clarity to investors. The proposed guidance is expected to become final before the election, and there is limited expectation that most of it will change meaningfully from its current form

Why the IRA might – or might not – be resilient under a Trump administration

Current market consensus is that the IRA would survive a Trump presidency – largely due to the job creation and beneficial economics it is delivering, and the difficulty of repealing legislation. We expand on these reasons below.

• Funding to red states. More of the announced funding has gone to Republican states than Democratic ones, with Texas likely to attract more than any state with USD 67 bn. This leads to an expectation that constituents will pressure Republican lawmakers to preserve the IRA.
• Delay in benefits. It typically takes more than two years for the benefits of major legislation to become visible in the economy. For instance, the Infrastructure Investment and Jobs Act (IIJA), signed into law in November 2021, was understood to be visibly driving business investment in mid-2023. It’s therefore likely that the next president will benefit from the economic impact of the IRA, potentially limiting any desire to repeal it.
• Major bills are rarely repealed. Conventional wisdom in Washington D.C. is that significant programmes that directly benefit individuals and companies rarely get rolled back.² Further, political gridlock and multiple veto options make any major legislative change difficult without a party winning the trifecta of Presidency, Senate and House.

However, as strong as these arguments are, they do not guarantee the longevity of the IRA. The state of US finances and heated culture wars over sustainability are key reasons why IRA funding could be threatened if the Republicans prevail this November.

• Federal deficit. A combination of factors – debt incurred due to the Covid response and social-support efforts, resurgent inflation, higher interest rates and increasing healthcare costs amid an ageing population – create anxiety about an emerging fiscal crunch. Any government spending perceived as unnecessary could therefore be axed. These concerns are especially relevant in the wake of the Joint Committee on Taxation’s (JCT’s) significant upwards revision for the impact of the IRA on the federal deficit.³
• Cultural politics around key ‘green’ topics. The IRA subsidises projects and goods, including electric vehicles (EVs) and home electrification, that have been the subject of an ongoing culture war between liberals and conservatives in the US about sustainability – even if these innovations are as much about applying superior technologies as environmental benefits.

Even if the IRA stood a good chance of supporting the energy transition under a Trump government, Republican efforts to repeal the law or constrict the flow of funds will be persistent.

Repealing tax credits and clawing back funding through new legislation are key tactics the GOP would likely employ to undermine the IRA, as we explain below.

• Repealing or reverting IRA tax credits. Several tax credits in the IRA are simply modified versions of pre-existing ones (e.g. 25C, 25D, 30D, 45Q, 48C and 179D). Republicans could therefore be expected to revert these tax credits to their pre-IRA status and repeal all new ones. This is addressed in the proposed Limit, Save, Grow Act from House Republicans, which is seen as a major policy initiative from the GOP heading into the 2024 election.
• Limiting funding for home electrification. The proposed Limit, Save, Grow Act proposes to repeal many IRA funding mechanisms that would improve home electrification, including the High Efficiency Electric Homes Rebate, home energy efficiency contractor training grants, and assistance for the latest and zero building energy code adoption.
• Limiting funding for electrifying transport infrastructure. The House Budget Committee’s Reverse the Curse Resolution (2023) proposes to claw back USD 25 bn in IIJA funds for electrifying transportation (e.g. EV charging, low-carbon buses and ferries, etc.), skills training, and the Carbon Reduction Program. (See Section H for more on the IIJA.)
• Clawing back IRS and other departmental funding. Both the proposed Limit, Save, Grow Act and proposed appropriations bills from Republican House committees⁴ propose to restrict IRA funding to the IRS, as well as pull IRA funding for the Environmental Protection Agency’s (EPA’s) Greenhouse Gas Reduction Fund programme and from Rural Electric Cooperatives, among other green incentives for rural Americans.

Republicans have effective mechanisms for undermining the IRA – but there are other dynamics that could also adversely impact the legislation.

What are the key risk factors for IRA funding mechanisms?

Rising costs for green technologies, departmental influence over funding allocations, and the vulnerability of new subsidies are  seen as weaknesses in IRA funding distribution.

• Tax credits where IRS guidance is key. Credits where IRS or Treasury guidance has a definitive role in determining final eligibility may be at risk of having the guidance being significantly tightened, as this can be done without involving Congress.
• Increasing costs. Funding might be impacted where the anticipated cost of green goods or projects have been revised upward, as additional government expenses are likely to become more difficult to justify in a high-inflation environment. Such funding could become vulnerable in efforts to offset tax cuts.
• Limiting bonus funding. Supplemental funds subject to additional rules towards domestic content of goods or FEOCs could be seen as ‘excessive’ and tightened by a new administration without approval from Congress⁵
• Abandoning new pools of funding. Subsidies that are in the early stages of being distributed would likely be less politically painful to repeal than long-established programmes.
• Departmental funding, subsidies and grants, as these are funding streams that can be largely adjusted without congressional approval

Given the potential for IRA funding to be constrained, what aspects of clean-energy production, storage and transmission could be at risk? We address this next.

A range of green power sources and technologies would be impacted be reduced IRA funding, chiefly:

• The modified tax credit for carbon capture and storage (45Q) and the new clean hydrogen production tax credit (45V) are expected to become substantially more expensive for the government than what was originally anticipated by the JCT, despite relatively strict guidance from the IRS for hydrogen production (see appendix B). As a result, the proposed Limit, Save, Grow Act would return 45Q to the pre-IRA version and repeal 45V entirely. Although some expect CCS to be vulnerable, we think it is unlikely to be repealed completely since the technology has received broad bipartisan support in the past (2008, 2018, 2020), as well as support from industry.
• Other tax credits at risk include bio-based and other clean fuels (45Z, 40B), some investment and production tax credits for clean electricity (48E, 45Y), energy storage (48C), and production credits for zero-emission nuclear power (45U), as these are all targeted for repeal in the proposed Limit, Save, Grow Act. This bill would also restore the tax credit for second-generation biofuels (40) to its pre-IRA version. In addition, pre-IRA tax code provisions that delivered a production tax credit of 1.5 cents per kilowatt hour (c/kWh) and investment tax credits of up to 30% for some renewable resources would reappear, but with considerably shorter time frames.
• While Republicans are expected to continue to target provisions relating to EVs and the production of certain types of green energy, solar subsidies are considered to be relatively less at risk because this power source has become an established component of the energy-supply mix – even in deep-red areas like the Florida panhandle. This would make their removal politically painful and prone to substantial pushback from utilities. Finally, all grants relating to expanding low-carbon electricity to rural Americans would be severely limited or effectively cut off after 2025

The above is not a comprehensive list of proposed or anticipated changes to US federal green stimulus for clean-energy supply. Rather, it highlights some of the more prominent potential impacts.

Beyond supply, several funding mechanisms relating to clean-energy demand are also at risk. These include:

• The IRA’s tax credits for clean vehicles (30D for consumers, 45W for corporates) are considered to be especially vulnerable under a Republican administration. The proposed Limit, Save, Grow Act would restore the pre-IRA credit cap of 200,000 vehicles per manufacturer, which many major automakers have already reached, and it would repeal credits for previously owned EVs and qualifying commercial clean vehicles.
  This move would be backed by an anti-EV narrative being promoted by the Republican party. The GOP asserts that Democrats are forcing consumers to buy overpriced, unreliable EVs to the benefit of China and to the detriment of US auto manufacturers, domestic jobs and the resilience of US auto supply chains. This narrative has played out in politics. For example, in January 2023 Glenn Youngkin, the Governor of Virginia and a Republican, blocked a proposed Ford-CATL⁶ partnership to build a battery plant in the state. In addition, these tax credits are expected to cost the government significantly more than initially expected based on the uptake observed so far, which has been interpreted by Republicans as a ‘cost overrun’ that should be curtailed.
• The components manufacturing for solar and wind energy, inverters, battery components, critical minerals and automobiles is also expected to be a target for Republicans. These provisions are expected to become much more expensive than originally anticipated by the JCT, and they have also been targeted for repeal under the proposed Limit, Save, Grow Act.
• Home electrification and energy efficiency has also been in the Republicans’ crosshairs. For example, the Limit, Save, Grow Act proposes to repeal the High Efficiency Electric Homes Rebate, assistance for zero building energy code adoption, as well as state-based home energy efficiency contractor training grants. For example, the Trump administration unwound regulations that would have made various home appliances more energy efficient, and former Presidential candidate and Florida governor Ron DeSantis blocked IRS funding for home electrification from being included in the state’s budget.

As with the supply measures, this is not a comprehensive list of proposed or anticipated changes to the US green stimulus for clean-energy demand, but focuses on technologies that could suffer lower IRA funding.

Is there anything in the IRA that is not at risk?

It is unlikely that the drug-pricing provisions of the IRA will become a target since these provisions would save the government money – which would be beneficial in the event of additional tax cuts. This is because these provisions allow the Secretary of Health and Human Services ) to negotiate prices for some of the most expensive Medicare drugs with manufacturers, with the aim of lowering costs for the government and taxpayers. These provisions are also among the most popular elements of the IRA on both sides of the aisle – as indicated by a recent KFF poll and the fact that these provisions are not targeted by any proposed Republican bills.

Besides the IRA, are any other policies at risk?

As mentioned above, the IIJA has also been targeted by some Republicans. For example, the Reverse the Curse resolution from the US House Budget Committee seeks to eliminate USD 25 bn from the IIJA. In addition, the Project 2025 initiative, launched by highly influential conservative think tank The Heritage Foundation, proposes cutting USD 102 bn from the IIJA’s total of USD 1.2 trillion. These cuts focus on what it claims are “wasteful” green initiatives, pointing to EV charging and low-carbon transport. However, the IIJA appropriates a fixed amount of spending, and much of the IIJA spend will have already been outlaid by 2025, which means that a repeal of these provisions would provide limited cost savings. This contrasts with the IRA, which has uncapped spending for many components for more than 10 years. Further, the IIJA gained relatively broad bipartisan support, unlike the IRA.

It is unlikely that the CHIPS Act will be targeted by Republicans, as this bill has not been highlighted in any conservative policy or legislative proposals. Further, it supports US independence from China in manufacturing semiconductors – a strategy broadly supported by both parties.

In this case study, we consider how scenarios two and three could affect total federal spending on electrifying ground transport. Since Republicans would most likely aim to simply stem the flow of federal spending going to these credits, this analysis focuses on a handful of mechanisms that are likely candidates for restricted funding.

Our analysis suggests that in scenario two, with a Republican President but divided Congress, the funding pool for purchasing new EVs would be significantly constricted due to tighter guidance for vehicle eligibility (for example, by further escalating FEOC restrictions). In scenario three, this funding pool would be severely depleted and drop to zero after 2025. If FEOC restrictions are tightened, this may serve as a tailwind to battery and critical mineral recycling in the US due to the ongoing need to procure these automobile components to meet the demand for EVs.

It is important to note that the tightening or repeal of the IRA would largely affect funding going towards EV adoption but not EV charging infrastructure, as only 1% of total funding going towards the electrification of ground transport is intended to bolster charging networks. This is because the majority of EV charging funding is provided under the IIJA, not the IRA.

The IRA financing measure for clean transport

Source: LOIM analysis at February 2024. The funding outcomes for each scenario are based on LOIM calculations. For illustrative purposes only.

Figure 3. Estimated clean-transport spending in the US under the three scenarios (USD bn).

Source: LOIM analysis at February 2024. The funding outcomes for each scenario are based on LOIM calculations. For illustrative purposes only.

Contrary to consensus, full deployment of IRA funding is not guaranteed irrespective of the 2024 US election outcome. In this analysis, we assess the likely impact of IRA outlays under three scenarios: a Biden presidency and a split Congress, a Trump presidency with a split Congress, and a Republican trifecta.

We find the bill is likely to be far from immune to a Republican victory, with one outcome resulting in a collapse from today’s estimated USD 670 bn to USD 130 bn. In assessing the potential outcomes of each scenario, we catalogue clean-energy supply and demand activities at risk of reduced funding, from SAF and hydrogen to EVs and energy-efficient buildings, while highlighting that solar energy will probably remain resilient given its current market penetration. It Is important to note that energy-transition funding from other bills – the CHIPS and Science Act and IIJA – should remain largely unaffected due to their bipartisan support.  

To illustrate how Republicans might exercise departmental influence or introduce new legislation to stymie or repeal the IRA, we use funding to clean ground transportation as a case study. This shows the extent to which tax credits could be repealed, and the concomitant reduction in funding, under increasing Republican power.

If the market takes a similar view of the threat a Republican administration would pose to the IRA, we expect a surge in clean-energy investment in the coming months – especially since detailed guidance on the implementation of tax credits has been released.