Out of all the contemporary social and political movements extant in the West today, the sprawling “green” movement ranks as one of the most—if not the most—influential. As an ideology and a cultural zeitgeist, the green movement holds great sway among a large segment of the college-educated “knowledge workers” of Western economies. (Noticeably lower enthusiasm for green causes among working-class constituencies reflects wider cleavages between educated and affluent urban-dwellers and the various left-behind hinterlands.) But while the green movement today often prides itself on its youthful, rebellious character—perhaps best embodied in the career arc of Swedish activist Greta Thunberg—it is far from being a countercultural force in opposition to the political or economic establishment. Embracing green ideas is now seen as a basic requirement for membership in many public institutions.
Accordingly, the green movement today drives—or at least seems to drive—significant economic and political decisions, particularly those relating to Western energy policy. Most notable in the United States is the recently passed Inflation Reduction Act (IRA)—which the EPA describes as “the most significant climate legislation in US history.” The IRA allocates nearly $400 billion in total spending, of which over $300 billion goes to energy, environment, and electric vehicles, according to McKinsey. For every $1 that goes to “normal” manufacturing, $6 goes to green sectors. Seen in this light, the IRA could be considered a watered-down version of the Green New Deal that has been discussed by the left wing of the Democratic Party for many years.
The IRA’s Unprecedented Energy Tax Preferences
The IRA is an enormous undertaking that makes previous energy policies pale in comparison. Yet the IRA is not the first time that the green lobby has secured significant subsidies from Congress. After the financial crisis of 2008, the Obama administration passed the American Recovery and Reinvestment Act of 2009 (ARRA). ARRA was a Keynesian stimulus package designed to prevent the American economy from falling into a depression. The thinking behind it was simple enough: the financial crisis and meltdown in the housing market led to a sharp uptick in unemployment and fall in aggregate demand. In order to counteract this, the federal government would step into the breach and replace this lost aggregate demand with debt-financed spending.
The ARRA was huge, floated at $787 billion when it was first passed and then revised up to $831 billion between 2009 and 2011. There is little doubt that it sped up the American recovery from the Great Recession, as can be seen if U.S. growth is compared with growth in European countries that engaged in austerity around the same time.
ARRA spending went toward a number of different ends. The largest line items were tax relief for individuals and companies ($288 billion), state and local fiscal relief ($144 billion), and infrastructure and science spending ($111 billion). But there was also a $43 billion carve-out for spending on energy, of which $27.2 billion went to “energy efficiency and renewable energy research and investment.”
Even though spending on renewables was only around 3.3 percent of the total spending in the bill, it had an enormous impact on the energy sector. To get a sense of just how large the ARRA spending is, consider figure 1, which compares the total energy-related tax preferences given to the fossil fuel sector with those given to the renewable sector.1 We see the impact of the ARRA spending in the 2009–16 numbers, and we see that even this 3.3 percent of total spending gave rise to by far the largest energy-related tax preferences on record since 1985—and probably in U.S. history.
But as the chart also shows, the ARRA stimulus is only a drop in the bucket when compared with what the IRA would do for the renewable energy industry. The chart shows what the IRA energy-related tax preferences will look like between now and 2030 if they are distributed on roughly the same schedule as the ARRA tax credits were distributed.2 The result is like nothing ever seen before in the history of the American energy industry. The largest tax credit ever granted to the fossil fuel industry was in 1985, when the federal government provided $8 billion in credits (about $19 billion in today’s dollars). With the IRA, we expect to see tax credits for renewables peak in 2023 at $36.2 billion, or $41.5 billion if we include nuclear. It is not clear that either the American public or policymakers comprehend just how large and how radical these subsidies are. The picture becomes more dramatic still if we consider the entire IRA stimulus package. In the seven years between 1985 and 1992, the tax preferences assigned to the fossil fuel industry added up to around $31 billion (or $70.2 billion in today’s dollars); this is a far cry from the $230 billion that will be spent on renewables in the coming years ($260 billion if we include nuclear). Note as well that while fossil fuel subsidies went to a tried and tested industry, the renewables subsidies are going to an experimental industry.
The “Virtue Premium” in Green Lobbying
It is no secret that Washington, D.C., is a pay-to-play system, and that lobbying can be thought of as a dollar-in, dollar-out business. To put it in business terms, lobbying can be considered a “cost of revenue,” and the end revenue is the amount of subsidies, tax credits, or spending the lobbying secures. Figure 2 compares the renewables industry and the fossil fuels industry in this regard.3 It measures how many dollars in tax credits each industry secures for every dollar spent on lobbying.
What this chart shows is that, since 2000, the fossil fuel industry has in its very best year managed to secure $84.69 for every $1 spent on lobbying. This is not a bad return on investment, and clearly the money that the fossil fuel industry is spending on lobbying is well worth it. But when we look at renewables, the picture that emerges is on a different scale entirely. In 2012, during the ARRA stimulus, the industry received $690.95 in tax preferences for every dollar spent. In 2023, we are on track to see that rise to $740.38 thanks to IRA distributions. Although the fossil fuels industry still spends more on lobbying in absolute terms, the returns on green lobbying are significantly higher. We call the green lobby’s outsized capacity to extract money from the government the “virtue premium.”
The IRA is not just much larger in the total spending it provides to the green lobby; it is also a wholly different beast than the ARRA stimulus. The ARRA stimulus had a genuine macroeconomic rationale. Keynesian theory tells us that, in a deep recession, any and all government spending is good government spending. Since the economy lacks aggregate demand, any additional spending just deploys resources that would not otherwise be employed. In Keynes’s famous example, even burying bottles full of cash and having people dig them up is superior to having those same people unemployed. But the IRA was not passed at a time of deep recession. As the spending from the bill comes online in 2023, unemployment is seeing record lows of 3.4 percent in some months—these are rates of unemployment not seen since the late 1960s.....
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