Beyond the Inflation Reduction Act: Achieving Net-Zero Greenhouse Gas Emissions in the U.S.

Recent analyses, including ours, estimate that the Inflation Reduction Act (IRA) will reduce U.S. greenhouse gas emissions by 40% (in 2030 relative to 2005 baseline levels). The IRA aims to spur emission reductions by offering consumers and producers subsidies, such as a tax break, to adopt technologies that reduce emissions. In theory, subsidies make it cheaper for consumers and producers to switch to lower-carbon fuels or more energy-efficient technologies. While the expected 40% reduction is noteworthy, it is not enough to keep pace with the U.S.’ long-term goal of halving 2005 emissions by 2050, an emissions level often referred to as our nationally determined contribution (NDC). Moreover, the IRA subsidies expire in 2033, risking subsequent emission increases.

In our recent publication, “Closing the Gap: Achieving U.S. Climate Goals Beyond the Inflation Reduction Act,” we identified different policy strategies that, when combined with the IRA, help the U.S. meet its long term emission goals. First, we introduce a carbon price in addition to the IRA. We model two different carbon price schedules, a lower price schedule starting at $51/ton in 2025 rising to $78/ton by 2050 and a higher price schedule starting at $155/ton in 2025 rising to $240/ton by 2050. Whereas the IRA subsidizes the adoption of decarbonizing technologies, a carbon price disincentives greenhouse gas emissions. Neoclassical theory suggests a carbon price is the most efficient way to reduce emissions because it creates a market for greenhouse gasses. In theory, a carbon price spurs innovation by allowing consumers and producers flexibility in how to manage their emissions.

However, carbon pricing has historically been politically intractable. Therefore, we also model so-called “command and control” strategies to reduce emissions in addition to those expected from the IRA. Relative to carbon prices, economists often refer to command and control strategies as “second best” alternatives because they are considered less economically efficient. The U.S. already uses some command and control strategies to manage emissions, such as mandating minimum fuel economy standards for vehicles and appliances. Our model assumes additional emissions reductions come from both new command and control strategies and making select existing standards more aggressive.

Figure 1: Annual GHG emissions in million metric tons of CO2-eq by energy sector.

To quote our paper directly…

“Under the Low Carbon Tax scenarios, GHG emissions decline rapidly in the first ten years resulting in a 52% reduction in 2030 GHG emissions compared to 2005 levels. However, GHG emissions plateau after 2030 in this scenario. The low value of the carbon tax is insufficient to spur reductions in sectors that are more expensive to abate. For example, GHG emissions from the industrial sector do not decrease substantially with a low carbon tax. In contrast, the Standards and High Carbon Tax scenarios result
in GHG emissions reductions economy-wide, including in the industrial sector, across the entire analysis period. By 2030, GHG emissions in the Standards and High Carbon Tax scenarios are 56% and 58% lower than in 2005, respectively. Furthermore, by 2050, GHG emissions in the Standards and High Carbon Tax scenarios are 74% and 76% lower than in 2005.”

While these scenarios do meet our NDC, they do not reach net-zero GHG emissions. The net-zero target is significant, as it keeps the U.S. in line with the 1.5 °C target set in the Paris Agreement. While our model includes a characterization of negative emissions technologies like bioenergy with carbon capture and sequestration and direct air capture of CO2, the carbon tax isn’t high enough to spur their deployment.

We also compare each decarbonization strategy using the ratio of benefits to costs. All else equal, strategies with a higher ratio of benefits to cost are preferred. Our analysis includes the capital, operating, fuel, and maintenance costs of technologies. We monetize the benefits based upon our assumed social cost of carbon plus the benefits of reducing criteria air pollutant emissions (NOx, SO2 , and PM 2.5 ). All of our modeled policies have a benefit-cost ratio greater than one; the ratios range from 6 - 24. We also calculate the average abatement cost, or the total incremental cost divided by the total avoided emissions. The average abatement costs are all under $20/ton CO2, ranging from $5/ton to $19/ton CO2.

A key finding from our publication is that the combination of command and control policies across the energy economy can lead to emissions reductions approximately equal to those obtained under a $200/ton carbon tax, meeting (and exceeding) our NDC. These two policies both reduce emissions ~75% by 2050 relative to 2005. While not quite net-zero, policymakers could build upon the fuel and technology standards modeled here to reach net - zero emissions by 2050.

Our results demonstrate two alternative strategies supplemental to the IRA that could meet the U.S. decarbonization goals: a carbon price and more aggressive command and control policies. A relatively modest increasing carbon price schedule, starting at $51/ton in 2025 and rising to $78/ton by 2050, reduced 2005 emissions by 55% in 2050, which surpasses the U.S.’ nationally determined contribution. On average, this modest carbon price produces about $24 of benefits for each $1 of costs. A tripling the assumed carbon price compares similarly to more aggressive command and control strategies, both reducing emissions by about 75% at similar benefits and costs. However, the benefit-cost ratio declines with increasing emission reductions. While a carbon price is theoretically most economically efficient, our results suggest policymakers could pursue command and control strategies towards similar ends. A command and control strategy has historically been more politically tractable for challenging environmental problems, as exemplified in the Clean Air Act, the Clean Water Act, federal Corporate Average Fuel Economy (CAFE) standards, and California's Zero Emission Vehicle standards. This work proves the efficacy of a suite of politically feasible technology standards to decrease energy system emissions.

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