How the Green Energy Transition Makes You Poorer

Crony capitalism at work

By Matt Ridley. 

"A leaked government analysis has found that Net Zero could crash the economy, reducing GDP by a massive 10% by 2030. Yet the spectacular thing about this analysis is that it expects this to happen not if Net Zero fails—but if it succeeds. In effect, it is saying that if the government really does force us to give up petrol cars, gas boilers, foreign holidays, and beef, then there would be perfectly workable things left idle, such as cars, boilers, planes, and cows. Idling—or stranding—your assets in this way is an expensive economic disaster.

Even more intriguing was the government’s economically illiterate response to the leak. A spokesman said: “Net zero is the economic opportunity of the twenty-first century, and will deliver good jobs, economic growth and energy security as part of our Plan for Change.” Do they really think that economic growth is the same thing as spending money? Because it isn’t.

Imagine the government saying that it is going to require the entire population to throw out all their socks and buy new ones by next Thursday. Under the logic it espouses for Net Zero, this would result in a tremendous burst of economic growth. Think of all the jobs created in the sock industry and the shops! They would be better off. Ah, but you, the consumer, would be poorer. You would have as many socks as before but less money. This is the broken window fallacy, explained by Frédéric Bastiat nearly 200 years ago: going around breaking windows makes work for glaziers but does not create growth.

Net Zero is a project to replace an existing set of technologies with another set of technologies: power stations with wind farms, petrol cars with electric cars, gas boilers with heat pumps, plane trips in the sun with caravan trips in the rain, cows with lentils. The output from these technologies is intended to be the same: electricity, transport, holidays, food.

Suppose, for the sake of argument, that these new technologies and activities require exactly as much money to build and run as the old ones. What have you gained? Less than nothing because you have retired existing devices early, losing the latter half of their lives. It would be like replacing all the socks in your drawers long before they needed replacing but with identical socks. Does that make you richer? No, poorer.

If the new technologies are more efficient than the old ones, fine. LED light bulbs use about 90% less electricity than incandescent bulbs did. So yes, it does make sense to throw out your old bulbs before they expire, stranding those assets, to save electricity and money. Is the same true of a wind farm or a heat pump? No, they are demonstrably more expensive and less reliable at producing the same electricity than the devices they are replacing. They are worse, not better.

That’s why they need subsidies. We have spent £100 billion so far subsidising “green” energy in the past few decades, money we could have spent on something else: tax cuts, for example. So, the green energy transition has made us poorer, not richer. It has given us the most expensive electricity in the entire developed world.

It has made some people richer, for sure. Dale Vince, an eco-tycoon, has made a fortune out of building unreliable energy. So have lots of fat cats in the City of London, lots of big landowners in the Highlands of Scotland, and lots of manufacturers in China. I have lost count of the number of times wealthy people have told me I am wrong to criticise the unreliable energy industry because “my son Torquil’s fund has done rather well.” Net Zero crony capitalism is efficient at one thing: transferring money from poor people to rich people.

This government has forgotten that its job is not to champion the interests of producers, but consumers. So did the last government, though Kemi Badenoch’s speech on Tuesday showed a welcome return to thinking about consumers. Electricity is not an end in itself; it is a means to an end, an essential input allowing us to do the one and only thing that does, really does, represent growth—achieving more output with less input. Right now, the Net Zero transition is doing the very opposite."

Repealing Only Two Biden-Era Tax Credits Could Cement Permanent Pro-Growth Tax Cuts

By Adam N. Michel and Joshua Loucks of Cato.

"When Congress passed the Inflation Reduction Act (IRA), it was told the new energy tax credits would cost about $270 billion over a decade. Revised official estimates put the cost at multiple times that amount, as much as $786 billion. But congressional scorekeepers may still be getting the long-term cost of the IRA energy subsidies wrong, and fixing this mistake is key to unlocking permanent pro-growth tax cuts.

A new Cato report by Travis Fisher and Joshua Loucks (one of the authors here) argues that two of the most expensive IRA tax credits could be functionally unlimited subsidies, costing as much as $180 billion annually by 2050. With no expiration in sight, the total cost of the IRA green energy subsidies could accumulate to as much as $4.7 trillion by the middle of the century.

These infinite tax credits can offset permanent extensions to the most pro-growth features of the Tax Cuts and Jobs Act of 2017, which largely expires at the end of the year. Without bending long-standing budget rules, Congress must ensure that any permanent tax cuts outside the 10-year budget window are offset with spending cuts or higher revenue. This rule is why tax cuts are often temporary.

Repealing two of the IRA’s open-ended tax credits could more than offset the revenue loss from cutting the corporate tax rate to 15 percent, restoring R&D expensing, fixing the interest deduction limit, and enacting full expensing.

Budget Scorekeepers Blew It; Fixing Their Mistake Is Critical

The Joint Committee on Taxation (JCT) badly underestimated the cost of the IRA energy tax subsidies. It has since revised many of the original estimates to more accurately reflect the consensus estimates that put the 10-year cost of the IRA at roughly $1 trillion. Government scorekeepers are very likely still not fully incorporating the long-run, uncapped costs of the production tax credit (PTC) and the investment tax credit (ITC). 

As Fisher has repeatedly pointed out, the ITC and PTC are functionally uncapped because they are not time-limited, like most other temporary tax credits. The ITC and PTC only phase down when the level of greenhouse gas (GHG) emissions from the electricity sector is reduced by 75 percent of the 2022 baseline. 

Figure 1 is adapted from Fisher and Loucks’ recent report. It shows GHG projections from the Energy Information Administration, which show that electricity-sector emissions will remain far above the IRA’s target of a 75 percent reduction in the 2022 level through 2050. The GHG phasedown trigger is not met even in the scenario with a high uptake of IRA subsidies.

The Treasury Department’s most recent tax expenditure estimates explicitly state they assume the subsidies will begin to phase out as early as 2034. The JCT could have made a similar mistake in its original score of the IRA. Had the cost estimates appropriately accounted for both the magnitude and the open-ended credits, the bill could not have passed using the budget reconciliation process, which requires that legislation not increase the deficit beyond a 10-year window.

A Golden Opportunity for Pro-Growth Reform

As Republicans work to repeal or revise the IRA credits in reconciliation, it is critical that the JCT properly accounts for the full cost of the credits outside the budget window. By 2034, the ITC and PTC alone will cost about $130 billion per year—enough to permanently finance four of the most pro-growth tax cuts under consideration. 

Figure 2 compares Cato’s $130 billion cost estimate for the uncapped energy credits with the Tax Foundation’s static estimates of four pro-growth tax cuts that reduce revenue by approximately $113 billion in 2034. The four changes are (1) cutting the corporate tax rate from 21 percent to 15 percent, (2) renewing full investment expensing, (3) returning the interest limitation to its less restrictive definition, and (4) allowing full research spending deductions.

The PTC and ITC are projected to continue to expand past 2034. In 2050, the two credits will cost as much as $180 billion annually.

Other pro-growth reforms, such as neutral cost recovery, have increasing static fiscal costs outside the budget window. Although neutral cost recovery is not included in our estimates, the escalating open-ended cost of the PTC, ITC, and other IRA provisions, such as the advanced manufacturing credit sub-provisions for critical minerals, would more than pay for neutral cost recovery even in the years beyond the budget window.

The IRA’s unlimited tax credits are a fiscal time bomb, costing between $2.04 trillion and $4.67 trillion by 2050. They represent an unchecked expansion of government spending with no clear end date. Policymakers have a rare opportunity to repeal these costly provisions and use the savings to fund permanent, pro-growth tax reform that benefits the entire economy—not just politically favored industries. Getting the scoring right is critical."