Inflation Reduction Bill Uses Public Finance to Stoke Energy Investment

A surprise deal by Democrats on tax reform, climate investments, and health care features new ways of using public finance for clean energy.

The Inflation Reduction Act (IRA) breathed new life last week into President Joe Biden’s climate agenda, which had been pronounced dead earlier in July. A variety of tax credits would help consumers buy technologies that are less prone to price spikes. One set of rebates would encourage drivers to buy electric cars. Another would help households install heat pumps, as Japan did after the 1970s oil crisis.

Beyond tax incentives, the bill directs new streams of public finance to rally private energy investment. It gives authority to the Department of Energy to issue up to $250 billion in loans, and creates a $27 billion national green bank.

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That public financing is especially timely as central banks launch markets into an era of tighter money. Sen. Joe Manchin (D-WV), the holdout vote on past versions of the package, has emphasized that the bill is about curbing inflation.

But the unprecedented scope of public financing also makes the legislation well suited to helping the renewable-energy sector withstand investment-killing rate hikes. “In solar, wind, and other forms of clean energy, most of the investment is up-front, so projects live or die on interest rates,” said Justin Guay, a philanthropic adviser on global climate issues.

AS MUCH AS $250 BILLION in loans and guarantees for energy infrastructure would flow through the Department of Energy’s Loan Programs Office. That number not only multiplies the department’s investment muscle—the LPO is currently working with around $40 billion in lending authority—but also allows the agency to stretch each public dollar much further. The new $250 billion loan authority would be funded with just $5 billion in appropriations, or a leverage ratio of 50-to-1.

That generous limit on lending contrasts with President Obama’s rescue package in 2009, which relied on the…

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