Potential risks to the Inflation Reduction Act under a second Trump administration

The November election is weeks away. With Trump heralding the Inflation Reduction Act (IRA) as the “Green New Scam” and a line of related rhetoric, there has been some concern about the risk to that piece of legislation and the broader energy transition under a potential Trump administration. Yet, figures tracking actual investment to date in both clean energy and transportation - from both the federal government in terms of credits and private investment – appear to indicate the legislation’s early (and substantial) success. Since the introduction of the IRA, nearly half a trillion dollars have been invested per the MIT-CEEPR Clean Investment Monitor (Figure 1). To be fair, other federal-level pieces of legislation such as the Bipartisan Infrastructure Law are also supporting the energy transition. But, the IRA and many of its tax-credit-linked opportunities are at the scale to be potentially transformative to clean energy and technology, especially as they are meant to encourage private spending. In the following, we will look at the areas of that legislation most at risk in the event there is a change of administration.

A considerable number of clean energy projects, including manufacturing projects that tend to support permanent job creation, are concentrated in traditionally Republican and swing states. The IRA is thought of as highly partisan, and indeed not a single Republican voted for it as it was passed through a reconciliation process. However, Republican legislators must consider their constituents and their economic interests when deciding its fate. That consideration is encapsulated by a letter signed by 18 House Republicans, which was sent to House Speaker Mike Johnson in early August with the request not to repeal the IRA credits. In it, they wrote, “Prematurely repealing energy tax credits, particularly those which were used to justify investments that already broke ground, would undermine private investments and stop development that is already ongoing. A full repeal would create a worst-case scenario where we would have spent billions of taxpayer dollars and received next to nothing in return.” That letter stands out as quite important leading up to the election. First, while that number includes public signatories, there may be more within the party that see the IRA’s benefits but do not want to publicly stand in favor of the legislation. Second, it demonstrates how difficult it potentially would be to achieve repeal with such a contingent of Republican legislators backing the Act in the House, which currently only has an eight-seat Republican majority and is not anticipated to have a significant majority post election.

In reality, the future of the IRA is unlikely to be a zero-sum game in which the act continues to exist or is repealed entirely following the elections. We anticipate that a Harris administration would largely represent a continuation of the priorities under the Biden administration. Even under a Trump win, a Republican majority in both the House and Senate would be required for an IRA repeal. Polls are currently showing a slim majority in the Senate and it is unclear which way the House will go. In the absence of any clear majority, a significant amount of coalition-building and concession-trading would be necessary for the possibility of repeal. As the Affordable Care Act (which survived dozens of repeal bills and challenges in the Supreme Court) demonstrated: once enacted, legislation is difficult to fully repeal. Generally speaking, tax credits (one of the hallmarks of the IRA) are harder to rescind than grants or loans, as they do not require specific appropriations, but rather reflect a change to tax law. The credits are meant to encourage private spending, which appears to be working at significant scale. However, this does not rule out certain provisions within the Act from changing form. Instead, the real risks to the IRA are around the excision of certain provisions. This could happen through tightening the qualifications, the use of executive action, or through use of the Congressional Review Act (CRA)[1], which effectively allows for revisions of guidance that was finalized too close to the end of the current legislative session. The repeal of certain credits could occur through legislation, though even selective repeal would require enough votes in Congress to pass. With slim projected majorities in either chamber, such repeal would still be difficult for all but the most vulnerable credits as legislators seek to protect investments benefitting their constituents. We outline some of the major risk considerations to the Act below.

A key priority under a second Trump administration will be an extension of the tax cuts introduced through the Tax Cuts and Jobs Act of 2017 that are set to expire at the end of 2025. Potential shifts in the IRA should be considered in the context of funding the extension of those cuts. At an estimated USD 4.6 trillion according to the Congressional Budget Office (CBO) for a full extension, the search for net cost reductions elsewhere will be at the fore. Though not all tax cuts may be extended, the scale of what needs to be “paid” for is quite large.

[1] The Congressional Review Act requires agencies to submit proposed rules to both houses of Congress and the Comptroller General within the US Government Accountability Office before they can go into effect. Major rules require 60 session days after the latter of receipt by Congress or publication in the federal register before they can go into effect. Given these are legislative days and the adjournment date for Congress is as of yet unknown, a May timeframe for rulemaking could make those potentially subject to the CRA. If Congress authorizes a resolution of disapproval, which requires both houses’ approval it then moves onto the president, who can then either sign the joint resolution for approval or veto it . In the event of a veto, Congress could override it with a two-thirds majority. If the joint resolution is passed, a substantially similar rule cannot later be enacted by that agency.

Prior attempts at repeal

Trump’s anti-electric vehicle (EV) rhetoric, in spite of its recent softening post his endorsement by Elon Musk, underscores the potential risk to EV-related provisions, especially in the context of his (and the broader Republican) stance on anti-China reliance. That anti-China rhetoric has also echoed in Trump’s numerous promises of tariffs on Chinese goods if he were to return to office.

In-progress changes focus on EVs and the prioritization of domestic content at the expense of foreign entities of concern

There are several in-progress attempts to change various provisions within the IRA. Though their timing so late in the legislative sessions makes them unlikely to be enacted, they do underscore which provisions may be at risk. A joint resolution under the CRA was passed in July to effectively remove the final rules for the New Clean Vehicle Credit 30D and Used Clean Vehicle Credit 25E. While that resolution is likely to be vetoed by President Biden, it does point to an area that currently has sufficient momentum to be put back on the agenda: sourcing requirements related to foreign entities of concern. For the 30D credit specifically, there are currently exceptions to the foreign entity of concern restrictions in the form of licensing deals and joint ventures with less than 25% ownership. However, a Trump administration could make those FEOC parameters stricter. Additionally, the lease exemption as it pertains to domestic content and manufacturing could be eliminated, given it is currently less restrictive than the 30D clean vehicle credit.

The 45X credit: Ensuring restrictions against benefits to foreign entities of concern

The 45X Advanced Manufacturing Production Credit is currently available to any entity in the United States. A bipartisan group of senators recently brought forth the American Tax Dollars for American Solar Manufacturing Act ensuring foreign entities of concern would not be able to benefit from the credit. Despite its name, the bill would have broader applicability to technologies relevant to the 45X credit, not just solar. The Protecting American Advanced Manufacturing Act and H.R.9338 also sought to limit the use of the Advanced Manufacturing credit by foreign entities of concern. Given the numerous attempts to delineate the entities that qualify for the Advanced Manufacturing Production Credit, a future refinement to prohibit its applicability to foreign entities of concern could be likely.

Other IRA elements

In addition, better defining – and hereby accelerating – the expiration date for what are often referred to as the technology-neutral tax credits (Clean Energy Production Tax Credit, Clean Energy Investment Tax Credit - 45Y, 48E) could also be on the table under a new administration. The credits, which take effect starting in 2025, phase out in 2032, or whenever electricity GHG emissions are 25% below a 2022 baseline. Such an undefined limit (and thus higher cost) is likely to come under scrutiny. However, even a change to that timeline would not rule out any future extensions, as had previously been the case with extensions to credits for wind and solar. However, we acknowledge that eleventh-hour extensions dilute the certainty that tax credit is meant to provide to developers seeking to fund their activities.

We note that traditional energy companies, especially the vertically integrated majors and some of the largest US independent exploration and producers also stand to benefit from the IRA, particularly with regards to their large-scale potential investments in carbon capture, direct air capture, renewable fuels and blue hydrogen.

Late-in-session rulemaking and use of the CRA

In a broader sense, the recent overturn of the Chevron doctrine could impact IRA guidance. This doctrine has formed the basis of judicial deference to federal agency interpretation of ambiguous law for the past 40 years. To the extent that provisions within IRA guidance were not explicitly codified within the language of the IRA itself, they could be subject to change. For example, the Clean Hydrogen Production Tax Credit (45V) as of this writing still has no finalized guidance. Its “three pillars” – additionality, temporal matching, and deliverability – governing a project’s qualification, were not specifically delineated in the text of the IRA.

Additionally, any new rules published in the Federal Register beginning in late May – though a definitive date will not be known until the current session is adjourned – could be excised under the auspices of the CRA. For example, the clean hydrogen finalized rules that Treasury has indicated will be published ahead of the close of the year would fall firmly in the timeline for potential review. In Table 1, we have included credits that had updates or guidance finalized within the potential window of time that falls under the Congressional Review Act.

IRA tax credits can be critical to help projects come online. Indeed, if a project qualifying for the investment tax credit also meets the requirement for prevailing wage, apprenticeship, domestic content, and the energy community bonus, up to 50% of its capital could come from tax credits. In such cases, certainty around the longevity of the credits is key. Changes to tax law under Republican control have typically been prospective, rather than retroactive. Projects could be grandfathered in providing they meet requirements for that relief, such as binding contracts. In some cases, however, that uncertainty could translate itself into projects waiting to see the results of the election rather than pursuing development. Particularly across technologies or in groupings that have not seen as significant a degree of clarity.

In conclusion, the IRA is largely expected to survive even under a change in administration. A full repeal is highly unlikely. Not only do the projections for the current composition of the Senate and House or Representatives appear to rule out a clear and decisive majority in either chamber, but many of the tax credits are currently benefiting traditional Republican and swing states. Additionally, changes to tax law tend to be more insulated from executive action than other regulations. A change of administration, however, could attempt to change tax credit provisions that have yet to be finalized and are still in progress. This avenue is available through the Congressional Review Act. The end of the Chevron doctrine could lead to attempts to change the interpretation of certain provisions through litigation.