Key Inflation Reduction Act and energy transition considerations under Trump 2.0

With the outcome of the US presidential election now decided, we revisit our pre-election analysis on the potential risks to the Inflation Reduction Act (IRA) under a second Trump administration, as well as broader potential for regulatory change that could otherwise support the energy transition. As we wrote then, a wholesale repeal of the IRA is still highly unlikely, however, that does not rule out modifications to its current form and scope.

The confirmed Republican trifecta makes avenues for potential changes to the IRA more accessible, including through a Congressional Review Act (CRA) resolution or through a new budget reconciliation bill [1], than otherwise would have been the case with a divided Congress. However, for the IRA such changes are still likely to be surgical to certain provisions rather than an outright, full repeal given the concentration of various investments in traditional Republican and swing states. As the Affordable Care Act demonstrates, it is difficult to repeal even unpopular law, but that does not exclude an evolution from its original form.

While the IRA is a driving force behind the energy transition in the US, the regulatory environment is also key to supporting the transition. Looking to Trump’s first administration can provide a useful guide to potential paths of action under a second term. That playbook is likely to include attempts to remove key pieces of environmental regulation through a repeal and replace pathway, including regulation related to power plant and vehicle emissions. During Trump 1.0 such attempts were ultimately not always successful, often resulted in a lengthy litigation process and added to uncertainty for industry participants.

[1] Budget reconciliation bills are related to spending, revenue, and federal debt limits. In practice, there may be one such bill per year. Recent examples of use of budget reconciliation have been Tax Cut and Jobs Act and the Inflation Reduction Act. Reconciliation bills, like a Congressional Review Act joint resolution, cannot be filibustered.

A Republican trifecta would set the new administration up for greater ease of use of the CRA. A joint resolution of approval requires both chambers of Congress’s approval – with a simple majority – before it moves onto the president, who can veto the resolution. Indeed, the use of the CRA would not be new for Trump. His prior administration holds the record for use of the CRA with 16 administrative rules repealed. However, to date, the CRA has never been used to remove tax regulation. We note that the Biden administration was deliberate in its ordering of guidance releases to ensure foundational credits to the IRA would be protected from the CRA.

The table below lists recently released and in-progress IRA tax credit guidance and other notable energy-transition related regulations that could be subject to a CRA resolution, if it were to be utilized. The lookback period for the CRA is defined as 60 legislative/session days – and thus will not be definitively known ahead of the close of the current session. As such, we have included not only IRA guidance, but also select rulemakings with the potential to impact the energy transition beginning in early May. Various sources peg the date of start of the CRA lookback window from anywhere near Memorial Day to early August. Steve Scalise, the House majority leader, sent a letter to colleagues on November 6 stating that the lookback period for the CRA extends into August.

Vulnerability of some credits can also be linked to their estimated cost. The top three credit groupings ranked by estimated fiscal impact are the clean energy production credit, clean energy investment credit, and the grouping for clean vehicles (of which the largest contributor is the new clean vehicle credit). We flagged all three in our previous publication. The clean energy production tax credits (PTCs) and investment tax credits (ITCs) – sometimes referred to as technology neutral – appear vulnerable given that final guidance has yet to be released and the expense factor, which stems from the lack of defined phase out date (and thus higher potential fiscal impact). Currently, the phase out occurs in 2032, or whenever electricity GHG emissions are 25% below a 2022 baseline. Indeed, as written, the ITC and PTC would be potentially the longest-standing credits under the IRA. A change to this credit set could include limiting the timeframe of applicability.

Electric vehicles have been objects of Trump ire on the campaign trail, though his rhetoric softened once he received Elon Musk’s endorsement. They key role Elon Musk appears poised to play in the White House raised questions around the degree to which EV credits would be changed. In spite of that relationship, EVs still represent one of the largest fiscal revenue effects from the IRA. The Joint Committee on Taxation estimate from June 2023 estimates that modifying the new clean vehicle tax credit would yield 80 billion dollars in net savings between 2025-2032 with most of that fiscal impact driven by the New Clean Vehicle Credit (30D).

As we wrote previously, looking at previous attempts of IRA repeal can be helpful to understand what is at risk. The Limit, Save, Grow Act included elimination of the tax credit for qualified Commercial Clean Vehicle Credit (45W), the Used Clean Vehicle Credit (25E), and put limits on the New Clean Vehicle Credit (30D). Limits to the New Clean Vehicle Credit (30D) could include closing the leasing exemption, tightening foreign participation. Currently the New Clean Vehicle Credit (30D) includes exceptions to the foreign entity of concern restrictions in the form of licensing deals and joint ventures with less than 25% ownership. In July a CRA joint resolution passed to effectively remove the final rules for the New Clean Vehicle Credit (30D) and Used Clean Vehicle Credit (25E) citing the current benefit potential to foreign entities of concern, including China.

The New Clean Vehicle Credit (30D) and Used Clean Vehicle Credit (25E) credits detailed above as well as the Advanced Manufacturing Tax Credit (45X) saw legislative action this year in an effort to minimize the potential benefits to foreign entities of concern. Those three pillars were not explicitly delineated in the text of the IRA. Given the recent overturn of the Chevron doctrine, that qualification could be considered outside of the scope for agency interpretation.

Anti-China reliance was a mainstay of the Trump campaign. The 30D and 25E credits detailed above as well as the Advanced Manufacturing Tax Credit (45X) saw legislative action this year in an effort to minimize the potential benefits to foreign entities of concern. The bipartisan, bicameral American Tax Dollars for American Solar Manufacturing Act seeks to ensure foreign entities of concern cannot realize the benefits of the credit. The Protecting American Advanced Manufacturing Act and H.R.9338 similarly sought to limit the benefits to foreign entities of concern. Given the Trump administration’s focus on domestic manufacturing, a continued emphasis on prioritizing domestic benefit appears likely.

Power plant emissions rules

Trump could attempt to repeal and replace the Biden-era clean power plant rules, which have become known as the Clean Power Plant II rules. Indeed, this pattern has taken hold over the past several administrations in respect to power plant emissions rule. Previously, the Trump administration worked to replace the Obama administration’s Clean Power Plant rules by putting forward the “Affordable Clean Energy” (ACE) rule. Like he did with the Obama-era rules, Trump could sign an executive order to review the rule upon entering office.

The Clean Power Plant II rules, were finalized this April, but are still currently being litigated. The Biden-era rules, while repealing the ACE, introduced more sweeping changes to emissions regulation including the use of carbon capture. As we wrote late last year, the Biden-era rule was explicitly written to regulate plants only “within the fence line” given the Obama-era rules were ultimately invalidated as being too sweeping for regulating emissions across all the power industry and thereby in the view of the Supreme Court exceeding the EPA’s authority as an agency. Trump is likely to take a page out of his playbook from his first term, by proposing an alternative to the Clean Power Plant II rules in an attempt to remove them, though this process will be lengthy given its legislative nature.

Depending on the details of any new proposed regulatory replacement, the general result is likely to be to keep more thermal generation in the dispatch queue as compliance costs are likely not to be as high.

Vehicle emissions and efficiency regulation

The National Highway Traffic Safety Administration’s CAFE standards and EPA tailpipe emissions rules, which were rolled back under Trump’s first term, could also be at risk for repeal and replace rulemaking. The California waiver for new vehicle emissions can serve as a moderating impact on any such change. The Clean Air Act allows other states to adopt the California standard without EPA approval. Presently, 17 other states and the District of Columbia have adopted some of the California vehicle regulations. Notably, Trump did attempt to revoke the California waiver his last time in office. The repeal went through a lengthy litigation process. The EPA must approve each use of the California waiver, when the state wants to change or create new rules. California’s zero emission vehicle and truck standards still have not been granted a waiver, though the EPA can only reject those deemed “arbitrary and capricious” or without sufficient lead time to develop those technologies at “reasonable cost.”

Offshore wind had been a topic of particular campaign trail ire for Trump. Similar to Biden’s executive order effectively placing a moratorium on federal leases for onshore and offshore oil and gas, Trump could attempt a similar executive order effectively placing a moratorium on new federal offshore wind leases. While ultimately Biden did reinstate the leases after legal challenges, such action could push the clock back on development. Notably, the IRA itself does tie offshore and onshore wind leasing to new oil and gas leasing. In order for the Bureau of Ocean Energy Management to issue offshore wind leases, at least 60 million acres on the outer continental must have been offered for lease and one such lease executed in the previous year. That link was a concession to Senator Manchin to ensure the continuation of onshore and offshore oil and gas leases.