Avoiding Unduly Concentrated Clean Energy Markets

The IRS will need help to avoid unintended adverse effects in implementing the Inflation Reduction Act’s clean energy provisions.
September 19, 2022

Originally published by The Regulatory Review (theregreview.org)

The Biden Administration has a two-part strategy to mitigate climate change. In one part, it seeks to minimize the role of fossil fuels in the transportation sector by encouraging people to switch to electric vehicles. In the other part, it aims to minimize the role of fossil fuels in generating electricity by encouraging generating companies to switch from carbon dioxide emitting fossil fuels to carbon-free sources, such as solar and wind.

Both parts of this two-part strategy must be implemented simultaneously and aggressively to have the desired effect on the rapidly changing climate. But the successful implementation of this plan faces many serious obstacles. One of these derives ultimately from the fact that people who consume fossil fuels directly or indirectly have no incentive to use carbon-free sources because they do not bear the cost of the emissions caused by their use of fossil fuels.

The Biden Administration’s efforts to implement recent legislation seeking to overcome this obstacle have the potential to create serious antitrust problems. To minimize the risk of this unintended adverse effect, the Administration must take steps to draft clear regulations implementing the recently adopted Inflation Reduction Act (IRA).

Economists widely agree that the most efficient and effective way to overcome consumers’ lack of incentives to use carbon-free energy sources would be to use either a carbon tax or a cap-and-trade system to force those who account for carbon dioxide emissions to bear the cost of those emissions. Politicians are not willing, though, to implement a system for pricing carbon emissions. The public is also not willing to pay the resulting large increases in the cost of gasoline, other petroleum products, electricity, and the many products and services that depend on those sources of energy.

The Biden Administration persuaded the U.S. Congress to implement a second-best solution through IRA by including provisions in this new law that provide large subsidies to electric vehicles and carbon-free sources of electricity. These provisions have the potential to cause major antitrust problems, however, because of the location of the raw materials that are required to implement the Biden Administration’s climate mitigation plan and due to the multi-step chain of production and distribution of those raw materials.

Clean energy technologies, such as electric cars, solar, and wind, are far more mineral-intensive than fossil fuel technologies. To achieve the Biden Administration’s climate goals, the United States must significantly increase the mining and production of eleven key minerals. The required increases are enormous. Thus, for instance, the demand for graphite, cobalt, and lithium will need to increase by 500 percent.

The United States accounts for only a small fraction of the mining and production of the minerals required to make the transition to carbon-free sources of energy. The primary sources are located in China, Brazil, Mozambique, Congo, Russia, Vietnam, Australia, Chile, and Argentina. The combination of converting raw materials into usable forms and distributing them to the United States depends on a complicated chain of distribution that is currently dominated by Chinese companies. Those unpleasant realities do not fit well with the climate change provisions of the IRA.

To persuade Congress and the public to support the large subsidies for clean energy in the IRA, President Joseph R. Biden had to characterize the transition to clean energy as a source of many new high-paying jobs in the United States.

Consistent with that characterization, Congress included three types of conditions on eligibility for each of the many subsidies in the IRA. First, a subsidy recipient must satisfy statutory conditions that require every contractor and subcontractor to pay the prevailing wage. Second, a recipient must maintain training and apprenticeship programs. Finally, a recipient must certify that every product, service, and component it produces or sells meets a specified minimum percentage of domestic content embedded in its total cost, including mining costs. In addition, no product component can come from a “foreign entity of concern,” a provision that targets the many components of clean energy equipment that come from Chinese companies.

The stringency of each condition varies depending on the product or service to be subsidized and the time when the applicant creates or sells the product or service. Since the new subsidies are contained in amendments to the Internal Revenue Code, the Internal Revenue Service (IRS) has the responsibility to issue, interpret, and implement the rules that determine eligibility for the subsidies. That task is extraordinarily difficult, given the multiple inconsistent goals that the subsidies are intended to advance and the reality that most of the cost of the raw materials required to implement the transition from fossil fuels to clean energy necessarily will be incurred in other countries.

The clean energy provisions of the IRA may have the unintended adverse effect of creating a clean energy market that is dominated by just a few large firms with intolerably high shares of the relevant markets for the products and services that are potentially eligible for the generous subsidies in the IRA. If the IRS drafts, interprets, and implements rules that are complicated and difficult to satisfy, only a few large firms are likely to have the expertise required to obtain the subsidies needed to enter the markets for clean energy products or services. The IRS can reduce that unintended adverse effect of the IRA by drafting, interpreting, and implementing rules that are relatively easy to understand and easy to implement.

The IRS will need help in the process of drafting, interpreting, and implementing rules that satisfy the IRA conditions for eligibility and that minimize the risk of unintentionally creating an unduly concentrated market for clean energy goods and services. The Federal Trade Commission (FTC) and the Antitrust Division of the U.S. Department of Justice should become proactive in providing that assistance.

The United States has experienced and overcome problems of this type in the recent past. The Affordable Care Act (ACA) included provisions that encouraged the formation of accountable care organizations (ACOs)—large organizations that have the potential to improve the quality of health care and to reduce the cost of health care by taking advantage of the economies of scale and scope that are potentially available in the process of providing health care services. The FTC and the Justice Department’s Antitrust Division were appropriately concerned that the IRS might unintentionally create unduly concentrated health care markets through the rules that it issued and interpreted to implement the ACO provisions of the ACA. Both the FTC and the Antitrust Division reduced that risk by assisting the IRS and other agencies in the process of drafting and interpreting the rules required to implement the ACO provisions of the ACA.

The FTC and the Antitrust Division should undertake to play a similar role by helping the IRS draft and interpret rules to implement the IRA’s clean energy provisions. In this way, the Biden Administration can reduce the risk that these provisions will have the unintended adverse effect of creating unduly concentrated markets for the provision of clean energy products and services.