Diving further into the Inflation Reduction Act: Part One
The first of two hardcore wonk-dives with Jesse Jenkins.
In this episode, professor and energy expert Jesse Jenkins returns to the pod to dig further into the details of the Inflation Reduction Act. We discuss what the models can and can't tell us, the ugly fossil-fuel leases embedded in the bill, and what to think about the carbon capture provisions.
Full transcript of Volts podcast featuring Jesse Jenkins, August 17, 2022
Last week, I hosted a podcast discussion with Princeton professor Jesse Jenkins and UC-Santa Barbara professor Leah Stokes about the climate and energy provisions in the Inflation Reduction Act. It proved quite popular! (If you haven't listened yet I highly recommend listening to it before this one.)
Among other things, we discussed the modeling of the bill done by Jenkins’ shop. In the days following, I noticed several questions popping up via email and social media about that modeling — how certain or uncertain it was, what it included and left out, how it treated various trends and technologies, and so forth.
It seems like people still have lots of questions and objections that weren't answered in the original pod, so I had the idea of having Jenkins back on to get deeper into the modeling. Then I solicited questions on Twitter. It prompted a veritable flood: questions about leases, about carbon capture and sequestration, about the EV tax credits, about heat pumps, and more. There is apparently enormous appetite for further information.
With this bushel of questions and objections in hand, I invited Jenkins back. We ended up talking for so long, about so many parts of the bill, that I have broken this pod up into two episodes.
In this one, we discuss the in’s and out’s of Jenkins’ modeling, the fossil-fuel leases attached to the bill, the subsidies for carbon capture and sequestration in the bill, and what how the bill affects environmental justice.
It's nerdy y'all. Buckle up.
With no further ado, Jesse Jenkins, welcome back to Volts. Thanks for coming again.
I feel like this is where I'm supposed to say, “Yeehaw! Let’s go!”
Let's start with the modeling itself. The bill was released alongside three separate sets of modeling: from your shop, from Rhodium, and from Energy Innovation. Each showed generally that this bill will lead to about 40 percent reductions in US greenhouse gas emissions by 2030, which is at least within striking distance of our stated Paris target.
Most people don't know how modeling works, what goes into it, or how to treat the results. I think some people maybe felt a little bullied by this idea that you have to just accept the modeling. So let's try to put the modeling in context. When your model says this is going to lead to 40 percent reduction by 2030, how certain is that? How firmly should we grasp on to that result?
If anybody could predict the future perfectly, I’d probably be in a different line of work and making a lot more money than I do here (not that this is a bad job).
Models are an attempt to understand, in an internally consistent manner, how changes in a complex system could play out. What's interesting is that three different modeling groups, with three models that have very different underlying structures and methods, and three different sets of expert judgments about how to represent each of these policies in our models, are all landing in a similar place – which builds a lot more confidence in the approximate order-of-magnitude impact of the bill in aggregate.
There's certainly a lot of uncertainty around any of these estimates. We're doing our best to rapidly assess a complicated bill, reflect a complicated energy system that you can't perfectly capture in a model, then communicate those findings in a timely manner that can actually be useful for decisionmaking, not just something that comes out a year later in an obscure academic journal. As useful and important as that peer review process is (and this is definitely not peer reviewed work) it is important to be approximately right in real time and then to refine our analysis as we go, and that's exactly what we have been trying to do with the REPEAT project.
In April of 2021, we set out to build a suite of tools on the back of the modeling toolkit that we developed for the Net-Zero America study at Princeton – which itself was a 2+ year effort with a dozen different researchers – and to use that suite of tools to be able to quickly and repeatedly analyze federal legislation and executive actions as they're being proposed in as close to real time as we can. A sort of Congressional Budget Office for climate and energy impacts (we're not official, so don't cite us as that).
CBO estimates the budgetary impact of bills not after they pass, usually, but in real time. As the bill is introduced and debated and amended and eventually voted on, they're trying to get a handle on the impact of that bill on the economy and on revenues and expenditures. Obviously that's approximate work too, but it's better than having no information available or just letting lobbyists or corporate interests or others lob into the media their views on what the bill will or won't do.
Our attempt here is to provide an independent, credible set of estimates based on a strong set of modeling tools – that are certainly imprecise, for two reasons. One, we can't perfectly capture how the real world works in a model. And two, we have to make some judgment calls and guesses about uncertain parameters that we use to set up the models, which are always wrong as well, to some degree.
Forty percent is the central case. How wide are those error bars? How big of an uncertainty are we looking at? Which trends could conceivably turn out much better or worse than you estimate, and what effects would that have?
It's helpful to break down the different sources of uncertainty. I should say, we have not published our uncertainty analysis yet. We’re actually refreshing all of our analysis at the REPEAT Project to bring it up to date to 2022 assumptions and conditions, because we started this in 2021 and we wanted to keep everything internally consistent so you could compare between the Inflation Reduction Act and the Build Back Better Act and it wasn't going to be apples and oranges.
Now we have to refresh and rerun everything. So in addition to updating the assumptions, everywhere we had to make a judgment call on a policy’s impact, we want to do a reliably pessimistic reading of those policies, a reliably optimistic reading of those policies, and a midpoint in between.
We probably will have more downside risk than upside risk. There are probably more ways this goes wrong than goes better than we expected. But there are ways that it can go better than we modeled, and there are whole policies that we ignored that have big impacts. So that's the uncertainty around what this policy will actually do.
If you look at Energy Innovation, which is one of the other three groups that's been looking at the bill and modeling it with a totally different modeling suite, that's exactly the kind of analysis that they have done consistently. They basically find in their work a plus or minus 2 percentage points difference compared to 2005 emissions levels, or roughly 150-200 million tons variation around their central estimate. That results from their uncertainty around the implementation of the bills.
That feels about like what I would expect as well, and based on previous tuning runs that we did, I would say plus or minus 150-200 million tons on either side of our central estimate, which was about a billion tons. So 15 percent plus or minus margin of error in absolute terms, or maybe a couple of percentage points of 2005 levels, if you want to put it in those terms.
Behind those assumptions or judgments about what a policy will do, don’t you also have a whole set of judgments and assessments about how the economy is going to do regardless? Of population growth, GDP growth, etc.?
That's exactly the second source of uncertainty, what I would consider external uncertainties beyond the bill itself: what the heck is going on in the world over the next 8-15 years? If you look at Rhodium Group, the other group that's done this analysis, that's the type of analysis that they've done. So when they present uncertainty bars, it's a different kind of uncertainty bar than Energy Innovation presents.
Energy Innovation is modeling a single set of assumptions about technology costs and macroeconomic conditions and fuel prices, then varying the potential impact of implementation of the policies in the Inflation Reduction Act or the other bills that they've assessed before. What Rhodium has done is assessed under a single policy condition – current policy or the Inflation Reduction Act – the variation and outcomes driven by uncertainty around fuel prices, economic growth, and clean energy technology costs (those are the primary categories that they look at). That drives a variation of about 6 percentage points of 2005 levels in their modeling. That's how they get from 31 to 44 percent.
So there's a lot of external uncertainty, a lot of stuff that isn't about this bill that we can't control, that could come in and change the trajectory for the United States – like a coronavirus pandemic, or the land war in Europe, or a surge or a drop in fossil energy prices. Those are all so hard to predict. Rhodium tries to span that range and finds it’s actually quite significant. So I would add some additional uncertainty around those things.
What does the apocalyptic scenario look like, if both sources of uncertainty break for the worse? And similarly, what does it look like if everything goes right?
It would be a condition in which oil and gas prices are very low; clean energy technology costs stop progressing and falling; newer solutions like carbon capture, hydrogen, or advanced nuclear just never get off the ground; consumer adoption of electric vehicles or heat pumps becomes really slow and mired in distrust or politicization, like it becomes a cultural touchpoint and half the country simply won't buy it even though it pays dividends; there's no ability to expand transmission lines because every single one is fought to the death; those kinds of things. That would be the aggregate worst-case scenario.
If you add all those things up, maybe we're talking about on the order of 30-ish percent below 2005 levels. But if you were to do that without this policy, we probably would be basically at today's emissions levels. We wouldn't really be seeing any progress made in that kind of condition either, maybe a little bit lower.
The worst case in Rhodium Group’s analysis just for the external conditions is a 24 percent reduction below 2005 under current policies; that's about 5.2 billion tons of annual emissions in 2030. Their worst case on the Inflation Reduction Act is 31 percent reduction; that's about 4.7 billion. So that's maybe a half billion tons of emissions reductions from the bill. Maybe it's a little less than that if you also throw in the bad policy implementation environment as well.
That's a big error bar. But that's also like if you roll the dice six times and you need to roll a one every time. The odds of that are really low. And many of these things are uncorrelated, so I would put the probability of all of the worst case stuff happening at very low.
Then there's also the upside, which is that all the best things happen.
When we talk about the best things happening, fossil fuel prices will be high, and that’s what will help renewable energy?
While demand for oil and gas is falling in the United States and Europe, which would normally drive prices lower, maybe oil and gas companies look at the medium-term outlook and they say, “We’ve got to invest in development of a project; there's risk there. It's going to take six or seven years to come to production, and then I need to know I can sell that oil for 10 or 20 years to make my money back. I don't really like the looks of the medium-term market environment, so I'm actually not going to bring those projects forward” – and then supply contracts, and that brings prices back up.
That's basically what we're seeing with US refineries already. No one has invested any significant capital in a US oil refinery in a couple of decades, because they just don't see a lot of long-term demand there. They're trying to sweat their current assets as long as they can, but they don't really want to spend billions of dollars on an oil refinery right now, because they don't think there's much demand for their product in the 2030s. So that could lead to higher prices, that ultimate equilibrium in the oil and gas markets.
Then let's assume wind, solar, CCS, nuclear, hydrogen, clean vehicles, sustainable aviation fuels, and all those things really are catalyzed by the set of innovation and industrial policies and market deployment support in the Inflation Reduction Act, the infrastructure law, and elsewhere in the world, and that the fact that we've now made clean energy cheaper than fossil fuels for everyone, for businesses and households and utilities, drives a feedback loop that leads to more and more adoption and more and more policy ambition over time at all levels of government. Now you're in the best-case scenario.
That's plausible. That could happen too. Again, maybe not everything, all those things I just listed all at once – but some of them could certainly happen and I would be willing to bet some of those feedback loops definitely will happen.
Before we move on from modeling, one other question. We remember there was $90 billion in the Obama stimulus bill for clean energy, and over the last decade we have seen the fairly extraordinary effects that that investment had. There were lots of other factors involved, but it clearly drove prices down and created a booming US market for those technologies it invested in. Were people modeling that when it came out? Is there any way to look back and compare what the models predicted that would do vs. what it did?
I'm not aware of anyone at the time who tried to model the impact of the Recovery Act funding. There were a lot of efforts to model the impact of the cap and trade provisions of the Waxman-Markey bill. The EIA modeled some of the federal renewable portfolio standard (RPS) policies. But I don't know that anybody tried to model the Recovery Act as a climate policy per se at the time, because it wasn't really seen that way.
As much as I am a huge proponent of the Recovery Act and its innovation, investment, and industrial policy-centered approach to energy policy – which is what we see here in the Inflation Reduction Act as well – I think we sometimes over-credit the Recovery Act with impacts.
Remember, the Recovery Act was a couple years of funding. And that was really important for some things – like keeping Tesla from going bankrupt one of the several times they nearly went bankrupt; helping the auto industry come out of bankruptcy and launch some of their first electric vehicle offerings; other catalytic programs like that that certainly helped bend the curve in the right direction. It kept the wind and solar industries from collapsing due to lack of tax equity for a few years during the Great Recession. So it had a lot of near-term impacts, and also kept follow-on impacts.
But what we often think of as the impacts of that era are the declining cost of wind and solar and batteries – which, while the Recovery Act contributed to, it was one of many global policies that helped keep those technologies on a downward cost trajectory and on a growing scale up. So it wasn't just the US. It was probably moreso Europe on the demand side and China on the industrial policy side also building out those industries over the same decade after the Recovery Act. And collectively, those policy interventions globally drove down the cost of solar to a tenth of what it was when the Waxman-Markey bill died, wind to a third of the cost as it was then, and batteries a tenth of the cost, enabling cost-effective grid-scale storage and electric vehicles that are already at lifecycle ownership cost of parity over their first five years. That's just transformative.
Congressional staffers are quick to remind me that the tax credit extenders that came between the stimulus bill and our current situation actually deployed a larger amount of money than the stimulus bill did and probably deserve more credit.
That's right, and those were more sustained over time as well. The wind credit expired or nearly expired once or twice; the solar credit has been continuously in place since 2008.
Let's move on from modeling. Now I want to talk about the part of the bill that is generating the most angst and anguish among people on the broad left side of the spectrum, namely this stuff regarding oil and gas leasing. To begin with, lay out what Joe Manchin inserted into the bill around oil and gas leasing.
There are two specific provisions that Manchin insisted on including in the bill that are at the heart of all of this concern. The first is the specific approval of four offshore lease areas, three in the Gulf of Mexico and one in the Cook Inlet in Alaska, that were offered under the offshore leasing program under the Trump administration in 2017 and were subsequently rescinded – three by the Biden administration's Department of Interior, and one by a court order.
Rescinded on the basis of environmental concerns.
Exactly, and/or improper administration and accounting for those concerns. Administrative procedures were not appropriately followed in the case of the legal proceeding and then the Biden administration came in and said “we're redoing the analysis on this and we're taking them back.”
So those are four specific projects that’ll presumably be developed. They don't necessarily have to be; they could be purchased and then just rented.
This is just offering them for lease?
No, it's that the lease sale shall be concluded, and, in one case, the National Environmental Protection Act permit shall be approved.
These are four specific projects that could lead to further oil and gas development, that are negatively impacting four sets of communities who followed all due process to fight those projects for years and won, where the legislature, that should normally have nothing to do with specific implementation of a leasing law like this, let alone overriding a court order, is coming in and saying these four leases should move forward.
That is, frankly, bullshit. That is not how the separation of powers should work. That is not how due process should work. I'm mad about it, and I have nothing to do with those projects.
Is it so far from how things should work that it could be subsequently challenged legally?
That is a good question for a lawyer, and I imagine they are thinking about it right now. From my perspective – and I dabbled in one or two college courses on administrative law, so discredit this immediately – it seems like a violation of the separation of powers, but then again, the legislature can do a lot. We'll see. I would hope that they can be challenged.
And you think these four projects are likely to be developed.
I would assume that the reason they're in there is because the people who won those leases – and I actually don't know which companies those specifically are, I should go find that out – wanted them enough and donated enough to Senator Manchin that he was willing to go to bat specifically for those four leases. So I think the odds of them being developed are fairly high.
It's hard to see how Manchin has any connection to any of these.
It's really not benefiting West Virginia or any of his constituents, other than he can maybe justify it as “we need lower gas prices and this will somehow lower your prices seven years from now.” That's probably how he sleeps at night. But the reality is it benefits him politically because this is his donor base.
So in terms of politically noxious effects on the bill that Manchin did, this is the grossest and the worst and the least justifiable.
The second provision, which I think is much less impactful for a variety of reasons, effectively is designed to prevent the president, current or future, from ceasing all leases of federal oil and gas on federal lands or waters – something that environmental groups and environmental justice advocates and keep-it-in-the-ground climate advocates have been fighting for several years.
Biden paused them but had to resume them because of a court order, right?
Yeah, Biden ran on a pledge to have a moratorium on leasing. He made good on that pledge when he took office, and the DC Circuit ordered earlier this year that he had to resume those programs, that the justifications for the pause were improper and that he hadn't followed proper procedures to do that. He could not entirely eliminate leasing.
So lease sales have resumed. They're at a lower level than they were under the Trump administration. The other thing that the president has discretion to do is raise royalty and rental rates on leases, so he has also done that.
Do those apply to fossil fuels and to wind and solar leasing, or do they have different royalty rates?
Only to fossil fuels. He raised oil and gas lease rates specifically for offshore, maybe also onshore.
The provision says if you want to lease offshore wind, you have to have offered for lease in the last year at least 60 million acres of offshore oil and gas lease areas. And if you want to develop any rights of way on public lands (like BLM land or National Forest Service land) for wind or solar, you have to have previously offered at least 2 million acres of onshore oil and gas leases.
Those are offered for lease, not necessarily purchased. There are ways in which a savvy administration that is so inclined can certainly offer 60 million acres that are not particularly attractive that meet the letter of that law. I imagine that there will be efforts underway to do stuff like that to get around this.
But what it tries to do is basically deny a victory not yet truly won by environmental groups and climate campaigners and others to ban federal oil and gas leasing. It basically says sorry, you're not going to be able to do that if you want to have any renewable energy on public lands as well.
You have to offer some land for oil and gas leasing. But offering is different than actually being leased, and actually being leased is different than actually being developed. Tell us what we should expect about the actual development impact of this.
It's very hard to predict from that requirement. There's a certain amount of oil and gas demand; some of that'll be on public land, some on non-public federal land, some international, and it's hard to exactly predict where the breakdown of that will be.
But if you think directionally about the impact of the bill on US oil and gas development projects overall, there is no subsidy in this bill for oil and gas development. There is no explicit thumb on the scale for oil and gas development; there is a big thumb on the scale for all of the competition to oil and gas. The bill is massively subsidizing clean electricity that will displace natural gas and coal-fired power. It is massively subsidizing energy-efficient and electrified buildings that will reduce demand for natural gas and heating oil. It is massively subsidizing electric vehicles, for commercial purchases right away and for personal purposes once they build their supply chains out, which will dramatically lower the demand for gasoline and diesel.
So in aggregate, this bill is pushing down demand for petroleum products and natural gas, driving the first sustained decline in demand for those fuels in US history. I want to just yell that over and over again – there has been no point in US history, outside of recessions, when we have had declines in demand sustained over years for oil and gas. The passage of this bill marks the beginning of that trend, and it will not be the end. It’s the beginning.
If you're an oil and gas company, you're saying “okay, they're offering some lands. Some of that land looks like it deliberately got stuck in there to suck, not interested in that. Maybe there's a couple in there that I might want to bite on. Do I want to lease this land and pay the higher rental rates that the bill also implements?”
In parallel with what Biden’s already done, it codifies the floor price for royalties and rental. When you lease federal land, you pay a rental price just to hold the lease until you produce. That rental price goes up by a factor of 10 over the next several years, so you can't just sit on a lease and never produce, which is what Biden's been yelling at the oil companies for doing right now as prices surge.
It also raises the royalty rate. It actually sets the floor rate to a little bit below where Biden is currently setting the rates at, but the president has discretion to lower them in the future, and this basically raises the floor up to close to where Biden has set it right now.
So royalty rates are going up, rental rates are going way up, demand for your product is going way down in the United States and probably globally around 2030 – if not sooner, if you believe projections from some of the big oil companies, like BP and Shell, that previously projected peak oil demand globally around 2030. That was before the crisis in Europe that's driving Europe faster away from oil and gas, and before the passage of the Inflation Reduction Act in the US, which will kick off that trend in the US.
If you take all that in aggregate, I don't see how this bill is going to lead to any increase in US oil and gas production. It's probably going to lead to a substantial decrease. The big uncertainty, which is what we focused on in our analysis, is simply, what role does the US specifically play in the global market for oil and liquefied natural gas exports? That’s outside of the scope of the bill and its impact and hard for us to model explicitly.
I think a lot of people have the idea that there are things in this bill that are going to juice oil and gas production on public land, and even if demand falls in the US, we’ll be exporting more and thus creating more emissions elsewhere, which will reduce the net global impact on greenhouse gases. You don't think that this is going to lead to increased oil and gas production or exports at all?
I don't know about exports. I don't think it will lead to an increase. All else equal, demand for the product is going down, the cost of development on public lands is going up, and I think overall US production of oil and gas will be lower than in a world without the Inflation Reduction Act.
The question is how much lower, and the big driver of that is whether or not the US continues to step up as a large global exporter of liquefied natural gas, which I think is pretty likely, and oil, which I have less of a feel for.
We are shifting out of this period that we've always been in since the ‘20s of being the world's largest importer of oil and gas. We've already become energy self-sufficient in the sense that we produce more oil and gas than we consume. We're net exporters of both natural gas and petroleum products now, and have been since 2020. So the question is, how much more will we expand exports?
In a world where Russia is being excised from oil and gas supply chains for allied countries and the US is likely to step up to fill some of that gap – not all of it, because demand is going to go down in Europe for oil and gas overall – we may continue to increase our exports for some period of time. That will reduce the impact on domestic production relative to the decline in domestic consumption.
The way we address that in the REPEAT project, and you can see this in our analysis, is that we constructed two bounding scenarios that represent much bigger variation than the impact of the leasing provisions themselves.
In one scenario, all of the decline in domestic consumption goes to reduce domestic production and imports, because we still import some petroleum products and crude oil in proportion to their current shares of our mix. We're basically doing import substitution and then reducing domestic production, so declining US oil and gas production. In that scenario, the exports remain fixed at the EIA’s projected levels before the crisis in Europe and before the passage of this act. That's still slightly higher LNG over the next couple of years, but then it flattens out. And oil exports are basically flat in that scenario.
There's another scenario we created which is the high oil and gas production, where we assume that natural gas and oil production stay flat at the projected levels without the bill and 100 percent of the freed-up domestic supply that we no longer need for US use goes to exports. They cap the LNG export potential in the near term based on some projects that are already underway or nearly contracted so we don't have an unlimited ability to export LNG, but that still allows a substantial increase in LNG exports. In that scenario, there's basically no impact of this bill on domestic production and all of our excess supply goes to the export market.
Both of them are probably extreme cases, and the reality is going to fall somewhere in between.
I guess this depends on your level of cynicism or your estimation of Manchin, but I have to say, by the end, the bill was in Manchin’s hands and Schumer had very clearly conveyed to him “give us literally anything, we'll sign it.” Given that context, he could have put in way more obnoxious stuff than this. Let your imagination run, there are all kinds of things he could have done.
So these four projects that are getting greenlit – terrible for the communities involved, terrible procedure, legally awful – and the leasing thing are bad, but not apocalyptic bad. It seems like he just needed to have something super obnoxious in it so that he could be seen making environmentalists scream. But in terms of obnoxiousness relative to impact, these are very obnoxious, but their overall impact on emissions is relatively small compared to a number of other things he could have done.
If you assume that the counterfactual is continued leasing as per the Biden administration's current lease offerings after the court order and BIU lease rates over the last decade under both Obama and Trump, then the business as usual impact of this is basically nil.
Brian Prest, an economist at Resources of the Future who has done probably the most detailed modeling and analysis of the impact of supply-side policies to constrain oil and gas production on emissions, posted a thread today on Twitter on a new analysis they put out that basically found that if your counterfactual world is the current one, where Biden is offering oil and gas leases and any future Republican administration certainly is going to as well, the impact of the combined increase in royalty and rental rates and the leasing provisions is maybe a little bit of a decrease in emissions in the US because of the royalty rates, and maybe a 2 million ton increase – something very close to zero.
If your counterfactual is the world that environmentalists and keep-it-in-the-ground supply-side climate activists have been fighting for, where you successfully ban federal oil and gas leasing and sustain that ban over the next decade, which is the best-case scenario, then this provision preventing that would lead to, in his estimate, a roughly 20 million ton increase in US emissions in 2030. That's 2 percent of the total impact of the bill. And that's a counterfactual world that climate activists have not yet succeeded in creating.
And, let's be serious, highly unlikely to create. Total federal ban on oil and gas leasing seems unlikely.
Then there’s a broad variation in oil and gas exports that we looked at in our analysis that could either keep US oil and gas production at the current levels or have it decline quite a bit. That's a variation of about 40 million tons per year from the high to the low end in 2030, or, again, about 4 percent of our total. Our central estimate in the report is an average of those two. It's plus or minus 20 million tons, or about 2 percent, around our billion ton estimate.
So the take-home here is the effect on US oil and gas production and demand by the clean energy policies in this bill dwarf the effects on oil and gas production and demand in these specific obnoxious provisions that Manchin put in.
That's how I read it, and that's what our analysis shows.
Beyond the bill, they’re trying to squeeze in permitting reform. Even if you think the effects of the bill will be relatively minimal on oil and gas production, there's worry that the oil and gas companies are getting involved in permitting reform and they're going to make it easier to develop land, and that permitting reform, even though it theoretically could benefit any kind of permitting including renewable energy, is going to in fact benefit oil and gas. How worried should we be about permitting reform?
Anytime you have a bipartisan bill that's being potentially assembled and led by Joe Manchin with 10 Republicans, there's a lot of opportunity for shenanigans and for policies that benefit their core donors and constituents. I would definitely say we need to be wary about what is included in the bill. There's one draft that went to legislative council that's been circulated by some, and that's certainly not the definitive bill, that's just people drafting stuff. We don't know where that bill is at.
So yes, there's potential that it will make permitting easier for pipelines. Senator Manchin is very explicitly focused on the Mountain Valley Pipeline that would allow greater exports of Marcellus natural gas in West Virginia, Pennsylvania, and Ohio to the coast and to Virginia, where it could be potentially exported or used in the East Coast population centers. There may be other specific pipeline projects that could be easier to proceed depending on what permitting reforms looks like.
The biggest downside risk in our modeling, the thing that could undermine the billion tons of emissions reductions the most, is the inability to build, site, and interconnect wind and solar facilities and transmission in a timely manner consistent with the economically optimal outcome in our modeling. We basically need to double the pace of US transmission expansion. Right now, there's a total logjam in the interconnection queues for the major grid operators that needs to be fundamentally rewritten into a process that is automated and much faster and easier to move through. If we don't succeed on that side of things, there are at least 100 million, maybe 200 million tons of emissions reductions at stake in 2030.
Again, it comes down to this real question about where you feel we are in terms of the tipping points in the energy transition. If you think that we are very close to wind and solar being dominant in the electricity sector and to electric vehicles being dominant in transportation and that the bill is going to catapult home electrification and building efficiency and a range of industrial decarbonization options forward as well, then allowing both fossil energy and renewable energy some amount of easier permitting processes should lead to faster reductions in emissions and more clean energy deployment on net.
If you think that we actually are still fighting really uphill and the best thing we can do right now is to just stop all the fossil energy development projects and anything we let through is a disaster, then you're going to be extra wary about that from an emissions perspective.
Then there's the procedural justice aspect of it, which is that again, the legislature just went in and approved four projects that they have no business doing. If the permitting reform process nukes the ability for people to have an appropriate say and due process, that is going to be bad from a procedural justice perspective. That's true on the clean energy side as much as it is on the dirty energy side.
We have to balance all of that. I don't know what the bill is going to look like, nobody does yet, but I think it’s premature to say immediately that permitting reform is bad and we have to fight it. We need to know what's in it, we need to try to shape it to be as advantageous as possible for the clean energy transition, and we need to be wary and on the defensive about particular poison pills that would really undermine procedural justice.
That's going to be hard, and it may not work. It may fall apart; I think that's pretty likely. But I wouldn't say our job now is to kill permitting reform. In fact, if you care about the clean energy transition, our central challenge now that this bill is passed is to build the clean energy economy as fast as we can.
That's going to need permitting reform. I want to underline – clean energy needs permitting reform more, arguably, than the oil and gas industry feels like they need it. We need to uncork this enormous amount of backlog. So the danger is there, but it's also not something that can just be skipped or completely squashed. We need the good version of it.
I actually got a note 30 minutes ago from Evergreen Action saying it's an easy call, we need to vote permitting reform down. I doubt that there will be a bill that moves this fall, because I think what you're going to see is folks like Evergreen and others standing with allies who are legitimately concerned about procedural justice and saying “look, we had to cut some deals to get the Inflation Reduction Act done, we’ll back you here in helping fight this.” At the same time, you're going to see Republicans saying “we don't have a lot of urgency here, we could do this next time we're in power on our terms.” So I think it's fairly unlikely that we get it done this time around.
But I do think it's important that anybody who cares about the clean energy transition, and I include my friends at Evergreen Action in this, that we are very clear that the challenge moving forward is to find a way to square the circle, to make it easier and faster to build projects while increasing procedural justice and the ability for people to have a say in the process.
Which would be challenging even if you were at a table surrounded by people working in good faith.
Yes. So I don't think that we'll get there in the next two months. But it's the conversation we need to be having next and we need to be focused on.
I'll just give my plug for my broad vision of how you might be able to square that circle. Right now, we have a bunch of processes that involve a whole bunch of different veto points where people with the right means, the right lawyers, and the right knowledge can come in and hold up a project at the local level, at the state level, different federal permitting agencies, etc. Basically you have a private developer coming forward and proposing a project and then lots of people – particularly the most well-resourced people, not the ones that we’re most concerned about in terms of procedural justice – are able to shoot it down at some point along the way.
That process just doesn't work for what we need to do to build a clean energy economy. It doesn't work because it doesn't make it easy for disadvantaged and overburdened communities to have a voice in the process. It doesn't work because it's just too darn risky – you can make it through four of the five hurdles and as long as one of them trips you up, you're done. It also doesn't work because it's project by project, and it's always easy to imagine a hypothetical better other project than the one that's sitting in front of you right now with an actual route through actual people's backyards and actual impacts.
We have to shift away from that somehow to a process that is much more programmatic and regional in scale and scope.We need to build the clean energy economy on a larger scale. We need to build hundreds of gigawatts of wind and solar; we need to build the transmission network to support that; we need to site and permit safe geologic storage basins for carbon dioxide and a safe pipeline network to support that; we need to build out hydrogen hubs. And we need to proceed in a way that allows for one process that is regional in scope that allows everyone to have a voice in that, which means probably paying people to come and be part of that process if they can't otherwise be part of it and making it easier for the communities that need to be heard from to have a voice at that table. And the goal is not to shoot down a project, it is to successfully site 20 projects.
That sounds radical, maybe. We don't have an agency that does that and I don't think we're going to get one in September. But we have to be moving in that direction. We have some good examples of that that have happened, including the Western lands solar siting process that BLM and Department of Interior led on federal public lands in the Obama administration era, where environmental groups and conservation groups and local communities worked together with the public lands agencies to identify renewable energy development zones that would be easier to permit in – that basically have their environmental reviews cleared where the public was supportive – and other sites that were like, don't go there, this is a high conservation value area, we don't want to see it there. That significantly de-risked development on federal lands.
There are similar efforts in the Northeast around offshore wind siting involving fishermen and lobstermen and marine industries and coastal communities. We have to do a lot more of that, and that'll have to work its way through the process at some point to get on the pace that we need to be and sustain it.
Let's move on and talk about the one of the other things that seems to bug the people the most – the tax credits for carbon capture and sequestration. To begin with, tell us what Manchin did to those tax credits.
A couple of small technical changes are what occurred in the final version of the bill. From the very beginning: the Build Back Better Act contained an expansion of 45Q, which is the tax credit for carbon capture, storage, and/or use. It's currently increasing gradually over time to $50 per ton in 2026 for capture and storage and $35 per ton for capture and use – like enhanced oil recovery or synthetic fuels or making cement that can absorb carbon dioxide, things that can take up carbon dioxide in industrial processes.
Manchin increased it to $85 per ton for capture and storage, and $60 for use. He also added in a new direct air capture separate subsidy. Direct air capture previously didn't qualify; now, if you take carbon dioxide directly out of the atmosphere, you can get $180 per ton if you sequester or store the carbon dioxide, and $130 for use.
So those levels went up, in both the power sector and in industry. There were some early discussions about having that only occur in industry and cut out power, but in the original version of the Build Back Better Act that released, the provision applied across both power and industry.
What has changed as the bill evolved is some threshold requirements about how much carbon dioxide a unit has to capture in the power sector or in industry if it wants to qualify. In the original House-passed bill, you had to capture at least 70 percent of emissions across the facility. What that meant is, if you're an oil refinery with a bunch of different point sources, you would have to capture 70 percent of all the carbon dioxide across your facility. Or if you're a gas or coal plant that has multiple generating units, you have to capture 70 percent of all of the emissions.
That changed as it went along to eliminate that requirement for industry, because it's very difficult. Industrial facilities are large and usually have multiple point sources, and you don't really want to disincentivize them from capturing where they can If they can't do it everywhere. So that's where that change came from.
There were also a bunch of changes along the way that ended up where basically, for power to qualify, they have to have the design capability to capture 75 percent of annual emissions at the average of the highest three years of production in the last 12. You have to design your facility to at least be able to capture that much. It doesn't require you to actually capture that much, which has some folks concerned, and it could be revised in the future if your production falls significantly.
I've been engaged with Sierra Club folks and others who are concerned that that is a blank slate for projects to install much less than 90 percent capture, which is where most of the engineering design studies that are underway for projects are targeting right now. Our modeling is assuming 90 percent capture. If you only had a 60 percent capacity factor and you only produce 60 percent of your maximum output over the course of the year and you only have to capture 75 percent of that, then maybe you're only capturing 45-50 percent of the emissions that you're generating over the course of the year if you were to somehow ramp up your production.
I respect that that is a thing that a utility could try to do under this law. The economics of carbon capture have large economies of scale to them, so that if it makes sense to install a capture system that could capture 50 or 70 percent of your emissions, it will make even more financial sense to install an incremental unit of capacity that can get you up to 90 percent capture, because the marginal cost of capturing that next percentage point falls as you build a bigger system – up to a point. That point is usually somewhere between 90 and 95 percent, where now there's so little carbon dioxide left in the flue gas that the amount of energy you have to consume to get the next increment out starts to go up exponentially, which is why most of these post-combustion capture systems are designed to capture somewhere between 90 and 95 percent of carbon dioxide.
So if it makes financial sense for you to do a 50 percent capture or 70 percent capture, it’s going to make even more sense if you do 90 percent capture. That's what we modeled because that's what makes financial sense.
Now, a lot of folks will point out, utilities are prone to do things that don't make financial sense. I can't argue with that. So maybe someone will do something that's dumb and leave money on the table, and it's going to be up to vigilant activists and ratepayer advocates, as it always is, to keep utilities honest.
In your model, a big chunk of the net emission reductions are attributed to CCS. CCS hasn't really panned out yet – and what if it doesn't pan out? What if it continues to be prohibitively expensive or difficult to build in practice? What happens to those emission reductions that it was supposed to be responsible for?
Whether you see CCS as a concession to Joe Manchin or other interests, or whether you see it as a necessary tool in the emissions toolbox to decarbonize industry (and maybe less important for power but it's something that makes economic sense under the bill), what our modeling is basically showing is that it will make financial sense to deploy carbon capture at scale across a variety of sectors, from power to heavy industry, where you have favorable access to offtake for that carbon dioxide – a pipeline or storage basin or user who will take that carbon dioxide from you. So not universally everywhere, but in certain locations across the country, there will be facilities that now make economic sense to install carbon capture that have never made economic sense before.
There may be technical hurdles. We've deployed carbon capture at full scale in every major application somewhere in the world to date, many of them in the United States, so there's a lot of technical derisking that's already happened. There are vendors who are willing to sell you systems with warranties. It now makes financial sense. I would imagine that will lead over time to a substantial amount of deployment. The big uncertainty for me is not is it zero, but, how fast can it grow?
If it's much less than the model shows, does that threaten the overall emission reductions?
To some degree it does. Our modeling has roughly 200 million tons of emissions reductions from carbon capture and storage across industry and power. It's about 60 percent industry, 40 percent power, but I wouldn't put a lot of faith in that split because the way our model is set up, we had to set aside the tons for industry first exogenously and then let the model fight over the remaining 90 million tons amongst the stuff that we explicitly optimize in our model. So it could be that it makes more sense to do other things.
But the 200 million tons comes from our estimate of how rapidly we can build out carbon dioxide injection and safely store that carbon dioxide in geologic basins. And that will be constraining. That 200 million tons is the cap we put in in 2030 on storage, and that is a binding limit. So if you can't build out transport and storage networks at that pace, there will be less carbon dioxide capture. If you can build out more, there might even be more. There are more economic opportunities that are not captured in our modeling.
So the growth rate for that – just like the growth rate for wind and solar and transmission deployment, or the growth rate for EV supply chains – is a central uncertainty that will make a big difference in the near- and medium-term. If all those break badly, emissions outcomes will be less than we model. If some of those break better and some of those break worse, then maybe they'll cancel out. And if they all break better, then maybe we'll make deeper reductions.
What about the worry among activists that allowing the carbon that's captured to be used for enhanced oil recovery in effect gives oil and gas companies a chance to have a green sheen while continuing production? In some sense, we'd be subsidizing that production by giving them money in tax credits for capturing and then allowing them to use that captured carbon to produce more oil and gas.
There already is enhanced oil recovery going on across the country. We inject somewhere on the order of 85 million tons of carbon dioxide a year for EOR.
That's what most captured carbon dioxide does now.
But most of that is not captured from point sources; it's taken out of geologic storage in Colorado and Utah and other places where we have naturally forming carbon dioxide. Or it's stripped out of natural gas as we pull the natural gas up, then pumped back down for enhanced oil recovery.
First of all, any of that carbon dioxide that we displace is a good thing, because we're not pumping up more fossil carbon dioxide that we don't need to. We already have that coming out of the smokestack, so let's use that first.
It's likely to be fewer than 100 million tons in total; that was our estimate for Net-Zero America of available and additional EOR. So if you do get to 200 million tons and grow from there, the majority of that will be geologic storage, not EOR.
EOR might have a net subsidy from certain capture sources, because remember, you have to pay for all of the capture and transport and injection as well with that $85 a ton, and that is probably about what it currently costs to do carbon capture. So there may be places where over time, carbon capture gets cheaper and it becomes a net subsidy for oil production, if they somehow manage to keep the profits on the oil side rather than the emitter side. Again, I think that's in the noise of what happens to global demand for oil and gas, which is going to be the big determinant of how much we produce in the US.
From an environmental impacts perspective, if we are going to be doing any oil and gas production in the US, it’s better off to do that in depleted existing basins than to do greenfield development in new areas that have not previously been impacted. That's not universally true, but it's generally true that it’s better if you're developing an existing site that already has the infrastructure in place, already has the pipelines built, and you're getting more oil out of it, rather than trying to site and build a brand new oil field or gas field that is likely to have even greater environmental impact.
I'm not the average person in the environmental movement, maybe, but it's not my central concern. And whether or not it gives them a green veneer depends a lot on how successful environmental activists are at continuing to problematize the moral license for oil and gas.I would say, have some faith in those efforts. They seem to be working.
The environmental justice community hates CCS tax credits and has for a long time; it's really dug in in opposition to them. Polluting facilities in industry or the power sector are often located in and disproportionately harm vulnerable communities. The worry, I think, is that allowing them to attach carbon capture rather than close down will continue that harm to environmental justice communities. How do you respond to that worry?
If you are living next to a specific project that would specifically impact your life, that’s a totally legitimate concern. It comes down to, again, what is your counterfactual. Is your counterfactual world where we successfully ban all fossil fuels in the next handful of years; where we successfully stop producing any cement or other industries that we might install carbon capture on that are not oil, gas, or coal facilities; that we entirely eliminate all environmental impacts of our energy system? That's an aspirational goal. That's a goal we're working toward, a goal we all want to get to. But I don't know that too many people feel like we're on the cusp of achieving that anytime soon.
If your other counterfactual is the current situation, then I think the question is, broadly speaking, when it comes to environmental justice, does this bill cause harm or reduce harm?
Well, it can do both at the same time.
Right. Certain provisions could cause harm, certain provisions could reduce harm. I think it's fair to say that there is no other world where this bill exists without any one of these provisions. We went all the way to the brink of failure twice, and this is the best product we could get out of the US Congress. I don't think you can take any of them out and still keep all the other stuff. You could have no bill or you could have this bill.
This is a tender subject, but in my estimation, and I think yours – and I think there's a clear case to be made for this – even purely viewed through the lens of environmental justice, even if you put all other considerations aside, a world with this bill is way, way better than a world without this bill.
That's exactly right. Again, we know that it specifically causes harm to the communities impacted by the four lease areas. Outside of that, whatever environmental harm you're talking about, in aggregate it is going down. Both oil and gas production will fall; the question is how much. Coal production is going to continue to fall; the question is how fast it gets to zero.
The generation of coal power inclusive of carbon capture falls to 7 or 8 percent of our US electricity mix in 2030 in our modeling, down from more than 20 percent today and 50 percent a decade ago. And it could be much more than that, because we're not capturing a range of policies in the bill that help further accelerate the retirement and repowering of the US coal fleet that we're going to try to model in our optimistic case next time around. That includes $250 billion in loan authority at DOE and $9.7 billion to capitalize grants and loans and refinancing at the USDA’s rural electric authority. So there's money to help accelerate coal retirements even further.
Air pollution from urban vehicles, which is the leading cause of air pollution in the country – way down. So if you're thinking about any of those environmental harms that are disproportionately impacting environmental justice communities today, they all go down, not up, under this bill.
Which disproportionately helps those communities. I emphasize this over and over again, because even in the environmental justice communities’ literature about this bill, that seems to get lost. If you reduce particulate pollution, or car pollution, or greenhouse gases – literally insofar as you reduce any environmental harm, you are thereby having disproportionate benefits for vulnerable communities. Because they're unduly harmed by them, they're unduly helped by their reduction. So, in a sense, every reduction of environmental harm in the bill is an environmental justice policy.
That's right, and that's outside of the $60 billion or so in explicit environmental justice provisions in the bill that will ensure that we accelerate emissions reduction and pollution progress specifically in environmental justice and disadvantaged communities. This bill will substantially improve environmental justice outcomes across the country.
What it won't do are two things that I think deservedly motivate additional action and frustration and in many cases, anger – they don't eliminate those damages (yet), and they also don't meet procedural justice demands of environmental justice communities. “Why the hell do Joe Manchin and Chuck Schumer get to write a bill in Washington that decides what happens in my backyard?” I get that. That is a different kind of justice. There's a procedural element of environmental justice claims that is very important – the people impacted by these things should have a say in the process. This bill does not meet procedural justice concerns, unless you feel like the US Senate is an effective body for representation of the myriad views of the US populace, which I know that the two of us certainly have our doubts about.
On the other hand, there is the outcome-oriented justice aspect of it, which is, what are the actual felt impacts for people in the world? This bill, I think, meets that test in the sense that it dramatically reduces those impacts on environmental justice communities all over the country. It also delivers a lot of economic opportunity in those communities very explicitly through policies in the bill that try to drive investment and manufacturing and economic opportunities into communities that want that development.
I have heard a lot of people say this will perpetuate or sustain harm. I don't know that there's a lot of strong evidence for that. I think that it will reduce harm all over the place, and particularly in disadvantaged communities that have been impacted most negatively by pollution. It doesn't eliminate that harm, so if by perpetuate you mean it doesn't successfully eliminate it, okay, that's fair. There's more work to be done. I am with you on that work. But I don't think it perpetuates, or necessarily even causes directly, any harm other than for the four specific leases where outside of the passage of this bill, those projects would not have moved forward. They are definitely additional, specific harms the bill causes.
Everything else that this bill does would not have happened without this bill, and all of those things are good for environmental justice communities and for Americans everywhere. So yes, from a procedural perspective, people cut deals that are not in your interest and that is unjust procedurally. From a harms perspective, I think that outside of those leases we're going to see dramatic improvements in environmental outcomes over the next decade, and that's good.
Okay, we’ve got a bunch of other stuff to hit; it's clear, as I probably should have predicted, that we're going to have to break this up into two episodes.
I’m going to go brew a cup of coffee and we'll keep going.