U.S. news: climate law's real impact a decade away

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This article was licensed through Dow Jones Direct. The article was originally published on the Wall Street Journal

It's called the Inflation Reduction Act but President Biden and the law's other supporters treat it as the "Emissions Reduction Act." The law, which Mr. Biden signed in August, is supposed to leave climate-warming greenhouse gases around 40% lower by 2030 from 2005 levels, mainly through subsidies that shift utilities and households to renewable electricity and electric vehicles.

That is symbolically important, since it moves the U.S. closer to its international commitment, but it's not the bill's most significant impact. After all, the U.S. was already on track to reduce emissions. The incremental reduction in emissions from the IRA is 6% to 10%, according to the research firm Rhodium Group, or 15%, according to Princeton University's Zero Lab. This translates to roughly 1% to 3% of expected global emissions in 2030: a start, but not enough to move the needle on temperature.

Where the law could be truly consequential is in planting the seeds for technology adoption that drives emissions lower beyond 2030. Recent history shows that climate policies such as taxes, subsidies and mandates matter most by catalyzing a virtuous cycle of higher demand that leads to more innovation, learning-by-doing and economies of scale that lower costs and further boost demand. "They're a nudge: they kick-start a much larger process of innovation," said Jessika Trancik, who studies the cost and performance of energy systems at the Massachusetts Institute of Technology.

In solar power, the results have been spectacular. Between 1980 and 2012, the cost of a photovoltaic module made from crystalline silicon fell 96%, according to a 2018 paper by Ms. Trancik and two co-authors. They attributed roughly 30 percentage points of this to public and private research and development, which among other things, led to more efficient modules and larger, thinner silicon wafers. Another 60 points came from "learning-by-doing" — improvements to the manufacturing process, such as less waste, that came with experience — and economies of scale: the average plant capacity grew roughly 200-fold.

These advances were spurred by the promise of demand that government incentives made possible. For example, generous German payments for solar power spurred China's massive investment in photovoltaic factory capacity.

Similar, though less dramatic, dynamics have been at work in wind power and battery storage. They all hewed to "Wright's Law," named for the 1930s aeronautical engineer Theodore Wright, according to which each doubling of production is accompanied by a roughly constant percentage decline in cost, known as the learning rate. "Over the long term these learning rates appear to be the best way to predict the future cost of technology that we know of," said Ramez Naam, an author and investor in early-stage green energy companies.

One implication is that as a technology matures, production takes longer to double and so costs fall more slowly. Sure enough, the cost of solar-generated power has fallen an average of 6% annually from 2018 through 2021, compared with 21% in the previous nine years, according to Lazard, an investment bank. Costs are also falling more slowly in wind power.

Costs should continue to edge lower for both. Wind farms could migrate from onshore to offshore and from fixed to floating bases, exploiting greater size and more reliable wind. Greg Nemet, an expert on energy systems at the University of Wisconsin-Madison, thinks solar installation could become much more efficient, as has already happened in Australia. Mr. Nemet also predicts the current shortage of key minerals such as lithium will ease as investment in new supply ramps up.

Yet the law's greater potential lies in replicating the experience of solar in other technologies that are currently too costly for widespread adoption. Emission reductions in the coming decade are the low hanging fruit, achievable with technologies such as wind, solar and batteries that are already competitive or nearly so with fossil fuels. Getting the rest of the way to net zero depends on hard-to-decarbonize sectors such as aviation, industrial processes and agriculture for which commercially viable technology to eliminate emissions doesn't yet exist.

"The biggest wins, the biggest price changes and the greatest induced innovation will be in those technologies that are younger than solar, wind and batteries," said Mr. Naam.

He cites hydrogen, in particular. When burned, it produces water instead of carbon dioxide so it can in theory replace natural gas for making cement, steel and fertilizer. Right now, though, most hydrogen is "gray": it's produced using natural gas and therefore adds to emissions. "Green" hydrogen is made by using renewable electricity to split water into oxygen and hydrogen, but it's uneconomic. Mr. Naam said the IRA's incentives, mainly a tax credit of up to $3 per kilogram, make green hydrogen instantly competitive with gray hydrogen. He predicts the resulting boost to demand will vastly increase output and, following Wright's Law, drive down the price of green hydrogen dramatically.

Ben King of Rhodium Group is less optimistic about green hydrogen, but bullish on direct air capture and carbon capture and storage where "we are at the very beginning stages of the learning curve."

These advances will be a relatively small part of the IRA's impact in the coming decade. Thereafter, though, the benefit could be huge. And, Mr. King notes, the benefits will accrue to the whole world, not just the U.S.

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Greg Ip

The Wall Street Journal