What to Watch in the Year Ahead

What’s coming up for energy and the environment in this major election year? Here’s a digest of the headline topics that speakers at Resources for the Future have discussed recently.

The podcast interview from which some of these quotes are drawn was originally released on January 2, 2024. The Big Decisions 2024 event in which the rest of these statements were made was held on January 24, 2024. The transcripts have been edited for length and clarity.

Inflation Reduction Act-ivity

Implementation

Joseph Majkut: Over the next year, I’ll spend a lot of time looking at the implications for US energy policy of a successful Inflation Reduction Act.

Making a lot of stuff requires a lot of energy. We want to move manufacturing back into the United States, where we want to be at the technological frontier for microchips, clean energy goods, and pharmaceuticals. It’ll be interesting to see how much this renaissance of manufacturing will change our energy forecasts, our energy needs, our plans for decarbonization, and fundamental energy reliability.

Take the case of Texas from the last couple years: Because of its population trends and economic growth, the power system there has gotten strained. It’s failed at different times and is still at fairly high risk. This situation may become the story for a lot of the United States, and I think that’ll be an important thing to watch: How do we meet the needs of this renaissance on the energy side while still achieving climate goals?

Robinson Meyer: I think one of the biggest questions this year—something we don’t know the answer to yet—is whether the money that is getting spent from the Inflation Reduction Act and the Bipartisan Infrastructure Law is starting to affect the lives of voters. I think the big questions I have around these two laws this year are: Will they spend enough money to be electorally significant in November? But even more importantly, will they spend enough money to create any durability around these two laws? And finally, what is all that money actually doing?

Rich Powell: The most important of all the existing clean energy tax credits, from the perspective of carbon impact, is the one that folks have talked about the least in the past 12 months. I’m referring to the new tax-credit structure—the 45Y and 48E credits, which are zero-emissions credits on both the production credit side and the investment credit side, which RFF’s climate models have provided insights about.

All the models from RFF and others show that these are the most consequential of all the credits. Yet, because these credits aren’t in effect until next year, they’ve had the least constituency pushing for the guidance to come out. I think there’s going to be a massive amount of focus on these credits, and some really big decisions have to be made around implementation that will drive their consequences.

Hydrogen

Rich Powell: The US Department of the Treasury has made its first proposed set of rules on the implementation of the 45V credit—the Clean Hydrogen Production Tax Credit—one of the most bipartisan and broadly supported of all the credits. And one that’s also been quite contentious. A lot of follow-on facts will arise for how the administration decides to incorporate the mountain of feedback that it’s now receiving about that proposed rule and to implement the final rule. I think that decision will shape the degree to which 45V is both a broadly used and broadly supported credit going forward.

This tax credit is significantly open to litigation risk because of some of the very assertive interpretations of the statute that were taken in its crafting. I’m particularly talking about whether existing nuclear plants can take advantage of the credit in the way that the statute explicitly says they can: a requirement was added in the Treasury guidance for additionality, which means that existing nuclear plants cannot take advantage of the 45V credit. For example, the Infrastructure Investment and Jobs Act modernized hydrogen research, development, and demonstration programs at the US Department of Energy. The act also appropriated $9.5 billion to commercialize hydrogen production and create foundational regional clean hydrogen hubs, including four that would use nuclear energy for hydrogen production. The tax credit was meant to complement the policies in the Infrastructure Investment and Jobs Act and boost the efficacy of the hydrogen hubs.

The Treasury Department runs the risk of squandering nearly $50 billion in hydrogen investments across the seven hydrogen hubs and stalling the deployment of clean energy that’s necessary to meet demand for energy in the industrial and power sectors. If 45V guidance is improved and follows the intent of Congress, we could see a rapid acceleration of clean hydrogen production and progress toward a low-carbon future, especially as energy is produced through clean assets like nuclear and hydropower.

International Trade and Competition

Joseph Majkut: Right now, the United States and China are in a new era of geopolitical competition. Technologies like batterymanufacturing facilities for electric vehicles and solar panels are viewed on both sides of the Pacific Ocean as strategic and important for both climate goals and long-term energy security. The United States is facing deep questions about how much we want to integrate US supply chains with technology from Chinese firms, which often are backed by the state, but often are better than what US firms can produce; for instance, cheaper, more reliable, higher-capacity batteries.

One of the things we’ve seen over the past few years is a rising trend of resource-rich countries—Indonesia is the highlight example—expressing a new resource nationalism. They’re saying that they don’t want to be just an extraction hub and sell raw ore to processors and manufacturers abroad; instead, they want to move up the supply chain of value to their own country. The whole world is moving toward decarbonization, so if a country can add more value and build manufacturing facilities, then they’ll get a bigger slice of this new economic pie.

The challenge for the United States, when you think in the framing of energy security and geopolitics, is that critical mineral supply chains are almost wholly dominated by China. This challenge has been an interesting, underthe-radar trend that we might see more of going forward: how resource-rich countries capture value from the resources they have and that they know the world needs going forward.

Relatedly, we need to think carefully about the role of the United States in the global energy system. I’m thinking particularly about expanding US export capacity for liquefied natural gas, which is going to be a big political debate over the coming years because, in the aftermath of the European energy crisis, we’re seeing a huge expansion of that capacity. The United States plays a significant role in global energy security, yet this role comes with climate implications and potentially domesticmarket implications. I think that’s going to be a rich conversation—we’ll see different dynamics arise over time, and that’s something to watch in the coming year.

Robinson Meyer: I think the United States is already busy playing catch-up. China and Europe have no problem actively subsidizing industries through all kinds of means. They see these industries as part of their industrial policy—China, especially. So, the upcoming election not only determines the path that the United States follows in terms of its decarbonization, but also the role of US firms and the US economy in global decarbonization more broadly. And that’s a very big deal. Climate is very much going to be on the ballot.

New Regulations and Policies

Federal Regulations

Vicki Arroyo: In 2024, the US Environmental Protection Agency is going to launch some big programs that invest billions of dollars in clean ports, zero-emission heavy-duty vehicles, improved methane monitoring, and capping abandoned wells.

We will finalize several regulatory actions. Our Risk Management Program rule will help communities near chemical facilities stay safe in the event of an accident and will facilitate planning to avoid those accidents. Of course, everybody’s looking forward to our greenhouse gas standards for power plants and vehicles. We are moving forward with plans to ban methylene chloride in consumer products and establish workplace protections for any remaining uses under the Toxic Substances Control Act, designate two PFAS [perfluoroalkyl and polyfluoroalkyl substances] as hazardous substances under Superfund, and move forward with the PFAS drinking-water rule. That’s just the tip of the iceberg, but those are some of the regulatory developments coming up.

Social Cost of Carbon

Kevin Rennert: As a part of the oil and gas rule that was finalized last year, the Environmental Protection Agency updated its social cost of carbon, which is the metric that federal agencies use to quantify the benefits or costs related to emissions increases or decreases. This update to the social cost of carbon, which was based on the current state of the science, revised the number substantially upward. What are the implications of that change? How is the social cost of carbon being used in agency actions in general?

Vicki Arroyo: The updated estimate nearly quadrupled the social cost of carbon to roughly $190 per ton and increased the estimates of the social cost of other gases like methane and nitrous oxide. Applying these new estimates, the final rule for oil and gas operations has climate benefits that are estimated at roughly $110 billion through 2038. The Environmental Protection Agency will use these estimates across our rules, National Environmental Policy Act reviews, and more.

Outside DC: Regional and State-Level Policies

Karen Palmer: One thing I’m keeping an eye out for this year is the rules and regulations to implement the cap-and-invest program in New York State. This is one of several policies and programs that New York is developing to achieve the goals of its landmark Climate Leadership and Community Protection Act that was signed into law in 2019.

These rules are important not only for what they’ll mean for New York State, but also as a model for future carbon pricing regimes in other states on the East Coast. Although carbon pricing is in place across some eastern US states, it’s mainly focused on electricity generators. The cap-and-invest program in New York would take things broader in different directions.

The second thing I want to mention that will be important this year is relevant to the Regional Greenhouse Gas Initiative (RGGI). I’m looking forward to the agreement that will come out of the ongoing program review of RGGI, regarding both future caps in the program and future design elements.

RGGI historically has been at the forefront of innovations in cap-and-trade policy design. The program pioneered features like using auctions to distribute allowances; using price floors in those auctions; and introducing price steps in the allowance supply curve, which is important because price steps make the program impactful and help RGGI work well and continue to have robust prices even while other state policies are advancing decarbonization.

What we’ve seen in the recent RGGI auctions is a steady increase in the allowance prices. This trend suggests that the market believes the program will continue to be important, as several states that participate in RGGI have very ambitious decarbonization targets going forward. I look forward to seeing how the program evolves in the next round with respect to program-design decisions.

Permitting

Karen Palmer: A policy issue that stands out for me is progress on legislation to address the various barriers to investment in energy infrastructure, including permitting. Not much has happened on this topic in the policy space in recent years, unfortunately.

We all know that addressing climate change is going to require massive and unprecedented investment in clean sources of energy, like renewables, the grid, hydrogen production, and pipelines, among other types of facilities. The Inflation Reduction Act provides important economic incentives in the form of tax credits for many of these crucial investments. But achieving all the investments that are needed to meet our national climate goals in a timely fashion is going to require overcoming various obstacles: supply-chain cost increases, lengthy interconnection queues for new electricity generation, and streamlining federal permitting-approval processes.

Part of the political negotiations that went into passing the Inflation Reduction Act in 2022 was an agreement between the Biden administration and Senator Joe Manchin (D-WV) to consider, in advance, legislation that would accelerate the permitting of energy infrastructure. One aspect of that proposal was a special focus on 25 priority energy projects that were designated by the president. That bill didn’t pass in the Senate, and no other bills that were introduced in 2023 and designed to address similar issues have made it over the finish line.

This policy discussion is not over, but the lack of progress on permitting this year probably is slowing the pace at which the promises of the Inflation Reduction Act will be delivered.

Rich Powell: All the incentives in the Inflation Reduction Act occur in an environment in which permitting at all levels is a devastating problem. Federal environmental reviews, federal environmental permits, regional interconnection queues, state and local technology-specific zoning and setback requirements—all these things are having a massive drag effect on deployment of clean energy technology alongside very high interest rates. We actually can get a bipartisan legislative deal on permitting reform. I was heartened by some remarks in January from Senators Joe Manchin (D-WV) and John Barrasso (RWY); they said they’re keeping hope alive that a deal may be possible by the end of this year. I certainly hope that’s the case and will be working on and supporting that, but that really will be the gas or the brake on how impactful the whole regime will be.

Supreme Court Decisions

Chevron Decision

Kevin Rennert: The courts will have a big sway over the energy- and environmental-policy landscape in the coming year. In particular, one of the cases that we’re tracking has to do with the Chevron deference doctrine. This is a Ronald Reagan–era precedent. The federal courts have to defer to an administrative agency’s interpretation of the statute that is being administered. This ruling also will come on the heels of some other pretty significant and consequential rulings, including ones where the court has revisited what is referred to as the major questions doctrine.

Lisa Heinzerling: It’s hard to overstate the importance of the Chevron doctrine to administrative law and therefore to the power of federal administrative agencies. What Chevron did is solidified the Supreme Court’s approach to agencies’ statutory interpretations into a very handy, understandable two-part test. The first part: Did the statute clearly allow or forbid the answer that the agency gave? If so, that meaning prevails. The second step: Is the statute ambiguous on this point? In that case, the agency’s reasonable view prevails, with the deference given at this stage.

For 40 years this summer, Congress has legislated under this framework, agencies have issued rules under this framework, and the Supreme Court itself has generated a huge body of case law under this framework. But the Supreme Court is now poised, I believe, to upend this whole longstanding framework. I think that it will either be outright overruled, which would not be surprising, or it will be so limited that it will be almost unrecognizable. We’re in for not only the demise of Chevron in a very substantial way, but we’re also in for a whole new world, and we’ll have to see what the court comes up with.

I think one thing is certain: agencies that are working on rules now cannot expect courts to defer to them in the future in the way that the courts deferred to agencies under Chevron.

Major Questions Doctrine

Lisa Heinzerling: The major questions doctrine really is a limit on the power of Congress. Congress cannot delegate an issue to an agency to decide if the issue is important, in the court’s view, unless Congress gives a super clear directive to the agency. “Super clear” means that Congress apparently needs to look ahead and see future problems enough to be able to name them.

That’s a limitation on the power of Congress, not just a limitation on the power of an agency. Again, the idea is that, if the statute is ambiguous and an important question is involved in the statute, then the agency loses. And this idea already, at least in the cases in which the statute is deemed ambiguous, turns Chevron on its head. Ambiguity means the agency loses, rather than the agency wins.

Another important thing to know about the major questions doctrine is that it’s not applied evenly. It’s skewed against ambitious regulation and favors either a lack of regulation or weak regulation. The more important an issue is, like climate change, the more likely ambitious action on it is going to fall prey to the major questions doctrine.

Technology Trajectories

Clean Energy

Robinson Meyer: Solar manufacturing in the United States is doing very well. There’s this great chart that uses Q3 in 2022 as a baseline and shows the before and after. What you see is that solar installation is taking off. Solar already was going at a fast clip before the Inflation Reduction Act passed. It’s continuing at an even faster clip, which is kind of expected. All these bounties are being paid directly, and a relatively small number of companies can take advantage of them—and we know those companies are taking advantage of them.

Battery manufacturing is doing quite well, too. That’s exactly what we see in the factory data and the industrial data, as well. Just enough points of investment so that the electric vehicle “Battery Belt” is being built over time.

Where it then starts to get a little slower is wind energy, both offshore and onshore. Last year wasn’t a great one for wind energy. I think what’s tough is that we’re also coming out of an extremely anomalous interest rate. The interest rate really affects clean energy projects, because most forms of clean energy investment are a trade-off in which you have no fuel risk—your fuel is the wind or the sun—but you have a lot of capital risk. I’m curious to see how things start to respond if the Federal Reserve cuts interest rates this year.

Rich Powell: Last year was incredible for investments in carbon capture and carbon management. I think last year saw more investment in carbon management than wind energy. Just the three largest offtake contracts signed for carbon management would have more net effect on emissions reductions than all the electric vehicles that currently are on the road in the United States. We saw multiple billion-dollar acquisitions of companies that will provide either carbon-capture technologies or provide carbon dioxide movement and storage infrastructure as well. I think the expansion of the 45Q tax credit is playing a big role in that. Among all the tax credits in the Inflation Reduction Act, 45Q is another one with strong bipartisan, durable support. So, folks can build a long-term investment thesis around it, which I think helps, as well.

Electric Vehicles

Joseph Majkut: I’ll be very interested to learn more about what states are doing on electric vehicle deployment. One of the biggest uncertainties in the medium term for climate and energy issues is, How quickly does the American consumer embrace electric vehicles—everything from e-bikes to the Cybertruck? I’m curious about what states can do to accelerate uptake, what consumers really need to see for demand to increase, how states will deal with balancing the electric grid and charging stations, and all the other things that have to be financed to create a full ecosystem for electric vehicles. This is an area in which I think states have a lot of authority. Some states clearly want to have a leadership position in this space, so I’ll be watching for that in the coming year.

Vicki Arroyo: A good example is the US Postal Service. The Environmental Protection Agency has a unique role in reviewing and commenting on environmental impact statements from other federal entities. In combination with White House efforts and incentives in the Inflation Reduction Act, the Environmental Protection Agency helped move the Postal Service from purchasing electric vehicles as 10 percent of their fleet to 62 percent, in part because the agency urged the Postal Service to evaluate and consider the true benefits of shifting to electric vehicles for their government fleet.

Interest Rates

Rich Powell: First and foremost, capital is the fuel that will power the clean energy transition. And capital is extremely expensive right now. For every 500 basis points of additional interest rates that a project has to deal with, the cost of the project doubles. We have seen 500 basis points added to interest rates as a measure to control inflation. And while that regime remains in place, clean energy will be much more expensive, whereas I think our entire policy space and policy advisory space became very comfortable over the last decade in a world of extremely cheap capital. We had the idea that we were going to constantly see the learning curves come down for all these technologies. And that expectation then became built into all the models that we all use for decisionmaking.

We’ve seen a hard asymptote. In fact, we’ve seen a number of technologies come back up that curve—offshore wind and onshore wind, in particular. We need to get overall spending under control, so we can get inflation under control, so we can start to bring interest rates back down. That’s the most important thing for the clean energy transition.

Picking a President

Robinson Meyer: The biggest decision of all in 2024 will be made by several hundred thousand voters who are concentrated in Arizona, Colorado, Nevada, Michigan, Wisconsin, Georgia, and maybe Ohio. As many of us know, it’s a hugely consequential election for energy and environmental policy. It’s an election that will determine not only the role that the United States takes with decarbonization in its own path—whether the United States meets Paris Agreement goals, US participation in international climate processes—but also the role that American companies and the American economy plays in the global decarbonization process.

What’s interesting about the industrial policy that the United States has embarked on, through the three big Biden-era statutes, is that in some parts of this policy, we’re playing catch-up; for instance, with growth in electric vehicles. But in some areas, the United States is at the technological frontier—say, in software. These different areas require very different kinds of policy playbooks. I think it’s the areas where we’re playing catch-up that could be most at risk in a future administration.