[Public Voices] U.S. Inflation Reduction Act: Focus Needed on Renewable Energy

The Largest-Ever Climate Change Response
Time to Consider Energy Security and Costs

Jiwung Choi, Researcher at Korea National Oil Corporation Smart Data Center

The U.S. government under Joe Biden places great importance on eco-friendly policies. In the past, the Donald Trump administration withdrew from the Paris Climate Agreement and pursued increased oil and gas production. In contrast, the Biden administration aims to address climate change and foster the green energy industry. The Inflation Reduction Act (IRA), which embodies this vision for green energy, recently passed the U.S. Congress. After the passage of the IRA, a major news item in Korea was the exclusion of Korean-made electric vehicles from the electric vehicle tax credit benefits provided by this law. However, this is not the only noteworthy aspect of the IRA.

The IRA is essentially an energy policy bill. Its core is to provide $369 billion (approximately 480 trillion KRW) in tax credits and subsidies to renewable energy and electric vehicle projects. This is the largest climate change response measure in history. Through this, the U.S. aims to reduce its greenhouse gas emissions by about 40% by 2030. The funding for this will be secured through an increase in corporate taxes. Currently, the U.S. corporate tax rate is about 21%, but some companies pay no corporate tax due to various deductions and exemptions. The IRA plans to collect a minimum 15% corporate tax from these companies to raise about $300 billion in funds.

This legislation reflects the U.S.'s deliberation on how to expand renewable energy. However, this challenge is faced not only by the U.S. but by all countries that have declared carbon neutrality. And it is an extremely difficult task. Energy sources from the past do not simply disappear and new energy sources do not automatically take their place over time. To be clear, the expansion of renewable energy does not happen just because time passes, nor is it achieved solely by market principles or by the voluntary efforts of citizens. Even as time passes, coal-fired power plants do not decrease, and the market’s preference for cheaper and more stable energy sources is hard to change. Moreover, while citizens may want carbon reduction in their hearts, they hope for lower fuel taxes and reject electricity price increases in their actions. Therefore, expanding renewable energy requires sophisticated policies to secure public acceptance and a strong resolve to overcome social conflicts.

The expansion of renewable energy and response to climate change can easily gain public support at the pledge and conceptual stages due to their political and normative justifications. However, legislating these is a completely different matter because it can lead to increased energy costs. The IRA supports the green energy industry while also taking an inclusive stance toward the oil and gas industry, which is in the same context. During the period when renewable energy is expanding, oil plays an important role in maintaining energy price stability. If oil prices rise, inflation cannot be controlled, and in such a situation, developing renewable energy becomes difficult. When energy costs increase, the public primarily wants supply to increase regardless of the energy source to stabilize prices.

The Biden administration has planned incentives to expand renewable energy and chose to raise taxes on large corporations to secure funding. This does not mean that the Biden-style support and tax increases seen in the IRA are necessarily correct. Rather, it is important to recognize that the development of new energy sources inevitably involves both costs and benefits. How to share those costs and benefits is a crucial social agreement in the process toward carbon neutrality. As the IRA is about to take effect, our society also needs to consider how to secure energy and handle its costs.

Choi Ji-woong, Researcher, Smart Data Center, Korea National Oil Corporation