Observations on the anniversary of the passing of the Inflation Reduction Act: How market forces have led the transition for the past 50 years (with help from OPEC+)
One year ago, the Inflation Reduction Act was passed. The Inflation Reduction Act has been a celebrated milestone for those who are worried about our planet’s emissions and the warming trends. Although noble, what I find most interesting is that the main drivers behind the Inflation Reduction Act were not protecting the environment or combating global warming. The real drivers were more economic in nature: energy prices, energy security and future job growth. The economics that, in actuality, generated the rise of clean energy for the past 50 years.
Even from an historical perspective, the major impetus for renewable power in the late 1970’s and early 2000’s had nothing to do with climate concerns but instead with the high cost of fossil fuels when OPEC was limiting production. Even the recent Inflation Reduction Act only made it across the finish line because of concerns about high energy prices. The energy transition has always been driven by the economics of energy. The drop in the price of renewables (99% drop in cost since 1970 and 90% drop over the last 15 years) with an associated drop in the price of storage technology (97% in since 1990 and 90% in last 15 years) is leading this transition.
The difference between the 1970’s, the early 2000’s and today is that the clean energy ecosystem, even before the passage of the Inflation Reduction Act, was cost-competitive not only with energy production (renewables are cost competitive with fossil fuel) but also with storage and transportation (EV’s). The new incentives from the Inflation Reduction Act are accelerating the transition begun years ago. Technology advancement over the last ten years allowed the price of renewables to start its downward swing. As we sit here today, the combined new vehicle sales from both true EV’s and plug hybrid have risen to almost 20% of global market share. Why? The price of EV’s and plug hybrids are now cost-competitive with traditional fossil fuel vehicles. The most exciting part is that China, a developing nation, represents the biggest market for EV’s. It is worth noting that this has occurred without an Inflation Reduction Act, yet certainly with other incentives. While climate concerns are certainly on the mind of policymakers and consumers in China, it is the economic case which is driving this transition.
The biggest impact of the Inflation Reduction Act in my mind is the decarbonization arms race it unleashed. With so much of the technology cost-competitive with the traditional fossil fuel ecosystem, it is much easier for politicians to aggressively support the energy transition. Politicians like nothing more than following an existing trend but taking credit for creating the trend (we must be careful of the tail wagging the dog effect). Leaders worldwide are increasing support for a clean energy ecosystem to politically benefit from job creation and a cleaner environment, boasting of their forward thinking. Yet, economic forces are the true leaders of the energy transition.
The biggest risk I see is people often get caught up in making it an either/or scenario: either we have the cheaper traditional energy ecosystem or we have a more expensive cleaner world. Often times, climate discussions can come across as being above the economics, which is neither true nor helpful. Don’t fall for this mutually exclusive line of thinking. We are at a stage where we can have both.