'Selective repeal and amendment' of Biden landmark US climate law expected by Republican Congress

When Congress convenes in early January, Republicans with their new majority appear focused on legislating federal clean energy subsidy limits, not terminating most 2022 climate law tax credits as the industry initially feared, according to policy experts.

“I think it will be a matter of selective repeal and amendment,” David Kautter, assistant secretary for tax policy at the Department of Treasury during President-elect Donald Trump’s first term, said on a recent webinar held by law firm Norton Rose Fulbright.

The party will have 53-47 control in the Senate and Vice President-elect JD Vance, in his future capacity as president of the upper chamber, can break deadlocks on legislation with an affirmative vote.

In contrast, Republicans’ advantage is razor thin in the 435-seat House of Representatives. The party won 219 seats in recent elections, a majority of only two. This could expand to four if recounts confirm initial results in three remaining tight races.

It would be then up to Trump and House Speaker Mike Johnson, the top Republican there, to enforce party discipline in a caucus riddled with cabals, ideological differences, and strong personalities.

While on the campaign trail, Trump slammed Inflation Reduction Act (IRA), the landmark US climate law passed by outgoing President Joe Biden’s Democrats in 2022, as the “greatest scam in history”.

After vowing to use executive action for repeal, he was advised this wasn’t possible and would require new legislation. He subsequently focused most of his ire on IRA provisions, mainly via threats to rescind certain tax credits and claw back unspent money in climate change mitigation and adaptation programmes.

IRA appropriates about $142.3bn to reduce greenhouse gas emissions and protect against climate change impacts, the largest such US investment in history. At least 60% has been spent or committed.

'No cap' tax credits

In addition to direct spending programmes, the law contains extensive revisions to the tax code to support numerous established and promising clean energy and climate-related technologies and supply chain manufacturing activities.

The total value of these tax credits, most of which will be in effect for at least a decade, is hard to evaluate given the majority have no caps on their use. Lower estimates are in the range of $500bn and those at the upper end, two or three times that amount, or more.

Either way, they are much more expensive than advertised by Biden and represent revenue that could be gained through selective repeal or modification. Trump would like to use that money saved – so-called “pay fors” - to help offset the cost of extending tax cuts passed in 2017 during his first term that expire at the end of 2025.

Estimates vary, but the cost of those tax cuts for individuals and small businesses could add $4trn over 10 years to the rapidly ballooning US debt, now $36trn.

“The amount of revenue that could be picked up by an IRA repeal is just a drop in the bucket compared to the potential cost that extension of the 2017 tax cuts would entail,” Joe Mikrut, who was tax legislative counsel for the Department of Treasury during former President Bill Clinton’s administration, told the webinar.

EVs at risk

He said the four IRA provisions most at risk include the electric vehicle (EV) tax credit that will cost about $112bn, according to the Department of Office of Tax Analysis at Treasury.

Another is $11.7bn in funding for Department of Energy’s Loan Programmes Office. LPO is using that money to expand its existing loan authority by tenfold and create a new loan program capped at $250bn to upgrade, repurpose, or replace energy infrastructure.

The other two provisions are the distant phaseout dates for renewable energy tax credits – geothermal, solar, wind – and $60bn allocated for computer upgrades and staff hirings at the Internal Revenue Service, which collects taxes and regulates the federal tax code. This was a provision unrelated to climate.

“While some of the tax credits may stay on the books, they may not look like they do today in terms of eligibility, scope, and time frames,” Mike Catanzaro, CEO of Republican lobbying firm CGCN Group and a special assistant for domestic energy and environmental policy to Trump in his first term, told the webinar.

Kautter agreed. “I suspect the Republicans will move to start the phaseout as soon as they possibly can and to grandfather existing arrangements. If a project is at a certain point, it likely will be grandfathered. There is a strong desire to move quickly,” he said.

Shovels in the ground

Party leaders will need to work with the White House on tax credit change transition rules, perhaps around construction start or a certain level of incurred costs.

Catanzaro noted that Republican lawmakers are seeing “shovels in the ground” and new factories in their districts that depend on IRA tax credits.

He cited an August letter from 18 House Republicans to Speaker Johnson warning that “prematurely” rescinding tax credits would impair private investments and waste public money.

“There is probably double that support among House Republicans. Others were just not willing at the time to sign,” said Catanzaro. “Margins are extremely thin in the House, as they have been. Those who want to keep these credits will have a fair amount of leverage.”

For those reasons, he expects Republicans will take a “scalpel, not a sledgehammer” to the IRA as Johnson forecast would occur before the elections in anticipation the party would control Congress.

Trump is expected to go along with Congress to retain tax credits as written in IRA that he and/or Republicans favour and have oil industry support. These include carbon capture, hydrogen, manufacturing, nuclear, and renewable fuels.