This essay has been updated to reflect news developments.
Though the average price of gasoline in the United States has dropped to about $4 per gallon, down from a high of around $5 in mid-June, rapidly increasing energy prices are still driving inflation over the year. It’s what Isabel Schnabel, a member of the executive board of the European Central Bank, memorably termed “fossilflation.”
Fortunately, the United States has finally decided to address it head-on: The Inflation Reduction Act of 2022, easily the largest climate bill in U.S. history, has cleared both the Senate and the House. It invests $369 billion to help get the country off fossil fuels and gives the Department of Energy $250 billion to lend to companies shaping the clean energy future. Together, these measures will leverage many hundreds of billions of dollars spent by businesses and households alike, producing and purchasing things like electric vehicles, solar panels and heat pumps.
But the harsh truth is that the transition from fossil fuels can be a slog. The bill will make green appliances and cars more accessible and affordable, and shield consumers in the long term from the vagaries of wildly fluctuating fossil energy markets, but there will be some growing pains. While decarbonizing our homes can lead to price stability and significant savings — my family, for example, cut our monthly utility bill by more than 75 percent in a recent renovation — we must also prepare for what Dr. Schnabel calls “greenflation,” the higher prices and labor crunches that come with the green transition.
The Inflation Reduction Act will help many more families take the steps my family took recently — decarbonizing our 750-square-foot apartment in a small, 200-year-old New York City co-op building. Over 18 months, we insulated the ceiling and walls, installed a heat pump, replaced an old water heater with an efficient new one and swapped a gas range for an induction stove to allow us to cut the gas line and go all-electric. Five of our six neighbors have also installed heat pumps.
The bill’s High-Efficiency Electric Home Rebate Program offers up to $8,000 to install heat pumps that both cool and heat homes, replacing air-conditioners and, typically, gas furnaces. If the current water heater runs on gas, the program supports going all in with a heat pump (a $1,750 rebate).
Fully electrifying one’s home also often means improving electric wiring (another $2,500 rebate), and the full benefits of home electrification only come with sealing gaps and insulating ($1,600). Switch from a gas range to an induction stove and get up to $840 back. Add solar panels on the roof (a 30 percent tax credit), batteries as backup (30 percent) and an electric vehicle in the garage (up to $7,500 per new car and $4,000 per used car), and home electrification is complete.
But good luck trying to find a capable contractor to renovate your New York apartment this year. The one who renovated ours shortly before the pandemic is now scheduling clients for summer 2023. The combination of low unemployment rates, pent up demand after Covid restrictions and the increased desire to renovate because of high energy prices pushes up prices. Car dealers are also asking for prices above manufacturer suggested retail prices for electric vehicles. These are the nascent woes of a new, low-carbon industry.
In the long term, the Inflation Reduction Act will help relieve these problems by developing manufacturing and domestic supply chains. One important measure in the bill involves faster permitting for renewable energy projects. Environmental reviews are sometimes used by those opposing construction in their backyard to delay and outright block necessary investments. That goes for building new housing as much as for transmission lines. Faster permitting processes have been a priority for industry and for the rapidly growing progressive YIMBY — “yes, in my backyard” — movement. The name of the game is to actually build the clean energy future we want. That means focusing on supply as much as demand.
Not burning any fossil fuels in your home and car is a good and necessary first step, but fully insulating oneself from fluctuating gas prices also means decarbonizing the electric grid. The bill jump-starts this process, but the transition is not painless.
The lower the fraction of electricity generated by oil, coal and gas, the more vulnerable the grid is to price fluctuations. Think of it as the throes of a dying industry. In the extreme, if grid stability depends on one remaining gas plant, that plant gets to set the price for everyone under current pricing rules, even if a vast majority of electricity comes from low-cost, low-carbon sources.
The bill includes tax credits for clean energy manufacturing in the coal fields, a provision celebrated by the United Mine Workers of America. It is precisely this kind of investment in domestic supply chains that helps address worries over greenflation by making sure that supply meets demand.
Higher prices for renewables send important signals. Over the long run — years and decades — they mean many more contractors, manufacturers and suppliers entering the market, who in turn climb the learning curve and slide down the cost curve, lowering prices for everyone. In the short run — months and perhaps years — focusing too much on creating demand may well mean increased prices and longer wait times.
The bill’s effects might be as much psychological as they are economic. The U.S. government is finally shouting far and wide that the clean energy transition is here, and it is here to stay. Getting the economics right in this transition is key, and subsidies help. But don’t be surprised if your contractor tells you out of the blue that he’s now “more selective” in picking clients who want to pursue “sustainable and more forward-thinking projects.”
Gernot Wagner is a climate economist at Columbia Business School.
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