Carrots, Sticks, and the Evolution of U.S. Climate Policy

Abstract

The Inflation Reduction Act (IRA), enacted by Congress in 2022, is the most significant federal investment in decarbonization in U.S. history. The law makes hundreds of billions of dollars available for clean energy tax credits, grants to state and local governments, and other financial incentives for public and private investments. The IRA’s focus on incentives, or “carrots,” marks a significant departure from the emphasis on prescriptive regulations and penalties, or “sticks,” that are prominent in federal and state climate policies that predate the IRA. This Article situates the IRA within the existing climate policy framework and explores the long-term impacts of the new law. The Article begins with an overview of regulations and tax incentives to reduce greenhouse gas emissions leading up to 2007. The Article then discusses the emphasis on pricing carbon through federal Cap-and-Trade legislation from 2003 to 2011, and the return to prescriptive regulation under the Clean Air Act when those federal bills failed. The Article contrasts these efforts with the positive financial incentives included in the IRA, tracking the evolution of the bill and the political and economic circumstances that created the policy window for Congress to pass such an impactful law. The Article concludes with a discussion of the lasting impacts of the IRA and the interplay between the existing policy instruments.