The U.S. Inflation Reduction Act: Climate policy as economic crisis response in a politically divided state

Meeting the goals of the Paris Agreement will require net zero greenhouse gas emissions by 2050 and substantial reductions as soon as 2030 (IPCC 2021). The United States is a crucial actor for meeting the goals, given its status as the world’s largest economy and second largest GHG emitter. In August 2022, amid a pandemic-induced economic recession and war-induced global energy crisis, the U.S. Congress surprisingly adopted climate legislation for the first time when the politically polarized Senate voted narrowly in favor of the Inflation Reduction Act (IRA). This legislation aims to reduce US GHG emissions with 44% from 2005 levels by 2030. The IRA will provide $370 billion in federal subsidies, tax incentives and investments in the green energy transition in the United States, aiming to cut energy costs, create new green jobs and address environmental justice issues. The design of the IRA breaks quite radically with market-oriented policy approaches previously discussed in the US Congress but never adopted, like cap-and-trade. This paper draws on political economy perspectives, document analysis of Congressional records, and media analysis to explain this policy change. First, the paper traces the decision-making process leading up to the adoption of the IRA, identifying key interests, actors, and institutions involved in shaping the design of the IRA. Second, the paper investigates whether the novel combination of climate policy instruments in the IRA – like the generous tax incentives, subsidies, and environmental justice requirements – can help explain why climate legislation could finally be adopted in Congress, juxtaposing the IRA design with previous climate legislation design. Third, the paper discusses whether the recession in the wake of the Covid-19 pandemic and the Ukraine war-induced energy crisis offered an opportunity for policymakers to re-examine the trade-off between economic growth and climate policy, thus instigating the adoption of the IRA. Finally, the paper concludes by highlighting main findings, outlook for the implementation of IRA, and visions for future research.