Clean energy bill can curb long-term inflation

U.S. inflation hit a 40-year high in January, with prices rising 7 percent over the last year, generating deep concerns across government, industry and financial markets. Yet, the sources of this inflation are complex. Most price pressure is being driven by oil, gasoline and other energy spikes, as well as the auto sector. Taken together, these account for about 70 percent of recent run-ups. This suggests that sectoral approaches focused on energy and autos could be helpful in curbing U.S. inflation.

Record government funding for COVID-19 and economic relief has played a role in driving up demand and prices, and interest rate hikes by the Federal Reserve will be needed to counter wider inflationary pressures. But today’s inflation also seems a perfect storm driven by market jitters over a possible Ukraine invasion that could restrict Russian oil and gas supplies, microchip and semiconductor supply chain problems in the auto industry, and resurgent consumer demand as the COVID pandemic appears to be easing. 

Members of Congress are increasingly concerned about inflation, with Sen. Joe Manchin (D-W.Va.) citing it as a major reason to withhold support for President Biden’s social spending package. Unfortunately, however, this decision has also threatened passage of pending electric vehicle and other clean energy consumer tax credits that have been legislatively paired with social spending. Yet, these clean energy incentives are precisely the measures with the strongest potential to limit the long-term inflation from oil, the automotive sector and other energy costs, by commercializing alternative forms of energy. 

The good news is Manchin has repeatedly expressed support for the Senate clean energy package, noting just last week that he’s “willing to do a lot of good things on climate.” The Senate should use this moment to pass clean energy tax incentives to jumpstart diversification of energy and transportation sources, a transition that is strongly in America’s economic, anti-inflationary, security and climate change interests.

Such action would recognize that the best way to reduce oil and gasoline prices is to cut demand, which is what electric vehicle tax incentives and other clean energy proposals now before Congress would do, in tandem with planned increases in auto fuel economy standards and the recent infrastructure bill. These efforts, heretofore marketed primarily on climate change grounds, should be touted as tremendously important to fighting future inflation and overall U.S. economic growth and competitiveness. 

Conversion by the auto industry from the internal combustion engine (ICE) to electric vehicles (EVs) will not be without costs and challenges, and the Biden administration should be honest about this. Even so, near-term costs pale in comparison to huge consumer and climate benefits EV’s will bring over time. Multiple studies show that electric vehicles will substantially reduce consumer operating and repair costs. By the end of the decade, EVs model sticker prices will be in-line with ICE vehicles according to experts, making consumer purchase incentives no longer necessary. But EV production will also be increasingly crucial to the future of U.S. manufacturing and transportation sector, as essentially all major automakers, including Ford and GM, intend most of their new vehicles to be EVs within a decade. These consumer incentives are crucial for U.S. industry to compete with large EV subsidies lavished on automakers in China, Europe and other markets.

While the EV transition will increase electricity demand by as much as 50 percent by 2050, a wide range of clean energy technologies, from wind and solar to geothermal to electricity storage, can cut long-term electricity prices as well as reducing emissions and limiting fast-rising costs of climate change impacts. Finally, the price tag for all pending consumer clean energy incentives is about $30 billion a year over a decade — very significant to the sector and consumers, but hardly hyper-inflationary in an overall $21 trillion annual U.S. economy. They are also paid for under legislation that has passed the Senate Finance Committee’s, so will not increase the U.S. deficit.

To ease near-term prices, Biden could order limited releases of oil stockpiles from the U.S. Strategic Petroleum Reserve (SPR), while remaining mindful that the threatened Russian invasion of Ukraine means he must maintain most of the SPR in case Russian oil supplies are disrupted. The president should encourage swing oil producers in the U.S., Saudi Arabia and elsewhere to increase oil and gas production and investments now, especially as a hedge against losing Russian supplies. But the White House should resist calls for a federal gas tax “holiday” proposed by several Democratic senators. While reducing prices at the pump by 18 cents, it would only increase oil demand at a moment when our system has little capacity to absorb it, ironically worsening underlying oil inflation.

Instead, the president should also step up the solutions for the huge spike in used auto prices, up nearly 50 percent in the last year. The White House has highlighted the need to bring key auto microchip semiconductor production back to the U.S., touting new factory announcements in Ohio, Texas and Arizona. The administration and Congress should continue to make such domestic high-tech manufacturing investment a major priority in reducing auto and transportation inflation, including by reconciling the bipartisan Senate USICA bill with the House America COMPETES Act, as well as signing a compromise bill into law this spring.

Limiting energy and automotive sector inflation will not be easy or quick. But over the long-term, diversifying our energy portfolio to be less reliant on oil and transforming our auto sector toward electric vehicles will bring tremendous consumer, economic and climate benefits, including lower costs. We should keep our eyes on this prize while also dealing with our current inflationary challenges.

Paul Bledsoe is a strategic adviser at the Progressive Policy Institute. He served on the staff of the U.S. Senate Finance Committee and the White House Climate Change Task Force under President Clinton.