INSIDE ECONOMICS

Mark Zandi:                       Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's Analytics. And I'm joined by my two trustee co-hosts, Cris deRitis and Marisa DiNatale. Hi, guys.

Cris deRitis:                        Hey Mark.

Marisa DiNatale:              Hey Mark. Happy Friday.

Mark Zandi:                       How are things?

Cris deRitis:                        All right. Hanging in there.

Mark Zandi:                       Well, I thought we should just advertise our upcoming conference in DC, shouldn't we, Cris?

Cris deRitis:                        We probably should, now that you mentioned it.

Mark Zandi:                       Yeah, you want to advertise it? We didn't rehearse this. Do you know the day?

Cris deRitis:                        June 4th.

Mark Zandi:                       Oh, thank goodness you're here because I would've said June 5th and misled everybody. It's June 4th.

Cris deRitis:                        June 4th, Tuesday. And the title of the conference, you're going to have to help me there. I think it's Long Run Growth.

Mark Zandi:                       I don't remember.

Marisa DiNatale:              You guys are really selling it.

Mark Zandi:                       I know. I was going to ask, you've seen the agenda. I think the agenda is pretty good. I think it's the economy in the long run, looking at the economy in the long run.

Cris deRitis:                        Something like that. That's right.

Mark Zandi:                       Yeah. But you've seen the agenda, which is your favorite session?

Cris deRitis:                        Oh, there were two sessions that really stood out to me, one on productivity and another one on housing.

Mark Zandi:                       Yeah, right.

Cris deRitis:                        Can't miss. Can't miss.

Mark Zandi:                       Can't miss on those, right?

Cris deRitis:                        Nope. Nope.

Mark Zandi:                       Because on the productivity you're going to be debating Dr. DeAntonio.

Cris deRitis:                        Yeah. We're taking our little inside economics debate on the road.

Marisa DiNatale:              Oh, cool.

Cris deRitis:                        Mano a mano.

Mark Zandi:                       Mano a mano. And then of course the session on real estate, mostly it's going to be focused on housing, single and multi.

Cris deRitis:                        That's right. I'll be moderating a panel there, so looking forward to that. External guest as well, so should be really interesting.

Mark Zandi:                       Yeah, it should be a good conference. So hopefully folks are interested. Just contact us and we'll help you register, but we'd like to see you there in DC on June the 4th. This is going to be a really interesting podcast, it's going to be focused on climate. And talk a lot about the Inflation Reduction Act, the piece of legislation passed in 2022. A lot of moving parts there, but the key aspect of that was all the climate-related provisions, and we've got a couple of great guests.

                                                We've got Chris Lafakis, our own colleague who follows these issues carefully. And then Trevor Hauser, who's at Rhodium, who's really very articulate voice on these issues. So we have them both and we'll come back to them. We'll invite them in into the conversation in just a few minutes. But before we do that, it was a light econ data week, wasn't it?

Cris deRitis:                        Very, very light.

Mark Zandi:                       But there's always things to talk about. So I thought maybe we just spend a few minutes, and we could each identify something that happened in the economy broadly, it doesn't even have to be directly related that provides some insight into how things are going, or in what direction we're headed, just to get the conversation going. Does that sound like a reasonable thing to do?

Cris deRitis:                        Yeah, absolutely.

Marisa DiNatale:              Yeah.

Mark Zandi:                       Okay. Do you want to go first, Marissa?

Marisa DiNatale:              Sure.

Mark Zandi:                       Okay.

Marisa DiNatale:              Well, two things stood out to me.

Mark Zandi:                       Two, okay.

Marisa DiNatale:              One is a statistic and one is an event.

Mark Zandi:                       Oh, okay.

Marisa DiNatale:              The first thing is did you see that UI claims popped up?

Cris deRitis:                        It did.

Mark Zandi:                       I saw.

Marisa DiNatale:              Quite a bit.

Mark Zandi:                       Does it mean anything though?

Marisa DiNatale:              It's apropos of our conversation last week, when we were talking about the jobs report and the weaker report, and I was a little more worried about it than you guys were worried about UI claims turning on a dime. They're still low, they're 233, but the increase was quite large, the largest we've seen pretty much all year. So I wanted to point that out. We'll see what happens with that.

Mark Zandi:                       I did notice, you may be impressed by my level of the detail I bring to these analyses, but I did notice that the biggest increases were in New York and California. It just felt weird. Seasonal adjustment issue, or something weird going on. No.

Marisa DiNatale:              It's tough with this data. It's weekly and it's aggregated from state UI claims, so we'll see.

Cris deRitis:                        We'll see.

Marisa DiNatale:              But it certainly caught my attention just on the back of the last jobs report. But the thing that I wanted to note just in terms of happenings in the economy was that the Bank of England had a meeting and they held their interest rate steady 5.25%, right where the Fed is at. But there was a little more dissension in the makeup of the monetary policy committee in terms of there were two members that wanted to lower rates. Inflation is now lower over there than it is in the US, and they seem ready to move ahead of the Fed. Most of these central banks take their cues from the Fed, but it increasingly is looking like the BOE and probably the Bank of Canada, and maybe even the ECB may end up moving before the Fed to lower rates.

Mark Zandi:                       I think a number of countries already have, smaller economies, emerging frontier economies.

Marisa DiNatale:              Scandinavia Northern European economies have.

Mark Zandi:                       I guess the concern or the limitation would be if their currencies came under pressure.

Marisa DiNatale:              Right.

Cris deRitis:                        Exactly.

Mark Zandi:                       It doesn't feel like that's happening though, have they? The pound seems pretty stable, I think, even though investors are now discounting a move by the Bank of England before the Fed. Have you noticed anything on the pound?

Marisa DiNatale:              I didn't look at that, but I haven't heard much about it. But they're looking at potentially moving in June. And we've pushed back our first Fed rate cut to September.

Mark Zandi:                       Right. Right. Good. No, those were good ones. Cris, anything you want to call out?

Cris deRitis:                        I saw a couple of things related to the consumer that came out this week. We had, of course, the University Michigan Consumer Sentiment survey came out this morning, showed a 10 point drop in the headline consumer sentiment, so that-

Mark Zandi:                       Did it really? I missed that. Wow.

Cris deRitis:                        So that's a pretty big drop from April to May. Maybe the vibe session's still there. Consumers still certainly on edge about the future.

Mark Zandi:                       Well, that must put the number back pretty close to the low if it's down 10 points, no?

Cris deRitis:                        It's back to where it was in November. It's going to tread around that low level, so that's definitely something to watch. Then I saw consumer credit, so that's the G19 report from the Federal Reserve, that was weak. It showed that credit growth for both revolving and non-revolving debt was around six billion or so, rounding numbers here. And that's certainly much weaker than expectations, which were before more something closer to 15 billion. Very weak growth on the revolving credit side. So that's bank card lending, and other credit card type of lending. Is that tighter lending standards preventing consumers from getting credit? Possibly. But I think it's also just consumers themselves retreating perhaps. Again, it would be consistent with that more cautious consumer confidence number.

                                                And then I was listening to some of the Wall Street reports, some of the retailers whatnot, like a Starbucks. And they're also indicating consumers, at least among their consumer base, they're seeing some potential weakness there as well. Kind of like that [inaudible 00:08:03] insurance claim number, I don't want to overreact, this is one set numbers here.

Mark Zandi:                       I'm telling you the Fed's got to ease interest rates.

Cris deRitis:                        Come on. Even Canada's going to do it.

Mark Zandi:                       Come on.

Marisa DiNatale:              Canada, yeah. We also got the senior loan officer survey, which showed-

Cris deRitis:                        It did.

Marisa DiNatale:              ... continued tightening in some segments and almost across the board weaker demand for all types of consumer credit.

Mark Zandi:                       It's not like they tightened more, it's just they're still tight. It's not like the net percentage of respondents that said they're tightening increased, it just evened down a little bit.

Marisa DiNatale:              No, some of them did.

Mark Zandi:                       Really?

Marisa DiNatale:              Some of them I think did. But I don't know if it's fewer, maybe one more increased and instead of staying the same or something, I don't know what the makeup is. But it did tighten on that.

Mark Zandi:                       I can take a no, it's still tight. There's still more numbers that are tightened-

Marisa DiNatale:              And demand. And my point was more about demand, which is-

Mark Zandi:                       Demand.

Marisa DiNatale:              ... Cris talking about the demand for credit.

Mark Zandi:                       Well, just add to your narrative. I thought you were going to mention the Equifax based data we get on consumer delinquency, we got that for April. Did you see that, Cris?

Cris deRitis:                        It did?

Mark Zandi:                       Yeah, I was a little surprised. I had thought the delinquency rate on credit cards and auto had stabilized, and it was stable for three, six months, but saw a pretty sizable increase in April. Now it could be seasonal adjustments that bear with this data, especially around tax refunds.

Cris deRitis:                        Tax, exactly.

Mark Zandi:                       Again, like you I don't want to read a lot into it, but this feels like softness is starting to build in here. And I keep going back to the Fed. Come on already, we're there. You're playing with fire here, but anyway.

Cris deRitis:                        That CPI report next week is going to be-

Mark Zandi:                       It's going to be-

Cris deRitis:                        ... important.

Mark Zandi:                       I was going to point to some commodity prices. Have you noticed the price of gold recently or the price of copper? Both have risen pretty considerably.

Marisa DiNatale:              Gold.

Mark Zandi:                       Gold prices are up. And my pet theory is just all the people's concerns about geopolitical risk and also central banks, particularly, I think the Chinese Central Bank has been shifting away from US treasuries, and needs to put its money somewhere, so it's putting it into gold, I think, I think. So that's something to watch, it's at a new high. I think on a real basis though it's not like in the stratosphere compared to history, but it's getting pretty high. And copper prices $4.65 cents. Now, historically, I would've said that means a strong economy, but I'm not so sure, that may just mean demand. We're going to talk about climate in a second. And of course, electricity and electric demand feels like it's starting to pick up, and you need copper for electric grids and to move electricity around. So demand for that's picking up and copper prices are up. But, okay, anything else you guys want to mention before we move the conversation forward and talk about climate? No.

Cris deRitis:                        No. Stay tuned.

Mark Zandi:                       Stay tuned, stay Tuned.

Cris deRitis:                        Next week will be key.

Mark Zandi:                       Key week. And let me introduce our guests, talk about climate change and everything related to climate change. We've got our own colleague Chris Lafakis. Hey Chris.

Chris Lafakis:                     Hey Mark, how are you?

Mark Zandi:                       I'm doing well. It's good to have you in the conversation. You've been on Inside Economics more than a couple times now, right?

Chris Lafakis:                     I'm a regular interloper.

Mark Zandi:                       You are an interloper, but very nice one to have when it comes to anything related to energy markets or climate change, so thank you for joining us. And a special guest, Trevor Hauser. Trevor, good to see you.

Trevor Houser:                 Hey, Mark, happy to be with you.

Mark Zandi:                       And Trevor, you're a partner at Rhodium Group.

Trevor Houser:                 That's right. Rhodium is independent research provider, and I'm with the company's energy and climate practice.

Mark Zandi:                       I think you run the practice, that's my understanding.

Trevor Houser:                 We now have multiple partners leading up the practice. But I'm the founding partner of our energy and climate business.

Mark Zandi:                       Can I ask you because I got to know you, or getting to know you through Dan Rosen. Dan is a really good economist, focuses on China. And we've had him on the podcast before, and very strong views about China all on the dark side, but all exactly right. How did you and Dan connect, and why is Rhodium focused on China and climate? How did that happen?

Trevor Houser:                 Well, Dan started Rhodium in 2004, it was called China Strategic Advisory then. So he had been in the Clinton White House last couple years, and had spent a career as a think tanker before that. And at the end of the Clinton administration wanted to do policy relevant research, but to do it in a more fast-paced private sector environment, and so decided to start his own shop. I, in 2005, audited a class with him at Columbia University. I was a student at City College of New York, which is 20 blocks north of Columbia. And I basically snuck into his class at Columbia, and we struck up a friendship, and he asked me to come join him in this new little consulting outfit he had started. And at the time it was just doing research on China, and he needed someone to cover the energy commodities side of the China story. And then over time, I built out an energy and climate research business with a more global scope.

Mark Zandi:                       Got it. Got it. And as I said, Dan has very strong views on China, and I belong to this group, I think it's the National Committee on U.S. China relations. So I think the lore is correct, goes all the way back to the Ping-Pong Diplomacy back in the Nixon days. And this organization is still around, and Dan is very involved in one part of that organization. And he's always in pitched battles with others that are much more optimistic about China, particularly the Chinese. But I'll have to tell you he's been dead on. And we were talking at the last NCUSCR, I think I got that right, meeting. And we were talking about investment in the US and how that's really taken off here. And he said that we should have you on to talk about the Inflation Reduction Act, and what kind of impact that's having on investment in the US. And thus, thank you for joining us really.

Trevor Houser:                 My pleasure.

Mark Zandi:                       Before we dive in, maybe I'll turn to Chris Lafakis just for a minute. Chris, do you want to just summarize the Inflation Reduction Act? I know there's a lot of moving parts there. We can't describe every moving part, but broadly speaking, can you give us a sense of the IRA before we go further?

Chris Lafakis:                     Absolutely. I'll keep the summary at a very high level, of course we can dive into individual components of the IRA as needed. So there are I would say maybe five key parts of the IRA. First is that it raised taxes on corporations. The second is that it grants... And we can go into great detail about any of these as you wish. The second is that it grants Medicare the authority to negotiate over prescription-

Mark Zandi:                       I'm going to stop you right there, Chris. I don't care about anything that's unrelated to climate risk. I know the IRA's got lots of stuff going on, but we're focused on climate in this one. So can you summarize the climate aspects of the legislation?

Chris Lafakis:                     Yes. So there are two important climate aspects to-

Mark Zandi:                       Sorry, but this is what you have when you have economists, this is what you deal with, right?

Marisa DiNatale:              Mark, you asked for a summary of it, so he gave you-

Mark Zandi:                       I did.

Marisa DiNatale:              ... a summary.

Mark Zandi:                       It's really my fault. He could give us the blow-by-blow on every provision in that piece of legislation. So very explicitly, let's focus on the climate provisions, Chris.

Chris Lafakis:                     Okay. There's two big things on climate, one is direct federal spending, and the other one is the provision of tax credits. The spending was initially estimated to be roughly 120 billion in direct federal spending, and the tax credits were the remaining 250 billion, that's the initial JCT score. So 370 billion as scored initially by the JCT, a combination of direct federal spending-

Mark Zandi:                       Joint committee on taxation, which is the group that scores the tax side of different pieces of legislation in Congress.

Chris Lafakis:                     That's correct, yes. And so 120 billion in direct federal spending for clean energy economy, 250 billion in provision of federal tax credits for the clean energy economy. These things can, they're focused on an array of initiatives. So they can either provide incentives to produce electricity from clean energy sources, invest in renewable energy technologies, address climate change through carbon sequestration, support renewable fuel production, clean energy manufacturing, securing the energy security, and I would say supply chains of critical minerals. So they're focused on really a range of aspects, and all of the individual components are intended to reduce our economy's reliance on fossil fuels at the end of the day.

                                                Now, the joint center for taxation came back a year later and said that these provisions were going to be much more costly than initially estimated, about two-thirds higher than initially estimated, so that's the bill which was helping to reduce federal government budget deficits, would be more like deficit neutral over the first 10 years or so. So I would say in a nutshell, tax credits, which are the bulk of the spending and direct spending by the federal government on a wide array of initiatives.

Trevor Houser:                 And maybe Mark a way to think about that is, so the Inflation Reduction Act, it basically discounts all types of clean energy available in the economy in pretty much all applications. So whether you want to buy a solar panel and put it on your roof, or a heat pump water heater to replace your old water heater, or whether you're a business and you want to invest in a new wind farm or a new solar farm, all of that is cheaper now than it was before because of the IRA. As Chris said the mechanism through which the bill makes it cheaper is varied. In some places you can file for a tax credit, in other places you have to apply for a government grant. But basically the way it operates is making all those technologies cheaper so that more people will buy them.

Mark Zandi:                       And it's been very, correct me if I'm wrong Trevor, but it's been very successful in a sense that there's been take up on all of this much greater than was envisaged when the legislation was passed into law, is that right?

Trevor Houser:                 Which is exactly why, as Chris mentioned, the initial, when the budget forecasters, whether at JCT or within the administration initially tried to estimate, "Okay, how much is this going to cost?" They actually don't know for sure because so much of it's the tax credits, and you can discount products, but you can't guarantee people buy them. And so you have to guess, if we cut the price by 30% of this via tax credit, how much more are people going to buy it? And the uptake has been stronger than originally expected, so that makes the fiscal cost of the bill a little bit higher, but it also means it's doing what it's needing to do. And even more so in terms of driving clean energy deployment and reducing emissions.

Mark Zandi:                       As I recall, this is a fuzzy recollection that the IRA in its totality, it was not paid for. And this is with the original scoring, not with what's happened subsequently. But the original scoring, it was not paid for in the 10-year budget horizon the CBO uses to score these things, the Congressional Budget Office, the nonpartisan group that does this work in the government. But over a long period of time, like a 20-year horizon that it did. Is that recollection correct, do you know, and has that now calculation changed because there's been more take-up. So this thing is no longer kind deficit neutral in the long run, do you know?

Trevor Houser:                 It sounded like Chris had the score right in front of him.

Mark Zandi:                       Do you know Chris?

Chris Lafakis:                     So the initial score was 450 billion in spending and 750 billion in revenue collection. Of course, that includes money that is from the IRA. The bill spends $80 billion to fund the IRS in the hopes of getting more money back from enforcement of the tax laws, because people are finding a way to get around paying their taxes. So that initial score was for 300 billion in savings over a 10-year window. Of course, a lot of things have changed since then. So we have a lot more clarity on how the law is being applied. Some of those provisions like on Medicare pricing won't go into effect until 2026. The insulin price caps went into effect in 2023. The IRS funding was lowered from 80 billion to approximately 60 billion. Of course, the big one is that the cost of the tax credits provided for clean energy have increased dramatically. I would still expect the bill to be I would say reduce the federal government deficit, but to a much lower degree than previously estimated.

Mark Zandi:                       Oh, so I was wrong. When the legislation was originally scored, it wasn't just deficit neutral, it reduced the deficit.

Chris Lafakis:                     Yes.

Mark Zandi:                       Okay. And now with the increased take-up on the tax subsidies, you're still thinking that when it's all said and done, this will still be a net plus for the federal government from a fiscal perspective.

Chris Lafakis:                     Yes, but only on the margins, really.

Mark Zandi:                       On the margins.

Chris Lafakis:                     I think for all intents and purposes, it's going to be deficit neutral.

Mark Zandi:                       Okay. Trevor I just want nail that down because wherever I go when I talk to people, they think there is just this massive government spending tax cuts and it's not paid for, and it's just adding to deficits and debt. And that's just not right, at worst it's deficit neutral. Is that a reasonable working assumption?

Trevor Houser:                 Yeah, it's a reasonable working assumption.

Mark Zandi:                       All right. Hey, anything else on the IRA that we should explain? Any other aspects of the IRA we should explain before we go on? Talk about what's working, what's not working and the economic impact?

Trevor Houser:                 The one thing I would say is for the purpose of talking about clean energy deployment, it's useful to think about the IRA in combination with the Bipartisan Infrastructure Law, which was passed the year before, which also included substantial and in many ways complementary investments in clean energy deployment. So when we assess the effectiveness, we're usually assessing the effectiveness of those combination of bills together. Because they really were each tackling different and complimentary pieces of the clean energy deployment challenge.

Mark Zandi:                       Because that infrastructure legislation had a lot of money for the electric grid, for example.

Trevor Houser:                 Electric grid, EV charging, hubs to drive deployment of early stage climate technologies like clean hydrogen, and direct air capture that then subsequently receive tax credits as they reach more maturity from the IRA. So they really were designed as tandem pieces of legislation.

Mark Zandi:                       And of course the other big piece of legislation that was passed was the CHIPS Act, obviously more chip development production here in the US, but also a lot of R&D. Does that play a role here as well?

Trevor Houser:                 A little one less so, certainly if you were looking at what are the policy drivers of manufacturing investment in the US, you'd want to look at all three of those together because of the CHIPS and Science Acts incentives for semiconductor investment. For clean energy specifically that comes in as a distant third in terms of its level of importance to the IRA, and the Bipartisan Infrastructure Law.

Mark Zandi:                       Okay. Very good. Before we dive into the more nitty-gritty and what's working and not working. From a broad perspective I just had this perspective, I just want to articulate and get your view, get your view on it. When I think about climate there's obviously in most people's mind, this is something we've got to tackle. The climate is changing very rapidly. Temperature rises here. It's having already observable impacts in terms of weather, and it's having economic consequences. We could see that on the southwest coast of Florida, having impacts on the housing markets, people are having trouble getting insurance and so forth and so on. But even if you put that to an aside, there's still reasons why we would want to move to green energy away from fossil fuel, away from greenhouse emitting kinds of activities. And that's simply national security, because as long as we're dependent on oil... And by the way, there's this perspective that because the US is producing so much oil, we produce more oil than anyone else on the planet at this point by orders of magnitude, that we are independent of what's going on in oil markets.

                                                Not true, the oil market is global. We still pay the price that everyone else pays. And so we are still very dependent on all the supply and demand dynamics globally that are influencing the price. For example, sanctions on Russian oil or Saudi production cutbacks, or what the Iranians decide to do or not do. So from my perspective, this move, this effort, and the IRA is part of it, the infrastructure's law a part of it, the CHIPS Act is a part of it. This move away from fossil fuel to green energy is just really a matter of national security. What do you think of that view, is that right or wrong?

Trevor Houser:                 It's interesting because in some of the most important pieces of early legislation that kick-started the clean energy transition in the US came in 2005 through 2007, signed into law by President George W. Bush. Really around the frame of folks will remember at a point where crude oil prices were skyrocketing. You had George Bush, a Texas oil man who in 2007 delivered a State of the Union address, where he declared that the US had to wean itself off of oil. And signed into law that year major legislation that increased fuel economy standards, invested in electric vehicles, included incentives for renewable energy production.

                                                And for the Bush administration, it was primarily around what you said, Mark, which was creating domestic alternatives to imported oil. Now of course, shortly after we had the shale boom and growth in domestic production. And the fact that from a balance of trade standpoint we are now at parity, or a little better than parity in terms of our energy trade balance, has lulled some folks into a little bit of a place of complacency that our economy is no longer vulnerable to oil supply disruptions around the world. But as you know better than I do, the macroeconomic impacts of an oil price spike are not limited to the balance of trade effects. That the impact on inflation, on consumer sentiment, and what you pay at the pump as an American driver, it continues to be determined by global oil markets, even though we're now a net exporter of oil. So if something goes boom in Saudi Arabia, the price of gasoline goes up in Iowa just the same now as it did a decade ago.

Mark Zandi:                       Exactly. Hey, Chris deRitis, anything you want to add there, or any color you want to provide?

Cris deRitis:                        I think he covered it.

Mark Zandi:                       You agree with that perspective? It is not only about climate, it's about national security, it's about becoming less dependent.

Cris deRitis:                        I would even say economic security. So we have the shale boom, but that shale boom has become apparent isn't going to last forever either. So we need to move to other fonts of energy in order to sustain the economy in the long run.

Mark Zandi:                       Marissa, anything? No.

Marisa DiNatale:              When we get to the stats game, you'll see.

Mark Zandi:                       Okay, fair enough.

Trevor Houser:                 Maybe one extra point on this, Mark, because this is often a question that people raise when you posit the national security benefit. Folks will say, "Well, what about with electric vehicles? A lot of the minerals and stuff that go into those EVs, those come from other parts of the world, aren't we just trading one national security concern for another?"

                                                They're very different in the way that they impact the US economy because one is a input to a manufactured product, and the other is a fuel for ongoing operations. So think about it this way, let's say we continue to be reliant on cobalt produced in the Congo for battery manufacturing. And let's say there's a big disturbance in the Congo and we can no longer get cobalt, everyone who has an electric vehicle continues to drive them. The cost of driving those EVs doesn't change at all.

                                                It does slow the pace at which you can manufacture new vehicles, but it doesn't change the operating cost of those vehicles overnight. So it doesn't have the inflationary impacts, it doesn't have the shock to consumer budgets as opposed to an oil supply disruption, which immediately impacts the economics of everyone driving a car on the road.

Mark Zandi:                       Good point.

Trevor Houser:                 And so these supply chain issues around the clean energy economy are real and need to be managed, but they're fundamentally different in magnitude than the national security issues that come from international oil and gas trade.

Mark Zandi:                       Well, of course, certainly at this point in time the oil market, the cobalt market, and any other mineral you want to conjure up that we need for an EV battery are on totally different planets in terms of their scale.

Trevor Houser:                 Yes, absolutely.

Mark Zandi:                       Totally different things altogether.

Chris Lafakis:                     I would add there Mark that some of the spending from the IRA addresses that point specifically. Last November, the Department of Energy announced 275 million in grants, and the goal there is to decarbonize the American economy in an equitable fashion while simultaneously reducing the US's reliance on China. So they're going to invest in nine former coal communities, and what they're going to do is establish domestic US production of critical materials that are currently imported from China. That's actually from the Bipartisan Infrastructure bill, my apologies. As Trevor mentioned, the two are complementary. But the US government is very focused on this question of critical minerals, because they will be needed as we transition away from the fossil fuel economy.

Mark Zandi:                       Okay. So let's talk about some of the nitty-gritty of the RA, because there is so many moving parts and hard to disentangle. Maybe the way to do it is, and maybe this is too simplistic, but I'll give it a shot. If you could pick one provision out of the IRA that's working really well, maybe even better than you anticipated, what would that be Trevor? Anything in particular that stands out?

Trevor Houser:                 So the biggest surprise in the IRA are the manufacturing tax credits. So the IRA includes tax credits for investment in new manufacturing in many different parts of the clean energy supply chain. So in the electric vehicle supply chain, everything from critical minerals mining, as Chris mentioned to battery component manufacturing, to cell and module assembly, to EV assembly. There's credits for wind farm component manufacturing, for solar manufacturing. And we've seen a remarkable uptake in those tax credits, far, far larger than expected, they really have fundamentally changed the economics of doing clean energy manufacturing in the US, and companies are responding very quickly. So in the last year we've seen in the US, so in 20... Let's see, let me just pull this up. In 2023 in the US there was let's say between 2022 and 2023, companies announced 156 billion in new investments in manufacturing, in clean manufacturing in the US.

                                                And that's 165% increase over the two years prior to that. It's large enough now we're talking about 50, 60 billion a year of actual investment activity that's happening in clean energy manufacturing, in all different parts of the country. So in the Midwest, in the traditional auto manufacturing regions there, in the Southeast, a new clean energy manufacturing hub that's sprouting up in the US Southwest between Arizona, and Nevada, and in California.

                                                And I think that a lot of observers had assumed that the US had permanently ceded leadership on manufacturing to China, that the US couldn't manufacture stuff anymore, and particularly not in the advanced vehicles or solar sector. And the amount of both solar, and battery, and EV manufacturing activity that we're seeing occur right now is genuinely surprising.

Mark Zandi:                       Interesting. Chris Lafakis, anything you'd want to call out that has been surprisingly positive from the IRA?

Chris Lafakis:                     Well, I'm right there with Trevor. The advanced manufacturing tax credits, the initial score from JCT was that those credits would cost $31 billion. The updated score pegs that number at $133 billion, that's an increase of 333%. I would say the EV tax credits, there's also been tremendous uptake of those. Well, exceeding the initial estimates from 14 billion initially to 72 billion in the updated score. On a percentage basis that's actually bigger than the advanced manufacturing uptake. But I am a little bit skeptical of those, because we saw during the cash for clunkers program that really what that program did is it pulled forward a lot of demand. So what could be happening with the EV tax credits, and obviously it's going to take time for us to know for sure. But maybe some of the EVs that people would've purchased in 2025 and 2026, 2027 got pulled forward to the more immediate window because of the provision of those tax credits.

Mark Zandi:                       Okay. There's been a lot of hand wringing about this transition to green energy, it's going to be very, very costly. And therefore, in the context of inflation and the problem of inflation that we've been suffering through here over the last several years, the worry was that that was going to be a tailwind to higher inflation rates going forward. We have to spend all this resource to go from our current fossil fuel-based energy system to something that's more green, and that's going to be costly and therefore raise prices, and exacerbate our inflationary problems.

                                                That could happen depending on how you drive this transition. I think here in the US given the IRA and the infrastructure legislation, and all the tax subsidies that have been provided, it really hasn't been at all inflationary. We're not adding to the cost of utilities or businesses, because it's all being absorbed by the federal government in the subsidies that they're providing. Whereas if you go over into Europe, perhaps there that might be inflationary because there the strategy has been not to use tax subsidies, not use a carrot, but use more of a stick, a carbon tax approach. Pushing businesses to adopt green energy, because it's costly not to do it because of the taxes, and that would be more inflationary. Trevor do I have that perspective right? Do you think that's what's going on here?

Trevor Houser:                 I think that's generally right. The one asterisk I would put on is I think there's a little bit of a difference between whether it's macro inflationary or micro inflationary. So I think from the micro level you're totally right. What economists had assumed would be the way that we would tackle climate change by putting a tax on carbon emissions that's socialized through the economy, that got some legs in Europe, that raises the price of goods to consumers while incentivizing them to buy cleaner options. So it's micro inflationary, the price of the individual carbon-intensive goods that customers are seeing that that price goes up. There've been a number of attempts to do that in the US over the years, and the politics are just pretty bad for it. And so what policymakers have learned in the US, there's two ways that you can price carbon.

                                                One is by making dirty stuff more expensive, that's what a carbon tax does. Or you can price carbon by making the clean stuff cheaper, it's all about relative prices. And in the US we've definitely gone with the make clean stuff cheaper approach via tax credits, which is micro deflationary because it's lowering the cost of electricity. So the Inflation Reduction Act lowers the cost of electricity, lowers the cost of vehicles to consumers. Now it's potentially macro inflationary if it is increasing aggregate demand and investment in the economy beyond what the economy can sustain. So that's where these overall equilibrium questions come into play. But at a micro level you're definitely right in terms of what consumers experience day in day out, in Europe climate policy feels inflationary, and in the US climate policy is experienced as deflationary.

Mark Zandi:                       Although if it's deficit neutral as we established, then the aggregate demand effect should be a wash really.

Trevor Houser:                 Should be fine. Exactly.

Mark Zandi:                       So it should not be inflationary at the end of-

Trevor Houser:                 Exactly.

Mark Zandi:                       ... the day. So it's actually quite fascinating when you think about it. So the US if you go back in time, going down the path that economists would recommend, this tax carbon or cap and trade was the approach that Congress got pretty close to passing. Maybe that was in the... I can't remember, was that in the Clinton administration or the Obama administration?

Trevor Houser:                 Obama, 2010, the House of Representatives passed a cap-and-trade-

Mark Zandi:                       That was it.

Trevor Houser:                 ... which just never made it through the Senate.

Mark Zandi:                       Never made it through the Senate. So that was the original approach, and I think we learned that that's a stick. The stick just doesn't work, people aren't going to go for it. But then we said, "Okay, well let's go with the carrot." And the carrot seems to be working pretty well, particularly again because we're paying for the carrot.

Trevor Houser:                 In addition, in the US that political reality happened to align well with congressional rules, which a cap and trade bill needs 60 votes to pass the Senate. Tax credits can pass through a 51 vote budget reconciliation process. So there was that additional factor that has inclined the US Congress towards the carrot statistic approach.

Mark Zandi:                       Oh, that's so interesting. It feels like the approach we've taken, it's working. It feels like the right approach. So if I asked you Trevor should we have a carbon tax or a cap and trade system, in the context of the IRA and the infrastructure legislation, do you think that's necessary at this point, or are we off and running here?

Trevor Houser:                 I think that the clean energy carrots approach gets you 80% of the way there, and the politics are much, much better. There are some downsides, you're doing it by proxy because you're not actually pricing the thing you ultimately care about carbon. You're trying to approximate it by we're going to provide this level of incentive for this technology based on how clean we think it is. You're going to get that wrong in some cases, you're going to have to readjust it. And then there are parts of the economy that a carbon price would ultimately work better for because of the international tradeability of the products. So for the industrial sector, which is something the IRA doesn't really touch that much, so that's steel, cement, aluminum, glass production. The ideal approach there would be to put in place a carbon price domestically, and then adjust that price at the border for imported products.

                                                Because you could get some harmonization with Europe's policy on the traded goods side. So that's a place where a carbon tax, or a carbon price would make more sense from a pure substance standpoint. But for 80% of what we wanted to carbonize, the non-carbon price policies are good enough, they're much better politics.

Mark Zandi:                       Good enough. Hey, Cris deRitis, I know this is a bit unfair. I keep throwing the ball into your court, but just want to make sure that I'm not missing anything that you'd like to ask on this particular topic. We will move on, but on this particular issue about carrots versus sticks.

Cris deRitis:                        I think there's a lot to say here. I think I might wait for the stats game.

Mark Zandi:                       Okay. We're going to get to that stats game. One more thing though before we get to the stats game, and that is we talked about the thing that surprised you on the upside. What provision or provisions in the IRA has been... what happened here has been disappointing to you?

Trevor Houser:                 The place where we're struggling the most in the clean energy transition right now is in wind development. So wind investment in the US has actually fallen by more than half over the past two years since the passage of the IRA, that is not because of the IRA. The IRA includes incentives for wind. It's that in the case of wind the incentives in the IRA have not been sufficient to address some of the other headwinds that the wind sector is facing, so part of that is inflation.

                                                Wind is much more sensitive to high interest rates than other types of clean energy technology because of the build times, particularly for offshore wind projects. But the other and probably the more important over the medium term is that wind is much more geographically concentrated in where the resource is. And where the resource is generally not where the demand for electricity is. So you got to find a way to move the wind from West Texas or from Oklahoma to Chicago. And to do that you need to build a power [inaudible 00:45:49]-

Mark Zandi:                       Chicago, really, the Windy City, you're telling me you got to move... Really? That's the best you could do, maybe Philadelphia, let's say Philadelphia.

Trevor Houser:                 Philadelphia. And so that means you got to build a transmission line to get it there. And so while the incentives in the IRA for wind are very strong, they've lowered the cost, they've made wind cheaper than it was before. To get that cheap wind to market, you have to build a transmission line that requires navigating myriad federal state and local regulatory agencies on siting and permitting.

                                                Now, tackling those permitting issues was not something that the IRA could do because again of those budget reconciliation rules, they could only do tax and spend. But it is the unfinished business of the IRA. And there was a deal when IRA was passed with Joe Manchin that Congress would come back and do a permitting reform bill, and that second part never happened. And so a lot of the places where we're seeing implementation struggle is indeed because that second part didn't happen. We haven't done the permitting reform needed to build clean electricity at the scale and pace necessary.

Mark Zandi:                       Got it. Got it. Hey, Chris Lafakis, same question to you. And don't tell me you're going to say wind.

Chris Lafakis:                     I am going to say wind and I'm

Mark Zandi:                       Oh, you're going to say wind.

Chris Lafakis:                     ... going to say permitting reform as well.

Mark Zandi:                       Permitting reform.

Chris Lafakis:                     You have Trevor on here. You don't need both of us. We're going to tell you the same thing.

Mark Zandi:                       I'm just using you to check each other, but okay.

Chris Lafakis:                     I would just say permitting reform is so difficult. How many decades Trevor have we been talking about permitting reform? It's because it's not just the federal government, it's because it's state and local. In addition, it's because one senator can muck up a bill, it's very difficult. And then you also have the not in my backyard, where a lot of constituents would oppose construction of long distance. In some cases, direct current transmit, high voltage, direct current transmission lines, which are necessary, unless you get some rapid advancements in battery technology. But even then, you still need those long distance transmission lines, because you have this wind corridor in the center of the country from Texas all the way up to North Dakota. That's where wind energy is most plentiful, and people don't live there, they live on the coast, and you need to get power to those places, the population centers.

Mark Zandi:                       Okay. Very good. Well, let's play the stats game before we come back and talk about the election, and what impact that might have on all this effort to move to green energy. In the stats game, we each put forward a stat. And Trevor I warned you about this didn't I?

Trevor Houser:                 You did.

Mark Zandi:                       Okay, so we each put forward-

Trevor Houser:                 But you didn't tell me if I needed to bring a stat or if I'm just answering stats.

Mark Zandi:                       Up to you. Up to you. I'm sure you can come up with one on the fly, but no worries if not. We each put forward a stat. The rest of the group tries to figure that out through clues and deductive reasoning and questions. The best stat is one that's not so easy that we get it immediately. And Trevor, you got to be really careful here because Marissa is really good at this game. I'm not sure how she does it. Not so hard that we never get it. And if it's apropos to the topic at hand, that would be all the better.

Trevor Houser:                 And this is Jeopardy style, we give the answer and then you got to guess the question. You got to guess.

Mark Zandi:                       We got to guess what it is. We always go with Marisa first. Marissa, what's your stat?

Marisa DiNatale:              My stat is three and a half percent.

Mark Zandi:                       Is it related to climate?

Marisa DiNatale:              Indirectly, definitely related to what we've been talking about.

Mark Zandi:                       Energy price rate.

Trevor Houser:                 Is it a price?

Chris Lafakis:                     Is it an interest rate?

Marisa DiNatale:              It's not an interest rate.

Mark Zandi:                       Is it energy price related?

Marisa DiNatale:              No.

Mark Zandi:                       It's not an interest rate. It's not an energy-

Marisa DiNatale:              Indirectly on that.

Cris deRitis:                        Okay.

Marisa DiNatale:              Which is a big hint, I think.

Cris deRitis:                        Is it an inflation measure?

Marisa DiNatale:              No, not directly.

Mark Zandi:                       See Trevor, this is what she does. This is how she does it.

Marisa DiNatale:              I'm sorry [inaudible 00:50:12]-

Mark Zandi:                       She pauses, she looks around.

Marisa DiNatale:              ... before I answer the question.

Chris Lafakis:                     What's the big hint? It's indirectly related to climate.

Cris deRitis:                        And inflation.

Marisa DiNatale:              Yeah, it's related to what we were talking. Remember you asked Trevor about the impact of energy on the economy and you came to me and I said, "I'll wait for the stats game." That's a-

Mark Zandi:                       You did.

Marisa DiNatale:              ... a big clue.

Cris deRitis:                        Is it the weight of-

Marisa DiNatale:              No.

Cris deRitis:                        ... electricity. No.

Marisa DiNatale:              No.

Cris deRitis:                        No. I got inflation on my mind.

Mark Zandi:                       Three and a half percent of something, right?

Chris Lafakis:                     Is it three and a half percent of total expenditure on clean energy economy?

Marisa DiNatale:              It's not a share.

Chris Lafakis:                     Not a share.

Cris deRitis:                        Not a rate.

Marisa DiNatale:              It's a growth rate.

Cris deRitis:                        It is a growth rate.

Marisa DiNatale:              Yes.

Cris deRitis:                        Not an interest rate, but a growth rate.

Mark Zandi:                       But not a growth rate in prices. Is it a growth rate in some form of employment or output or...

Chris Lafakis:                     From the renewable share.

Marisa DiNatale:              It's related to inflation, it's related to climate energy.

Mark Zandi:                       I think you got to put this out of our misery.

Marisa DiNatale:              Okay. It's the one-year ahead inflation expectation from the University of Michigan survey.

Mark Zandi:                       Yeah, sure.

Cris deRitis:                        All right.

Marisa DiNatale:              Which is exactly equal to what CPI inflation is on a year-over-year basis right now. So University of Michigan, which we know is problematic. We've talked about the drawbacks of this particular consumer sentiment survey. But I thought it was a good statistic to illustrate how sensitive the US economy can be still to energy prices.

Mark Zandi:                       I see.

Marisa DiNatale:              Michigan overall, the sentiment survey fell a lot over the month in May. And that was mostly because of the expectations component, which was led by consumers expectations of what inflation will be one year ahead and five years ahead. It's the biggest uptick, and the highest inflation expectation that we've had since last fall when Israel-Gaza started.

Mark Zandi:                       Did this come out today?

Marisa DiNatale:              Yes, it did.

Mark Zandi:                       Oh, I missed that.

Marisa DiNatale:              Yeah, it came out this morning.

Mark Zandi:                       It was lower. It was closer to three. And you're saying it jumped to three and a half.

Marisa DiNatale:              That's right. That's right. It was 3.2% in April, it jumped to 3.5%. And it hasn't been-

Mark Zandi:                       I see.

Marisa DiNatale:              ... three and a half percent since November.

Mark Zandi:                       And you're positing this is because gas prices are up.

Marisa DiNatale:              Yeah, that's right.

Mark Zandi:                       Which probably makes sense. Okay. We were sending around in this email this chart that showed media reports around gasoline prices. And once you get over three buck 50 for a gallon of regular unleaded, the media really starts to pay attention.

Marisa DiNatale:              It's all over it.

Mark Zandi:                       And obviously that has an impact on the collective psyche is what you're saying and their expectations. Good.

Trevor Houser:                 Unless you're in California like I do, then it's 4.50. 3.50 we're dancing in the streets, celebrating 3.50.

Marisa DiNatale:              I'm in California too, and I just paid 5.30 last two weeks ago.

Mark Zandi:                       Holy cow.

Marisa DiNatale:              Yeah.

Mark Zandi:                       Wow. Well stop driving, you got to get an EV. Come on.

Marisa DiNatale:              I did. I was going to save this for next week's podcast, but I bought an EV last week.

Mark Zandi:                       Full on EV. Full on EV.

Marisa DiNatale:              Yep, 100% electric.

Mark Zandi:                       Oh, good. Very good.

Trevor Houser:                 What'd you get Marissa?

Chris Lafakis:                     That is awesome.

Marisa DiNatale:              I got a GENESIS GV60.

Trevor Houser:                 Oh, okay nice.

Marisa DiNatale:              It's really nice.

Mark Zandi:                       Who produces that?

Cris deRitis:                        Did you get a tax credit?

Marisa DiNatale:              It's Hyundai, Hyundai is luxury line.

Trevor Houser:                 Can I go next just because I'm going to give you a hint. It's going to segue off of Marisa's.

Mark Zandi:                       Yeah, sure. Fire away.

Trevor Houser:                 So I'm going to give you two numbers, it's related to what the hint is, and it's related to what Marissa just said. So the two numbers are negative 8% and positive 80%.

Mark Zandi:                       Is it something related to EV sales?

Trevor Houser:                 It is.

Mark Zandi:                       EV sales over the past year are down 8%.

Trevor Houser:                 Close. Some segment of EV sales are down over the past year 8%. That's right. Tesla is down 8% year-on-year on Q1 in terms of registrations. So what's the 80%?

Mark Zandi:                       Overall EV sales.

Marisa DiNatale:              Everything else.

Mark Zandi:                       Everything else.

Trevor Houser:                 Hyundai Kia is up 80% year-on-year-

Marisa DiNatale:              Wow.

Trevor Houser:                 ... in the first quarter.

Mark Zandi:                       Cool. Wow, that's a good one.

Cris deRitis:                        You chose well.

Marisa DiNatale:              And it's very related.

Mark Zandi:                       Actually, if you hadn't segued like that, there's zero probability we would've gotten it.

Trevor Houser:                 Correct. That's why I grabbed this moment, otherwise, we were going to make no progress on it.

Mark Zandi:                       That one's really good. So Tesla sales are down 8% year over year and Hyundai-

Trevor Houser:                 Up 80% year-on-year in the first quarter. Again, this is registration data, which lag sales data by a couple of weeks. So it's when the registrations come in at the DMV, but the broad trends are going to be the same.

Mark Zandi:                       And overall EV sales what are they do you know?

Trevor Houser:                 Up 14% year-on-year in the first quarter. So that's slower. It's a slowdown, but also it's important to remember total vehicle sales growth dropped considerably in Q1 relative to last year. So it looks like that slowdown in aggregate EV growth in Q1 is more macro than micro, that's just part of the overall slowdown in vehicle sales, new vehicle sales in the first quarter of the year.

Mark Zandi:                       So you're still optimistic the... Oh, sorry, Cris, go ahead.

Cris deRitis:                        I was going to say you're not including hybrids in that category.

Trevor Houser:                 I'm including plug in hybrids. I think that we need to retire the term hybrid, just a regular hybrid that's just a more efficient gas car. Plug in hybrids, like the ones where you actually can run off the battery for a period of time. So we're including those, the plug in hybrids, but not just regular hybrids like a Toyota Prius.

Mark Zandi:                       So you're not worried about EV sales, there's been a lot of concern that the bloom is off the rose, or the rose is off the bloom. Is it bloom off the rose?

Marisa DiNatale:              Yeah.

Mark Zandi:                       Bloom off the rose for EVs. You're not seeing that, you don't think that? No.

Trevor Houser:                 I'm certainly concerned just because we're at this very tenuous part of the EV takeoff, where we're moving from the early adopters that are paying for premium vehicles to wider spread adoption, and we need the... OEMs need to be offering a wide enough range of mid-range cars in the next year or two to make that transition, and the charging infrastructure has to get in place. But I think that the press coverage over the past quarter has been histrionic, keying mostly off of some very bad Tesla numbers, which are as much a Tesla specific story as they are a story about the EV market in general.

Mark Zandi:                       Oh, that makes me feel better. That's good. Great. That was a great stat. Trevor, you can play this game anytime. Cris, did you want to say something else?

Cris deRitis:                        Yeah, just question on that note, how much is available still in terms of the EV tax credits?

Trevor Houser:                 So the tax credit is $7,500 per vehicle is available to, indefinitely, basically, it's available for a decade, but there's a couple of conditions. So the vehicle has to be assembled in North America, and a certain share of the battery components and the critical minerals need to come from North America, or North America and free trade partners respectively. And then there's income thresholds for the tax credit.

Mark Zandi:                       There's no limit by manufacturer.

Trevor Houser:                 There used to be. So the original EV scheme was $7,500, but it was only for the first 200,000 cars sold. And so a couple of years ago, GM and Tesla had both blown through theirs. The IRA removes the cap on the total number, but then imposed income thresholds, vehicle price thresholds, and these local content requirements.

Mark Zandi:                       Got it. Got it. Hey, Chris Lafakis, you want to go next?

Chris Lafakis:                     And just to add on that, the vehicle price thresholds are actually critical to ensuring that the tax credit doesn't get capitalized in the cost of the vehicle. So it was a well-designed piece of legislation on that front. Because prior legislation has shown that if that didn't exist, that it could get capitalized in the cost of the vehicle. Actually, we see that that's not the case with Tesla announcing that it would lower its prices over the past month or so for Model 3s, and I believe Model Ss as well. And I agree also that this is a temporary blip in the long-term positive trend, which is evident in Tesla stock price versus General Motors and stuff like that. So yes, I can go next.

Mark Zandi:                       Yep.

Chris Lafakis:                     So I don't know if I should include the unit or not. Maybe. I think I should, I think without the unit you guys will not get it.

Mark Zandi:                       Fire away, Chris.

Chris Lafakis:                     Okay. $139 per kilowatt-hour.

Mark Zandi:                       $139 per kilowatt-hour.

Marisa DiNatale:              Really high.

Trevor Houser:                 Is that the final price of electricity from Vogtle 4 after it came online, the new incredibly expensive multi-billion dollar nuclear power plant in Georgia?

Chris Lafakis:                     No, it's not, but it's somewhat related to-

Mark Zandi:                       That's expensive. Boy, if that's [inaudible 00:59:46].

Marisa DiNatale:              It's a lot.

Mark Zandi:                       Is that like the coal plants put up in South Africa, something like that?

Chris Lafakis:                     It is not, it related to Trevor's, the theme, the lines that Trevor was on.

Mark Zandi:                       Okay, so some source of-

Cris deRitis:                        Energy.

Mark Zandi:                       Yeah, energy.

Marisa DiNatale:              Is it wind? Is it something with wind power?

Chris Lafakis:                     It's not wind power.

Mark Zandi:                       It's not solar. It can't be solar, can it? No. Is it fossil fuel related?

Chris Lafakis:                     No, it is EV related.

Mark Zandi:                       Oh, EV related. I have no idea. Trevor, I think you're the only person who would possibly get this $139 per kilowatt-hour. I don't know.

Trevor Houser:                 Yes. Oh, per kilowatt-hour, is that the price of a battery pack?

Chris Lafakis:                     Yes, it is Trevor. It is the volume-weighted average lithium-ion battery pack-

Marisa DiNatale:              Oh, wow.

Chris Lafakis:                     ... and cell price split. It's $139 per kilowatt-hour. A decade ago in 2013 it was $780 per kilowatt-hour. Prior to the election of President Obama was over a thousand dollars per kilowatt-hour. So it's just a testament to how much the market has made EVs more affordable, and thus allowed their sale to proliferate.

Mark Zandi:                       Oh, that's interesting. Does the technology suggest that the cost is going to continue to decline?

Chris Lafakis:                     I think that we have achieved most of the gains in the reduction, in cost. The pace of decline in the li-ion battery pack has slowed significantly over the past five years or so. I think that some additional efficiencies can come to bear, however. I think maybe five to 10 years from now we'll be looking at a price that is maybe $110 per kilowatt-hour, somewhere in that neighborhood, plus or minus $10.

Trevor Houser:                 The big focus now for the battery manufacturers Mark is not so much driving additional cost reductions in traditional lithium ion batteries, but in alternative chemistry. So LFP batteries or sodium ion batteries, or chemistries that are able to just much lower ultimate price entitlements than what lithium ion can do.

Chris Lafakis:                     Or crazy stuff like phosphate where the technologies are not really economically efficient at the moment, but you could achieve bigger breakthroughs.

Mark Zandi:                       Well, I want to say that was a good stat, without Trevor we would've never gotten that. Never gotten that.

Trevor Houser:                 I should just as a disclaimer for my friends at the Southern Company in Georgia that that was a joke. Vogtle would never be charging $139 per kilowatt-hour, it is expensive, but not that expensive.

Mark Zandi:                       Yeah, there you go, there you go. They're choking over there in Atlanta or wherever. Hey, Cris deRitis, what's your stat?

Cris deRitis:                        It's 71 euros and 59 cents

Mark Zandi:                       Natural gas.

Chris Lafakis:                     Natural gas in Europe.

Trevor Houser:                 The EU-ETS carbon price is recently settling at about 70 bucks.

Cris deRitis:                        That's right. That's right.

Mark Zandi:                       Trevor's good at this game.

Cris deRitis:                        He's very good.

Trevor Houser:                 We're on energy.

Marisa DiNatale:              It's right up his alley.

Cris deRitis:                        He was waiting for this moment.

Mark Zandi:                       You want to explain?

Cris deRitis:                        So the EU, we alluded to it earlier, they have a cap and trade system when it comes to carbon, they have these carbon permits that get auctioned off and they're traded in the market. There's a certain limit in terms of the amount of carbon that industries are permitted to release, and they buy these permits in order to cover their emissions. I brought it up because it's certainly the alternative way, or another way we could go about addressing the climate issue and the emissions issues.

                                                And I think we were starting to talk about effectiveness earlier, and simple read of the data would say, "Hey, EU with this carbon trading system has their emissions down 47% below 2005 levels." The US without it going down the path of the IRA at least early days still perhaps, but still lagging far behind the EU's path there.

                                                So I'd still argue that it's certainly a much more efficient, effective way to go about this than the IRA itself. Maybe politically, this is the expedient path, the only path available, but from an economic standpoint, certainly I think the cap and trade is still the way to go.

Trevor Houser:                 All self-respecting economists should have on their tombstone written, "It should have been a carbon tax."

Mark Zandi:                       Should have been a carbon tax.

Trevor Houser:                 It should have been a carbon tax.

Mark Zandi:                       And maybe we still get there, right? Well, maybe a few disasters away from a carbon tax, who knows. Okay. I got a stat 17.4 cents, 17.4 cents.

Trevor Houser:                 Is that what you pay for electricity, Mark, is that your retail rate?

Mark Zandi:                       That's a pretty good guess. I am the typical American, you look at me and you see America. I'm not kidding.

Trevor Houser:                 Well, typical American pays 12 cents. So I assumed you were a little richer than the typical American, I was putting you at 17. We're in a slightly higher-cost jurisdiction.

Mark Zandi:                       Because I'm looking at the average price of electricity per kilowatt-hour, and it's US Bureau of Labor Statistics, it says 17.40 cents.

Marisa DiNatale:              Oh, so that is correct, that was what it is.

Mark Zandi:                       Well, no, no, but Trevor was saying it's lower than that.

Marisa DiNatale:              But that's what you thought it was.

Trevor Houser:                 But this is a difference whether it's retail, whether it's at residential rates or average rates for all consumers.

Mark Zandi:                       Okay.

Chris Lafakis:                     Yeah, that sounds high mark.

Trevor Houser:                 Individual mileage can vary.

Mark Zandi:                       I'll send you the chart or send you the data. You can take a look. I'm sure there's a gazillion ways of measuring it. It says US city average, or maybe it's for people living in cities.

Trevor Houser:                 It's possible.

Mark Zandi:                       Something like that. But it was 13.4 cents before the pandemic hit. So we're up four cents per kilowatt-hour. In the decade between the financial crisis, or a little over a decade between the financial crisis and the pandemic, it did not change at all, it was basically flat, so it's risen a lot now. Early on after the pandemic that goes to the Russian War and the impact on natural gas prices, we saw a spike in electricity prices.

                                                And I'm assuming the cost of climate, we're having problems in California and Texas and different parts of the country, and that's adding to costs as well. But it feels like it's starting to increase again very significantly, even though natural gas prices are backed down. So if you look at the cost per million BTU. Correct me if I'm wrong Chris Lafakis, but I think if you go back in the teeth of the Russian War, when Europe was struggling with their natural gas shortage, we were at six, $7 per million BTU. We're now backed down to $2 and a quarter, which is low by historical standards. So does anyone have a sense of what's going on here? What's driving that? Chris Lafakis do you-

Chris Lafakis:                     Yeah. Yeah. So the electricity prices are regulated, so there are state, you have to get your price increases approved by the state, and so they're much stickier. They're not as likely to decline whenever input costs decline, just because they're a stickier price in general. Except for in deregulated markets where you have a little bit more competition and providers are bidding for customers. But by and large, you've had this period of very high inflation. So even though the input cost to produce electricity, just input has declined the cost of natural gas, labor and equipment, and compliance, and maintenance, all of those costs have increased. So you have these cross currents that affect the overall cost of producing electricity that are outweighing I would say the decline in natural gas prices. And then the other component is that they're regulated at state level, so that's why they've actually risen a little bit over the past couple of years, even though natural gas prices have fallen.

Mark Zandi:                       Well, it feels like there's a pretty long lag. Natural gas prices peaked over two years ago, so it feels like something else is going, it could be demand. I belong to this group of economists, and I was just listening to the conversation around AI, and one of the concerns that was expressed more than once by folks who are in that world, is the demand for electricity generated by artificial intelligence. Because to power the calculations necessary to make AI functional, it takes a lot of electric input. And of course you have crypto on top of that, and that's all electricity. Chris knows a lot about that. Trevor, he is all in on crypto and trading all the time, and doing all that kind of money-

Cris deRitis:                        Single-handedly.

Mark Zandi:                       Single-handedly driving the price up. Could that also be playing a role or is that not showing up in the data? I don't know the market well enough.

Trevor Houser:                 It will. Part of what Chris was saying is wholesale electricity prices post gas price decline are not super inflationary. Retail prices are both that cost of energy plus the cost of getting that energy to your house. In all of that distribution system investment, those costs are going up a lot because of inflation. And that's the stuff that there's a greater lag on, because of the way it gets rate-based by the utilities. Usually in your bill you've got an energy cost component and then a non-energy cost, like your transmission and distribution cost component. The energy cost component is a little bit more variable with the wholesale market.

                                                Gas prices are higher, your energy cost is up, gas prices go down, the energy portion of your bill goes down. Then there's the rest of your bill, which is the amateurized investment that the utility is making, and the infrastructure that gets the energy to your house. And that there's more of a lag on because of that regulatory process that Chris mentioned. And we've seen in a lot of markets wholesale power prices staying flat are going down, and retail electricity prices going up because of all of the investment that's required to continue to maintain and upgrade that electricity distribution infrastructure.

Mark Zandi:                       All right, I got it. So that all makes a lot of sense. It's not demand though, it's not like demand is kicked into a high gear here.

Trevor Houser:                 It will. So demand's starting to grow up. So that's the trick. As demand does grow going forward, the amount of increased transmission and distribution investment that that requires does have the chance of translating into meaningfully higher rates.

Mark Zandi:                       Yeah, it's so interesting. The concern was that the break on AI is actually going to be electricity. Just the cost of electricity is going to be so high that it's going to make it very difficult for businesses to expand out their AI infrastructure, so I thought that was interesting.

Cris deRitis:                        We've also seen a huge spike in the price of uranium over the past year. Isn't that another, I know it's not the major feedstock, but certainly a contributor.

Mark Zandi:                       To nuclear, cost of nuclear.

Cris deRitis:                        Cost of nuclear. And then much of the nuclear, much of the uranium comes from Russia or has come or from Russia historically-

Mark Zandi:                       Good point.

Cris deRitis:                        Another national security.

Chris Lafakis:                     But uranium costs is a small part of the overall cost of producing renewable electricity from nuclear sources.

Trevor Houser:                 And usually the nuclear plants aren't setting the price at the margin in a wholesale market either. Usually that wholesale price is getting set at the margin by the price of gas, because that's where the marginal supply is coming in. So that's why the wholesale electricity prices follow natural gas prices pretty much one for one.

Mark Zandi:                       One. Okay. Trevor, you've been very generous with your time, but I want to end the conversation talking about the election. I know nobody wants to talk about the election, but, we got to talk about the election. Because it feels like to me, all this progress that's been made, and it's my word progress on selling this transition from fossil fuel over to green energy, could be in jeopardy depending on whether former President Trump wins election. He's ostensibly no fan of renewable energy, very much a fan of fossil fuels. And will shift the incentives here away from green back towards fossil fuel, and has been spoken very critically of the Inflation Reduction Act. And the worry might be that he uses his executive order or other tools at his disposal, regulatory tools to muck up or derail, or even rein in the things that have been done on the IRA. Am I just overly concerned here if that's the case? Did I characterize things correctly and if so, am I overly worried about this?

Trevor Houser:                 I think that, so the first piece of context is useful for folks that haven't been tracking the clean energy space as closely is through all of the policy and technical innovation work that's happened over the past 20 years, a number of clean energy sources, whether that's electric vehicles, or wind, or solar, have now come down to a level of cost parity. Where they've achieved escape velocity, they're going to continue to grow. It's a question of speed, how fast, not if. And so for a lot of parts of the clean energy economy, even a complete rollback of the IRA is not going to completely kill those industries. It's just going to slow the pace of progress. Now that matters a lot because when it comes to climate change, speed matters every year that we are releasing more greenhouse gases into the atmosphere is another year where they're accumulating and contributing to warmer temperatures, so speed matters.

                                                The question would be both if President Trump won re-election, what's the composition of Congress? Is there Republican control of both chambers or just of one chamber? And for the Inflation Reduction Act, how popular with individual Republican members have the investments that the IRA is already starting to deliver become?

Mark Zandi:                       I see.

Trevor Houser:                 And we saw in the first Trump term, there was a pretty concerted effort to roll back the Affordable Care Act that ultimately failed because those were real benefits that were flowing into the economy, and constituents in both red states and blue states did not want those benefits removed. And so the question for the Inflation Reduction Act will be, how significant have the investments in new factories, new plants and equipment driven by the IRA been? How organized and vocal are those companies and their workers with their members to try to protect those investments going forward? So I think it's pretty unlikely, even in a Trump administration and Republican control, both the House and Senate that you would see all of the incentives in the IRA rolled back, but I think you would see some of them rolled back. The bigger change is actually going to be on the executive side between the two election outcomes, how much regulatory action happens, and that I think it'll be an about face.

                                                So a Trump administration would immediately try to stop regulatory actions that the Biden administration's EPA has started putting into effect, and certainly would not be promulgating any new climate focused regulations. Whereas a second term of a Biden administration would not only continue implementation of the EPA regulations that have already been adopted, but would likely put in place additional regulations as well.

Mark Zandi:                       Okay, got it. So what you're saying my words is that you used the words escape velocity that we've achieved, the IRA, the infrastructure legislation has now been in place long enough. It's now in the DNA of the economy sufficiently enough that it's going to be very difficult to stop this train from moving forward, that it's going to continue. It may not move as fast forward, but it's going to continue to move forward. And there will be some regulatory changes that will slow down the process, and may put some aspects of the effort to address climate change on hold. But broadly speaking, we're off and running here.

Trevor Houser:                 That's right.

Mark Zandi:                       Got it. Okay. Great. Guys, anything else you want to ask Trevor before we call it a podcast? I think we covered a lot of ground. No. Okay. Hearing. No. Chris Lafakis anything, Chris deRitis, Marisa, no. Okay. Very good. Well, Trevor, I want to thank you for taking the time with us. It was really very insightful, thoughtful, and engaging, and appreciate you coming on to Inside Economics.

Trevor Houser:                 Yeah, this was a lot of fun. Thanks for having me on.

Mark Zandi:                       You can tell Dan I thought you did a better job than he did when he was... No, I'm just kidding, just kidding. He scared the heebie-jeebies out of us I'm just saying. You made me feel better. He made me feel a lot worse, so you can come back anytime. You can come back.

Trevor Houser:                 Great. That's what I like to hear.

Mark Zandi:                       Anyway. Well, next week it's all about inflation. I believe the Consumer Price Index is released on Wednesday, so of course a big release, and we'll be talking a lot about that. And until next week thank you dear Listener. We'll call this a podcast. Take care.