On Earth Day 2023, Smart IRA Climate Investments Offer Hope

Psychology will play a major role in determining the degree to which the global community succeeds in mitigating the effects of anthropogenic global warming. This is why, on Earth Day 2023, we all need to be thinking about how people are wired to process climate information, how to learn from past mistakes, and how to seize new investment climate opportunities—if we are smart.

Research by psychologist Lola Lopes indicates that there are three key emotions which influence how people take risk, namely fear, hope, and the need to feel successful (which she calls aspiration). Certainly, the consistent message from the UN Intergovernmental Panel on Climate Change is that there is plenty to fear about the effects of high greenhouse gas concentrations in the atmosphere.

The failure of the global community to live up to the Paris Agreement is a reflection of serious past mistakes. Psychologically, the effects of aspiration and hope have been stronger than the effect of fear. Past hopes reflect the feeling that the threat posed by global warming is minor. Past aspirations have been narrowly focused on short-term solutions. Unwarranted hope and short-term aspiration have combined to produce a powerful delusion.

The starting point for learning from mistakes is to accept reality. An important part of that reality is the global community has systematically failed to act on the recommendations by mainstream economists about using taxes to price greenhouse gases at their social costs. Prices, not pledges, are the main drivers of actual behavior.

There is hope for a better climate future, if we are smart. The basis for this increased hope is partly technological and partly psychological.

The technological part relates to newly emerging methods for creating energy, reducing emissions, and removing greenhouse gases from the atmosphere.


The psychological part relates to reframing climate investment from being a burden to being an opportunity. It also relates to finding means other than taxes to price greenhouse gases closer to their respective social costs. This is important because in the last two years, the Environmental Protection Agency has dramatically increased its estimate of the social cost of carbon, from about $85 per metric ton to about $190. This is important because the higher estimate significantly increases the number of projects deemed worthwhile from a cost-benefit perspective.

These two elements, the technological and the psychological, come together in provisions of two recent pieces of U.S. climate legislation, the Infrastructure Investment and Jobs Act and the Inflation Reduction Act (IRA).

The IRA is particularly important because of the way it was written. Although the general estimates of how much public funding the IRA will provide is approximately $375 billion, the law does not impose a cap. A report by Credit Suisse suggests the actual amount of public funding will more than double this amount. Since increased public funding will induce increased private funding, the total amount of new investment could approach $1.7 trillion.

It is easy to underestimate how much can be accomplished in a decade. Ten years ago, the large language model technology underlying ChatGPT was nascent. Apple introduced the first iPhone in 2007. Smartphone technology has changed how people live, and the promise of AI technology is already clear.

Technologies for direct air capture and carbon dioxide removal are currently nascent. A year from now year, DAC and CDR will be better than they are now; and the odds are high that a decade from now both will be much more advanced, just as happened with LLM and smartphones.

There are many new opportunities to invest in our planet, just as the slogan for Earth Day 2023 indicates. The IIJA and IRA are already making a difference to project selection and scalability. Consider two examples.

Climeworks, one of the best-known CDR firms, operates a pilot plant in Iceland called ORCA. ORCA runs on 100% clean, geothermal power and sequesters carbon in volcanic rock. Climeworks’ capture units are 90% efficient: 10% of their capacity is used to capture the plant’s own emissions. The remainder is carbon negative. While ORCA is small, Climeworks has teamed up with two other firms, Battelle and Heirloom, to propose building a large DAC facility in southwest Louisiana, with funding provided through the IIJA.

Noya is an innovative CDR firm, which just completed its third funding round. Until recently, Noya’s strategy had been to retrofit cooling towers in order to engage in CDR at the same time the towers cooled air. However, the IRA has induced a change in the firm’s strategy. Noya describes the strategy as taking advantage of a “tailwind” (this being the IRA). To be eligible for IRA funding, a firm’s projects must capture at least 1,000 metric tons of carbon dioxide a year. Many of the cooling towers Noya would retrofit do not provide this capture rate. As a result, Noya is redeploying its technology away from smaller cooling towers to standalone projects which are co-located with geologic storage.

It is still the early days of these technologies, and there are bottlenecks to deal with. Despite a flurry of permit applications for DAC projects relating to the IIJA and IRA, the EPA has yet to grant approval for the wells associated with them, known as Class VI . Except for Wyoming and North Dakota, the EPA has full control over the review and approval processes. The application bottleneck is leading to growing pressure among applicants for the EPA to turn control over to individual states.

It is fine for the EPA to double its estimate of the social cost of carbon. But it needs to put government money to use.

States like Louisiana are eager to assume control, which is interesting because of their traditional role in fossil fuels. The IRA has changed the game, as traditional energy- producing states are shifting into green technologies. The shift is not just economic, but also political.

On Earth Day 2023, climate aspirations are changing; and there is reason to have hope for avoiding a climate catastrophe, if we are smart about how we invest.


Note: Psychology’s role on humans’ response to climate change is the subject of my forthcoming book Unsettling Behaviors: The Behavioral Economics and Politics of Global Warming. The book will appear in the Cambridge Elements in Quantitative Finance series edited by Riccardo Rebonato. When it is published later this year, for a limited time it will be available to access free from the Cambridge website.