Effects of the inflation reduction act on PM2.5: empirical evidence from the U.S.

Environmental issues represent the most significant market failure witnessed by the global community. Ranking as the second-largest contributor to greenhouse gas emissions globally, the U.S. is responsible for addressing and finding solutions to these issues actively. However, throughout its history, the U.S. Congress has witnessed the failure of numerous bills intended to address environmental issues to secure passage. The Inflation Reduction Act (IRA), enacted on 16 August 2022, is a significant climate legislation in U.S. history, backed by over $369 billion in funding. To uncover the causal effect, we apply a difference-in-differences (DiD) methodology, and our study finds that the IRA causes a substitution effect from traditional fuel to clean energy, causing a decrease in PM2.5 pollution. The robustness test estimations further confirm our findings. We find two complementary mechanisms: the demand effect and the quality effect. Finally, our study suggests that the IRA has a positive spillover impact on employment and contributes to reducing inflation.