With climate change, many scientists fear that if countries do not mitigate global warming through decarbonization, sea levels will continue to rise, natural disasters will become more common, and large swaths of the planet may become uninhabitable.

The Inflation Reduction Act (IRA), which the U.S. Congress adopted in 2022, aims to encourage private investment in renewable energy. It seeks to promote this investment through “derisking”—the use of government incentives to increase the attractiveness of private investments into clean energy by minimizing the risk of profit loss. Sometimes referred to as a “carrots without sticks” approach to decarbonization, the IRA leverages tax credits for clean energy industries and includes conditions that enhance the value of these tax credits to spur investment.

In a recent article, Shelley Welton of the University of Pennsylvania Carey Law School and Conor Harrison of the University of South Carolina critique the IRA’s derisking approach by examining a prior use of this strategy—a failed attempt to revive the U.S. nuclear energy industry in the early 2000s. Drawing on this failure, they argue that derisking clean energy projects may result in utility ratepayers bearing the financial burden of projects with little to no decarbonization benefits.

Derisking strategies have been present in the United States for a long time, note Welton and Harrison. They trace these strategies back to land grants and financial incentives for railroads in the 1880s. Over the past 50 years, the U.S. government has leveraged risk mitigation tools to promote renewable energy following the advent of electricity markets—often with great success, according to Welton and Harrison.

Yet they point to one former climate derisking effort—the attempted restoration of U.S. nuclear power in the early 21st century—that they observe offers several important cautionary lessons for regulators.

Starting in 2000, concerns about rising energy prices, air pollution, and the recent accident-free record of nuclear generation prompted utilities to consider new investments. A subsequent broad lobbying effort culminated in the passage of the Energy Policy Act of 2005. This law offered production tax credits, loan guarantees, and risk insurance to utilities willing to invest in new nuclear reactors. Welton and Harrison explain that the goal of these incentives was to lower the barrier to entry for utilities and help shield investors and lenders from risks associated with the new projects.

But according to Welton and Harrison, these incentives failed to entice a large majority of U.S. energy firms. The federal subsidies did not guarantee that nuclear energy could be produced at competitive rates compared to other generation sources. Welton and Harrison explain that only a handful of southern states—those that relied on traditional public utility regulation that ensured utilities could pass construction costs onto customers—chose to pursue these nuclear incentives. These states also adopted additional state-level derisking policies to provide further impetus for developers to undertake nuclear projects.

The results were grim, say Welton and Harrison. They observe that Georgia’s Plant Vogtle was the sole example of a completed nuclear reactor built using incentives provided by the Energy Policy Act. This project, however, was completed over a decade behind schedule and cost more than $35 billion, double its initial budget.

South Carolina fared no better, according to Welton and Harrison. They explain that the state never completed its nuclear venture, leaving two unfinished reactors and nearly $9 billion in costs. Florida and North Carolina, two other states that pursued nuclear investments, also abandoned their projects. Utilities forced ratepayers to shoulder much of the financial burden of these failed nuclear projects with very little to show for them, Welton and Harrison note.

Drawing on these case studies, Welton and Harrison identify a few hidden risks in derisking initiatives that threaten to derail future climate investment. For example, they cite permitting hurdles and legal challenges that have frequently delayed energy projects. Welton and Harrison explain that new energy ventures often unfold at a glacial pace, spanning decades. At the same time, energy markets undergo dramatic shifts in the background, changing the financial calculus that prompted the initial project investments. Political and institutional commitments also keep these failed projects alive long after investors should have withdrawn their support.

Welton and Harrison argue that poorly designed derisking strategies—ones that do not adequately address these hidden risks—result in clean energy projects that can harm communities and fail to decarbonize the grid. Local communities will frequently bear the financial burden of these projects, despite the promised national benefits these projects often fail to deliver. Welton and Harrison suggest that additional public oversight of derisking initiatives is necessary to manage the hidden risks associated with energy projects that rely on derisking policies.

Climate derisking is a complex and uncertain method for pursuing clean energy, Welton and Harrison acknowledge. But they note that derisking is the politically viable path chosen by Congress, through the IRA, to address a warming climate. It is now up to federal administrators to protect against misguided projects, and their agencies must expand their capacities to manage the clean energy transition, Welton and Harrison argue.

They conclude that, by heeding the cautionary tale of the failed nuclear renaissance, legislators and regulators can better address the risks associated with projects that rely on derisking and ensure that future clean energy projects are successful.