How Hybrid Thinking Can Bridge America’s Budget and Climate Goals

The debate over the new federal budget resolution is yet to see an end in Washington. With key provisions of the 2017 Tax Cuts and Jobs Act (TCJA) set to expire in 2025, Republican lawmakers have made clear their intent to extend the tax reductions introduced under the first Trump administration. Amid growing concerns over long-term fiscal imbalance—potentially over $5 trillion in the next ten years—Republicans are under increasing pressure to identify offsetting spending cuts in other places. In this context, the Inflation Reduction Act (IRA)—once considered as a cornerstone of American climate ambition under the Biden administration—is increasingly being viewed as a budgetary leverage. The IRA’s most generous consumer-facing subsidies and industrial tax credits are now squarely placed in the crosshairs of ongoing budget discussions.

It is no secret that climate action is being rolled back under the second Trump administration, and targeting the IRA is merely one of the indications. Yet rather than rejecting all scrutiny of climate-related spending, it may be wise to acknowledge that some IRA programs are not delivering the impact they promise. For example, the IRA’s clean hydrogen production tax credit (Section 45V) has previously drawn criticism from scientists who argue that its definition of “clean” hydrogen is too permissive, and multiple scholars argued that producers with high-emission production methods could take advantage of the imperfect policy. 

Beyond climate performance, certain IRA tax incentives also fall short of fulfilling the Act’s explicit promise to drive economic growth. Some lawmakers champion IRA subsidies simply because they bring jobs to their own districts. Two congressmen from California recently introduced legislation (S.789: Critical Minerals Security Act of 2025) to expand the Advanced Manufacturing Production Credit (Section 45X), aiming to spur clean energy production and support local employment. But it is far from clear whether such credits increase overall economic output. Simply relocating employment from oil fields to solar plants is not net job creation—it is economic redistribution. When subsidies merely shift labor across sectors without significantly generating new demand or export competitiveness, they fail to create real economic multipliers.

Although both the TCJA and the IRA serve as tax instruments, their impacts differ significantly. The TCJA, while contributing to the federal deficit, is designed to stimulate private sector investment and long-term growth through broad-based market incentives. By contrast, many IRA provisions—such as Sections 45Q and 45V—function more as targeted subsidies aimed at shaping industrial behavior through direct fiscal support. In essence, the TCJA prioritizes market energy and competitive responsiveness, whereas the IRA often relies on financial assistance and administrative allocation to achieve policy goals. This divergence reflects two different approaches to economic transformation—one that trusts the market to scale, and one that centers state intervention.

Given today’s fiscal constraints and the imperative to allocate limited public resources efficiently, the U.S. cannot afford to favor redistributive subsidies over growth-oriented mechanisms. From a broader market economy perspective, policies that merely shift labor and capital without creating new productivity or demand risk distorting competition, entrenching inefficiencies, and weakening the long-term foundation of innovation. In this context, it is not just a matter of budgetary discipline, but of protecting the dynamism and allocative efficiency that underpin sustainable economic leadership.

Nevertheless, this does not mean the country should withdraw from climate efforts altogether. On the contrary, it underscores the need to reform policies like the IRA—preserving and adapting provisions that align with both economic and environmental priorities, because there are still plenty of targeted climate-industrial policies that can simultaneously drive innovation, support growth, and reduce emissions. 

Among the many sectors eligible for climate-industrial policy attention, the automotive industry stands out as a uniquely strategic focal point. It is one of the remaining pillars of American manufacturing with a deep domestic supply chain, proven export potential, and large-scale employment. From a climate perspective, transportation accounts for 29% of U.S. greenhouse gas emissions—the largest single sectoral source. Any serious decarbonization strategy must therefore confront vehicle emissions directly. The case for investment in this space is not only national, but global. Globally, private cars and vans were responsible for approximately 10% of total greenhouse gas emissions. Moveover, countries across Europe and Asia are rapidly advancing their own industrial transformations around low-emission vehicles. As such, it offers fertile ground for policies rooted in both TCJA-style pro-growth incentives and IRA-style clean energy ambitions. If the United States wishes to remain competitive in both advanced manufacturing and sustainable technology, the automotive sector provides a natural—and necessary—starting point.

However, a full transition to battery-electric vehicles (EVs) may not align with current U.S. industrial and geographic realities. Unlike countries with dense urban populations and centralized infrastructure planning, the United States faces structural geographic constraints: sparse rural regions and underdeveloped charging networks make large-scale EV deployment less feasible in the near term. At the same time, the U.S. also lacks sufficient domestic capacity to produce high-range lithium batteries at competitive scale, posing an additional industrial barrier to rapid electrification. Together, these gaps create friction between long-term environmental goals and short-term economic feasibility. 

In this context, hybrid electric vehicles (HEVs) offer a more pragmatic alternative—one that reduces emissions, leverages existing manufacturing capabilities, and enables technological advancement without requiring an all-or-nothing leap. 

HEVs reduce fuel consumption and emissions while building directly on the country’s existing automotive infrastructure. They introduce electrified components into traditional vehicle designs, creating a product that is not only more compatible with consumer behavior but also manufacturing capabilities. For both automakers and consumers, HEVs offer a path toward saving and earning—less fuel cost for drivers, more product competitiveness for producers.

At the same time, HEVs help establish the technical foundations for deeper electrification. The U.S. builds practical experience and innovation momentum in electric drivetrain technologies in this process. This incremental path also ensures that electric vehicle development is supported by real market incentives rather than sustained solely through subsidy, laying the groundwork for a more resilient and self-sustaining clean vehicle sector.

Perhaps most importantly, HEVs position the U.S. to stay in the race for the future of mobility. Scalable electrical power is capable of enabling transportation systems to evolve toward automation and intelligent operation—something combustion engines alone cannot provide. Electrification is not just about private cars; it is the entry point for AI-enabled transit, connected logistics, and digitally managed freight systems. In this sense, HEVs are not the end goal, but a realistic and strategic beginning.

For U.S. automakers, HEVs represent not merely a temporary compromise, but a strategic step forward in keeping pace with global innovation trends while playing to domestic industrial strengths. That is precisely the kind of climate investment that should be preserved as Congress reassesses the IRA under budget pressure. In a fiscal environment defined by hard tradeoffs, it is both reasonable and necessary to distinguish between high-cost, low-impact subsidies and those provisions that align clean energy goals with economic growth. The TCJA framework, with its emphasis on private-sector incentives and scalable productivity, offers a useful lens for such prioritization. HEVs demonstrate how market-driven innovation can deliver measurable environmental progress without sacrificing industrial competitiveness or fiscal responsibility. Reforming the IRA is not about retreating from climate action—it is about elevating the policies that work.