By Dr. Robert McCollister
After years of discussion and months of negotiation, Congress passed legislation to address critical issues facing the country, including measures to combat climate change.
The Inflation Reduction Act (IRA) is an ambitious law that follows in a long tradition of federal government actions throughout American history to shape markets and promote emerging technologies. New technologies can transform our economy, create jobs and economic growth, enhance our national security, and mitigate the effects of the most complex environmental challenge mankind has ever faced – the climate crisis. In the past, government action has encouraged the development of railroads, aviation, telecommunications, space exploration, and the electricity grid, among other cutting-edge technologies. The IRA is another example of government policy encouraging markets to move in a direction that makes America stronger and more prosperous.
President Biden came into office pledging to cut America’s greenhouse gas emissions in half by 2030, and to make the power sector emissions free by 2035. The goal of the IRA is a 40 percent reduction in emissions by 2030. Several analyses project that this law comes very close to, or even exceeds, that target. The REPEAT Project led by Jesse Jenkins at Princeton estimates that the law’s provisions will reduce emissions 42 percent by 2030. While the IRA alone does not get the U.S. to 50 percent by 2030, it puts us close enough that additional actions taken by federal agencies, state and local governments, and private industry can fully realize that ambitious target.
Consumers will benefit from a variety of tax incentives included in the IRA. Drivers who purchase a new electric vehicle (EV) will receive a $7,500 tax credit, and a new credit of $4,000 was created for the purchase of a used EV. Until the passage of this law purchasers of some models – Tesla and GM specifically – no longer received the credit because it was limited to the first 200,000 vehicles sold by each company. That cap has been removed. The tax credits are available to individuals with single filings on incomes less than $150,000 and joint filings under $300,000. In addition, the credits are available only on EV’s that sell for less than $55,000 and for pickups, SUVs, and vans whose purchase price is less than $80,000.
For homeowners, the law extends the rooftop solar tax credit of 30 percent for ten years. It also restored an expired energy efficiency tax credit of 30 percent or $1,200 per year for energy efficient appliances, doors, and windows. This will eventually be replaced by a $9 billion dollar program implemented by the states that will give consumers rebates at the point of sale for the purchase of heat pumps, heat pump water heaters, electrical upgrades, sealing and insulation. The amount of the rebate is based on income. Buyers making less than 80 percent of the local median income receive the largest rebates, with smaller rebates extending up to 150 percent of the local median income. Estimates are that people who take advantage of all these incentives will save approximately $1,800 each year from their energy bills.
The IRA extends the current Production and Investment tax credits of 1.5 cents per kilowatt hour produced for clean energy – principally solar and wind power – through 2025 and creates new credits at the same rate that last through 2032, with a total value of $127 billion over ten years. Utilities can receive a 10 percent bonus for locating facilities in communities that have relied on fossil fuel production in the past or in low-income areas to spur economic development in often neglected localities. There are bonuses to encourage domestic content sourcing of solar panels, wind turbines, or other materials and technologies.
For local energy cooperatives and municipal power companies that cannot benefit from tax credits, $9.7 billion is allocated in direct pay incentives to shift to clean electricity production.
There are additional tax credits to encourage energy storage – a key to expansion of wind and solar – and to keep nuclear power plants online. The Department of Energy is granted $8.6 billion in loan guarantees for energy infrastructure and to encourage private sector investment in clean energy. This could enable up to $290 billion in overall investment.
Several of the most important goals of the IRA relate to the manufacturing sector. There are provisions to spur investment in the manufacturing of clean energy technology, increase domestic production of critical minerals, and expand domestic supply chains that create jobs, stimulate economic growth, and make the United State less vulnerable to international supply chain disruptions. Throughout the law, there are bonus incentives for utilities, EV manufacturers and consumers, and other industries to source their purchases here in the United States. There are also bonuses granted to companies that pay the prevailing wage for the industry.
The IRA extends the 30 percent tax credit for Advanced Manufacturing of solar technology, wind turbines, geothermal, and biomass, with 40 percent of these funds dedicated to legacy coal communities. It creates a new tax credit to encourage the establishment of facilities to produce solar panels, wind turbines, batteries, and critical minerals processing. The amount of the credit varies according to the clean energy technology being produced.
There are important new tax credits to encourage the development of emerging technologies, especially carbon capture and sequestration, and green hydrogen produced with renewable energy, or hydrogen from natural gas paired with CCS. The DOE also receives $5.8 billion to fund the development of clean production in high polluting industries like cement and steel.
Finally, the law puts in place the first attempt at carbon pricing with a new fee on methane emissions. A cap is placed on the release of methane, with a fee of $900 per ton above the cap in 2023, rising to $1,500 per ton by 2025. Companies can receive grants to reduce methane pollution.
For Rural Communities
The USDA receives $3 billion in loan and grant authority to encourage rural clean energy development through the Rural Energy for America program. In addition, the law appropriates $20 billion to encourage regenerative agriculture and sequestration of carbon in the soil. There are also funds to encourage tree planting and the protection of old growth forests.
Environmental Justice and Finance
One transformational aspect of the IRA is the appropriation of $60 billion for environmental justice. Throughout the bill there are provisions for 10 percent in additional tax credits to encourage economic development in poor communities and in regions heavily reliant of fossil fuels. In addition, $3 billion in community block grants will be available for local communities to undertake environmental projects. It creates a Greenhouse Gas Reduction fund with $7 billion allocated for deploying solar power and pollution reducing technologies in low-income areas.
There are additional funds to reduce transportation pollution, indoor air pollution in schools, and money for the White House Council on Environmental Quality to map and prioritize those communities most in need of help.
The IRA also provides $27 billion dollars for the creation of a Green Bank that can leverage private investment for clean energy projects. It is estimated that for each government dollar provided the Green Bank will attract $9 in private capital. Of the $27 billion, $15 billion or 55 percent is targeted at low-income areas.