The U.S. climate bill, more formally known as the Inflation Reduction Act (IRA) of 2022 was signed into law by President Joe Biden on August 16th. The 755-page bill includes 100 climate, energy, and environmental programs that are designed to cut U.S. carbon emissions by 40 percent. The incentive-driven approach in the IRA is expected to avert more than a billion tons of carbon by 2030.
The IRA has provisions for emissions reductions in every major sector of the economy including electricity production and transportation as well as energy-intensive manufacturing industries like steel, chemicals, and cement.
The IRA pays for itself, creates jobs, reduces drug prices, and improves access to healthcare. The climate law advances research in clean energy and carbon removal as well as other forms of cleantech. It also contains provisions for drought, supports energy security, critical minerals processing, and zero emissions equipment in ports. The IRA pays for itself and slashes the deficit by amost $300 billion making it the largest deficit reduction bill since President Barack Obama signed the Budget Control Act of 2011. The climate law is the first time in years that the deficit reduction stipulation in the reconciliation process was used as intended.
The IRA relies on a combination of tax credits, rebates, subsidies, and other incentives. Much of the law is focused on unleashing a wave of clean energy. Nuclear Energy Institute President and CEO Maria Korsnick called the bill a “momentous milestone for clean energy legislation here in the US.”
The IRA is being described as a long-term climate roadmap and most economists are predicting that it will supercharge carbon reduction efforts in the U.S. Leah Stokes, a climate policy expert at the University of California, Santa Barbara described the climate law as “a massive turning point,” adding, that it is “truly historic” and a “huge opportunity to tackle the climate crisis.”
How much does the IRA cost?
There is no cost associated with the IRA as the legislation pays for itself and reduces the deficit. Topline estimates indicate $300 billion in deficit reduction, The IRA will raise $737 billion and authorize $437 billion in spending including $369 billion for climate action.
A total of $222 will come from a 15 percent minimum tax on large corporations and a 1 percent tax on stock buybacks. Another $124 billion will come from enhanced IRS enforcement to collect taxes already owed by corporations and wealthy individuals. Tax rates will not increase for families earning less than $400,000 per year.
Western drought resiliency will get $4 billion and much of the rest of the investments will go towards health care including subsidies to expand access under the Affordable Care Act. For the first time, Medicare will be allowed to negotiate lower prescription drug costs.
How will the IRA reduce inflation?
According to the Committee for a Responsible Federal Budget, the IRA fights inflation by reducing the deficit ($30 billion in the first two years and $300 billion over a decade). More revenue is expected to offset spending and regulatory and permitting reforms in drilling, pipelines, and export facilities will increase the supply of energy thereby reducing costs. The macroeconomic effects of harmonizing supply and demand alongside the microeconomic effects of lower prescription drug costs, health care premiums, and renewable energy, will also reduce inflation through lower prices for both consumers and businesses.
10 key climate provisions in the IRA
In addition to health care and inflation-fighting provisions, there are10 key climate provisions (environmental justice, green jobs, home efficiency, electric vehicles (EV), climate-smart agriculture and forestry, carbon removal, nuclear energy, green hydrogen, renewable energy, and fossil fuels). Each of these has dedicated programs which are summarized below.
1. Environmental justice provisions
The IRA provides unprecedented support for environmental justice (EJ). It will save thousands of lives through pollution reduction that disproportionally impacts people of color, and it will also improve the quality of life for millions of people in low-income, disadvantaged communities. These provisions invest in community projects that reduce pollution, as well as support. equity, and safety. Disadvantaged communities bear the brunt of pollution and these EJ provisions are an attempt to address some of the historical injustices.
“To me, the critical duty of the presidency is to defend what is best about America. … To pursue justice, to ensure fairness and deliver results that create possibilities that all of us can live a life of consequence and prosperity in a nation that’s safe and secure. That’s the job. Fulfilling that pledge to you guides me every single hour of every single day on this job,” President Biden said at the signing ceremony.
Experts at the Just Solutions Collective estimate that the IRA includes $47.5 billion in direct benefits for low-income families and communities of color. Several of the EJ programs in the IRA require states and local governments to prioritize the disadvantaged. A good example of an EJ program in the IRA is a $2.8 billion program that awards environmental and climate justice block grants to community-based nonprofits. For a complete summary of all of the EJ provisions in the IRA see Table 1 on the left.
For a more detailed review of all the environmental justice provisions in the IRA including eligibility requirements see this table.
2. Green jobs provisions
The IRA will create millions of long-term, quality jobs through programs in energy, electricity, transportation, building, EJ, land, and agriculture. A recent study found that the IRA will create 9 million direct and indirect, public and private jobs over 10 years. These are good jobs that pay a fair wage. To benefit from the IRA companies must conform to eligibility requirements like “prevailing wage requirements”. These stipulations ensure that the jobs provided are good jobs and they are found throughout the law.
“Few pieces of legislation this century have come close to such sweeping job creation potential. This bill’s investments offer an opportunity to support and create good union jobs and for workers and communities to reap the economic gains of the clean economy,” BlueGreen Alliance Executive Director Jason Walsh said.
The BlueGreen Alliance commissioned a study from the Political Economy Research Institute (PERI) at the University of Massachusetts Amherst that concluded the IRA will create 5 million jobs in clean energy. More than 1.7 million jobs will come from tax credits that will dramatically expand access to solar, wind, and other clean energy sources. Grid modernization will create another 40,000 jobs and rural electric cooperatives will create more than 90,000 jobs.
Of the 900.000 jobs in clean manufacturing, more than 670,000 jobs are expected to come from tax credits for the manufacturing of wind turbines, solar panels, EV batteries, and other clean technologies. Clean vehicle manufacturing will create nearly 80,000 jobs and industrial transformation will create another 120,000 jobs. Nearly 60,000 jobs will be created by the low-emissions construction materials for infrastructure projects.
Of the 900,000 jobs in efficient building, nearly 720,000 jobs will come from tax credits that support residential and commercial building retrofits and new home construction that boosts energy efficiency. Home energy rebates will generate more than 170,000 jobs and affordable housing will create nearly 10,000 jobs.
There will be 600,000 jobs in natural infrastructure, including more than 50,000 jobs from investments to help coastal communities protect themselves from climate-related storms as well as protections for fisheries and other habitats. More than 100,000 jobs will come from grants and investments that support healthy ecosystems through the protection and restoration of 2 million acres of climate resilient forests. More than 20,000 jobs will come from investments to protect and restore public lands. Nearly 380,000 jobs will come from investments in regenerative farming practices that reduce climate pollution, strengthen drought resistance, and boost productivity.
Of the 400,000 jobs created in clean transportation more than 260,000 jobs will come from tax credits directed toward batteries, fuel cells, EVs, and EV charging. Clean trucks and buses will create nearly 50,000 jobs mostly in vehicle electrification.
In the area of environmental justice, 150,000 jobs will be created including 30,000 jobs from grants for community-led projects that address pollution. Nearly 60,000 jobs will be created by grants that support transit equity and reunite communities of color divided by polluting highways. and more than 5,000 jobs will come from investments to reduce air pollution in schools and other sources. For a complete breakdown see Table 2 left. For a comprehensive summary of IRA, job creation estimates click here.
3. Clean vehicle, transportation, and battery provisions
The IRA includes important provisions for electric vehicles and batteries. Clean vehicles are a key element of the IRA appearing 31 times in the new law. The IRA makes new EVs cheaper while expanding access to EV charging. Consumers are eligible for up to $7,500 in tax credits on new EVs and up to 4,000 in tax credits for used electric. Purchasers of EVs will also benefit from not having to buy gas and lower maintenance costs.
Clean manufacturing tax credits will go towards EV batteries, and grants and loans will establish, expand or retool factories that manufacture clean vehicles. A total of $2 billion in grants will be available to transform traditional vehicle manufacturing plants into EV plants and $20 billion will go into low-interest loans for new plants.
The IRA also invests in clean transportation technologies and clean commercial vehicles. Under the new law, the U.S. Postal Service will purchase zero-emission vehicles. There will also be support for the acquisition of clean heavy-duty vehicles, like buses and garbage trucks.
Critical minerals (eg nickel, lithium, and copper) used to build clean cars and batteries will get a 10 percent tax credit. The IRA will provide billions for battery recycling companies and battery manufacturers. A total of 2,300 grid-scale battery plants are expected to be built due to the IRA. Battery plants will benefit from production credits and other incentives. The climate law includes a tax credit of $35 per kWh for each US-produced lithium-ion battery cell. The IRA will pay for more than a third (35%) of the cost of $100 per kWh batteries and there is an additional tax credit on battery modules of $10 per kWh.
4. Home appliances, energy, and efficiency provisions
There are numerous benefits for families in the IRA in addition to the $7,500 in tax credits for new electric vehicles and $4,000 for used EVs. Families are eligible for $14,000 in direct consumer rebates when they buy heat pumps or other energy-efficient home appliances. Families can get a 30 percent credit for renewable power and when they take advantage of all the available tax credits they can save thousand per year.
Families that take advantage of these programs can save $1,800 a year on energy bills in addition to predicted declines in energy costs of between $500-$1000 per year. All together American families can save more than $2,500 each year.
The IRA supports the purchase and installation of energy-efficient electric appliances, heat pumps, renewable energy, and home efficiency. To accommodate increased electrification consumers can get up to $4.000 to upgrade home electrical panels (electric load service center upgrades) and $2,500 is available for electric wiring.
The legislation includes $4.5 billion in rebates and subsidies that consumers can use toward the purchase of energy-efficient electric appliances. Consumers have access to rebates of $840 on a new electric cooking appliance and an additional $500 to help cover the costs of converting from natural gas or propane to electric.
The climate law makes up to $8,000 available to install a modern electric heat pump that can both heat and cool buildings. A total of $1,750 is available for a heat pump and water heater, and $840 is available for an electric heat pump and clothes dryer:
There are also clean energy incentives including tax deductions for homeowners who install wind or solar. Consumers could receive a 30 percent rebate on rooftop solar panels or wind turbines. This rebate also covers solar electricity, solar water heating, fuel cell, and geothermal heat pumps.
Energy-efficient retrofits like insulating, air sealing, and ventilation (electric HVAC systems) are eligible for up to $1,600, while whole-house upgrades can get up to $8,000. The IRA efficiency programs provide $4.3 billion for direct consumer rebates on whole-home upgrades that achieve 20 to 35 percent household energy savings. These rebates are maximized for those with below-average earnings. Affordable housing whole-building updates will receive $1 billion for upgrades including water and energy efficiency as well as climate resiliency.
5. Climate-smart agriculture and forestry provisions
The IRA invests almost $40 billion in climate-smart agricultural and forestry management. A total of $20 billion will go to the U.S. Department of Agriculture to improve agriculture conservation programs. These programs provide incentives and support for sustainable farming practices that reduce methane emissions, increase carbon capture, and optimize the usage of farm inputs.
Another $14 billion will go towards the clean energy transition in rural communities including the single largest investment in biofuels. The remaining $5 billion will go towards protecting communities from wildfires, supporting climate-smart forestry, scaling carbon sequestration, building urban climate resilience, and prioritizing historically underserved landowners.
The IRA includes a range of natural climate solutions (NCS) like provisions for enhanced soil carbon storage through investments in climate-smart agriculture. For more information click here.
Provisions in the IRA will increase the viability of many SMEs in the CDR space. It will also benefit big oil and other emissions-intensive industries. Princeton’s Jesse Jenkins tweeted that the climate bill makes carbon capture viable in high emitting industries like refineries, cement, steel, and power generation. An analysis by Jenkin suggests that provisions in the IRA could enable CCS to capture and store 200 million tons of carbon by 2030.
The IRA relies heavily on tax credits to grow carbon removal technologies. The amounts vary, CCS in industrial activity will get a tax credit of up to $85 per ton, while the tax credit for DAC will more than triple from $50 to $180 per ton. Tax credits that offset startup costs will help to grow new carbon sequestration projects and a flood of private investment capital are expected.
7. Nuclear energy provisions
The climate law emphasizes nuclear energy, referencing it 25 times in provisions that keep older nuclear facilities online and provide support for new nuclear plants. In response to the IRA Korsnick said “The energy provisions in the Inflation Reduction Act send a clear signal that nuclear is essential to the transition toward a carbon-free economy.” She believes the law ensures that “nuclear can form the backbone of a stable electric grid.”
The IRA also includes an extension of the Advanced Energy Project Credit tax credit program, Under the program, the U.S. Treasury can authorize a maximum of $10 billion of these tax credits for clean energy manufacturing and facilities production. Investment dollars and tax incentives will also go to advanced nuclear reactors and high assay low-enriched uranium (HALUE) projects. The law includes $700 million that will go towards the research and development of HALEU fuel sources. The IRA also includes $150 million for the Office of Nuclear Energy which will be used by the Department of Energy to invest in nuclear innovation research/
Production tax credit (PTC) for existing nuclear power plants includes a credit of $15 per megawatt-hour for electricity produced. On its own, this PTC is expected to prevent more than a dozen U.S. plants from closing. There are inflation-adjusted PTCs of at least $25 per megawatt-hour for smaller, safer, and cheaper advanced nuclear plants. Tax credits are increased by 10 percent for locating a zero-emissions power source on land previously used for coal-based energy production.
There is an investment tax credit (ITC) equivalent to 30 percent of building costs. Like the PTC, The ITC is increased by 10 percent when a nuclear plant is located on land previously used to host a coal plant.
Through the Department of Energy, the IRA guarantees up to $250 billion worth of loans for energy infrastructure. This can include updating, upgrading, or repurposing existing nuclear power plants. These loans provide capital while reducing risks and costs. The IRA also incentivizes the construction of new projects in other ways.
Tax credits for component parts
The IRA includes a manufacturing production provision that grants tax credit for component parts. The size of the tax credit depends on the type of component being manufactured.
8. Green hydrogen provisions
“Hydrogen” is mentioned 65 times in the IRA, making it the most frequently mentioned solution in climate law. This legislation benefits the producers of green hydrogen, also known as clean hydrogen which is so named because it is low-emissions or emissions-free. Hydrogen production will receive both investment dollars and tax incentives.
The applicable amount of tax credit varies from 20%-100% depending on the amount of emissions generated by the hydrogen production process. If applicants produce zero emissions of hydrogen and meet all requirements including the prevailing wage requirements the base credit could increase by 500%.
The PTC for clean hydrogen in the climate law can be worth as much as $3 per kilogram. The provisions in the IRA are expected to make American hydrogen the cheapest in the world. KPMG predicts it could go as low as $0.73 per kg.
Many energy-intensive industries will benefit from cheap emission-free hydrogen fuel. Steel manufacturers are among those who are likely to drive demand. The green hydrogen provisions in the climate law drive down the price and let the market do the work. This is expected to price dirty manufacturing of hydrogen (ie fossil fuel-powered production) out of the market.
9. Renewable energy (wind and solar) provisions
The IRA contains a wide array of provisions that support renewable energy like solar panels and wind turbines, but it also supports clean energy technology research and a deployment accelerator. Provisions in the IRA are expected to result in the manufacturing of 950 million solar panels, and 120,000 wind turbines.
The IRA benefits wind and solar companies, as well as utilities transitioning to renewable energy. Manufacturers, installers, and owners of renewable sources of power will benefit from production credits and other incentives in the law. Clean manufacturing tax credits will go toward wind turbines and solar panels. Loans and grants will go towards grid modernizations that will enhance efficiency.
Clean energy provisions in the IRA restore the PTC and there is an ITC for larger-scale renewable power generation projects. A Day Pitney analysis indicates the IRA provides a base payment clean energy PTC of .6 cents per kilowatt-hour (kWh) but ranges up to up to 3.1 cents per kWh. The ITC is 6 percent ranging up to 50 percent.
The IRA expands the areas authorized for offshore wind leasing and there is a tax credit for the domestic production of wind components and related goods. For offshore wind, the tax credit is 10 percent of the sales price.
As reported by JD Supra, The IRA includes a 45X credit for manufacturing solar cells, wafers, and modules. Different types of solar are subject to different tax credit schemes. See the infographic below for a summary of the amount of credit received by component type (thin film photovoltaic or crystalline photovoltaic cells, photovoltaic wafers, solar grade polysilicon, polymeric backsheets, and solar modules).
10. Fossil fuel provisions
There are a number of provisions pertaining to fossil fuels in the IRA including efficiency upgrades and carbon capture incentives that will help to lower emissions from oil and gas. Other incentives and fines seek to stem leaks of the potent greenhouse gas methane which is commonly released at drilling or holding sites. Tens of millions of dollars will go towards monitoring methane and other pollutants. There are also fines and Superfund taxes on crude oil and related products.
While the climate law will not help the coal industry and smaller oil companies, larger companies will benefit from tax credits and other incentives. The oil and gas industry will also be able to take advantage of a provision that opens up Federal lands and offshore waters for oil and gas drilling without consideration of climate impacts. This easing of the permitting process will also apply to pipeline projects.
Despite provisions that may increase fossil fuel extraction, the net result of the IRA will be a very significant drawdown of U.S. emissions. According to the think tank Energy Innovation, the IRA will see emissions decline between 37-41 percent by the end of the decade. Energy Innovation calculates that for every ton of carbon emissions from new oil and gas, there will be 24 tons removed.
Some are speculating that the IRA will unleash ancillary benefits like cross-technology synergies. The extent to which such collaboration will materialize is unclear, what is clear is that this is the biggest American climate bill ever and the largest climate action in human history.