The U.S. Inflation Reduction Act of 2022

BY CHAS FEINSTEIN *

May 16, 2023

Mark Twain famously said: “Everybody talks about the weather but nobody does anything about it.” As someone who has been following the glacial progress of climate change negotiations since 1991, I could equally say: “Everybody talks about climate change but nobody does anything about it.” This remark is especially fitting of the U.S., the second largest greenhouse gas (GHG) emitter on the planet.

However, as described at a recent Energy Thematic Group presentation by Dr Dan Lashof, Director for Domestic Programs, World Resources Institute, the U.S. has moved decisively to reduce its climate change impact through the oddly named Inflation Reduction Act (IRA) passed by Congress last year. The IRA is a major piece of climate legislation that includes several provisions to accelerate the transition to a clean energy economy:

  • Tax credits for clean energy projects: The IRA extends and expands a number of tax credits for clean energy projects, including the investment tax credit (ITC), the production tax credit (PTC), and the renewable energy bonds (REBs). This will make investments in clean energy technologies more affordable for businesses and consumers.
  • Financing for clean energy projects: The IRA provides $30 billion in grants and loans to states and other entities for the development of clean energy projects. This will help to accelerate deployment of clean energy technologies and create jobs in the sector.
  • Investments in energy efficiency: The IRA invests $10 billion in energy efficiency programs, including weatherization assistance, energy efficiency upgrades for homes and businesses, and public transportation. This will help to reduce energy consumption and lower energy bills for consumers.
  • Support for clean transportation: The IRA invests $15 billion in clean transportation programs, including electric vehicle charging infrastructure, public transit, and zero-emission school buses. This will help reduce GHG emissions from the sector.
  • Research and development for clean energy technologies: The IRA invests $10 billion in R&D for clean energy technologies, including carbon capture and storage, nuclear fusion, and advanced batteries. This will accelerate the development of new clean energy technologies to help the U.S. achieve its climate goals.

Taken altogether, these clean energy supports are forecasted to significantly reduce GHG emissions. Under a business-as-usual scenario, the U.S. would reduce GHG emissions by 24% – 35% by 2030 compared to 2005 levels. Assuming effective IRA implementation, the level of reductions would grow to between 31% to 44% by 2030, bringing the U.S. about 60% along the path to meeting its commitments under the 2015 Paris Accord on Climate Change (see Figure 1).

Figure 1:

 

Total commitments under the law’s climate and clean energy tax credits amount to $374 billion between 2022 and 2031 according to U.S. Congressional Budget Office estimates (see Figure 2).

Figure 2:

Even more significant than the volume of public outlays is its leveraging effect on private sector investment: Experts estimate this catalytic effect could spur as much as $3 trillion in new private capital for clean energy over the 10 year life of the IRA.

Notably, and perhaps critically for the future of the IRA, the law does not set specific caps on the levels of tax credit and subsidy support for clean energy investment: Funding is demand based. The open-ended nature of the IRA could be key to its success or partial demise. President Biden’s signature climate law is encouraging more investment in American manufacturing than initially anticipated, powering an expected surge in new factory jobs and domestic clean energy technologies, according to independent forecasters. In the eight months since the bill’s approval, companies have announced plans to invest at least $150 billion in clean energy projects, including 46 new or expanded large-scale factories making everything from wind turbine towers to electric vehicle batteries. If the boom is sustained, the law could be even more effective than hoped at reducing GHG emissions.

But rising cost estimates have fueled an angry response from Senator Joe Manchin III, Democrat of West Virginia, whose vote was crucial to the law’s passage. Manchin has threatened to vote to repeal the law if steps aren’t taken to reduce its costs. The price of tax credits has become central to the ongoing standoff between House Republicans and President Biden over raising the nation’s borrowing limit to avoid catastrophic default. The bill Republicans passed in early May to lift the limit would repeal most climate tax credits from the IRA.

Mitigating opposition is the reality that much of the money has so far flowed to red states. Out of 191 clean energy projects announced since the bill, more than half are in congressional districts held by Republicans, who have often welcomed the investment while criticizing the law.

 

* Chas Feinstein is Co-chair, Energy Thematic Group. He can be reached at charles.feinstein@gmail.com


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