The Inflation Reduction Act of 2022 (IRA) signed by President Biden on August 16, 2022, features $369 billion of incentives to dramatically reduce U.S. greenhouse gas (GHG) emissions. Future blog posts will analyze individual provisions of this legislation in detail, but we first want to provide a broad overview of an extremely complex and far-reaching new statute.
What's changed since the Waxman-Markey climate legislation failed in 2010?
Supporters of Congress's attempts to address climate change have long regretted the failure of the Waxman-Markey climate legislation a dozen years ago. That failure occurred despite the fact that the Democrats held much larger majorities in the Senate and the House of Representatives than they do today.
But at least three things have changed. First, the Democrats used the budget reconciliation process, which only requires 51 votes in the Senate (50 Democratic senators plus the Vice President), thereby avoiding the need to overcome a Republican filibuster. Second, the IRA climate provisions are mostly carrots (federal investments in the form of tax incentives, loans, and grants), whereas the centerpiece of Waxman-Markey was a stick (a mandatory cap-and-trade program designed to put a price on carbon emissions). Finally, the disastrous impacts of climate change now make news every day, a far cry from the scientific projections of future harm (often disputed in political arenas) that dominated the narrative at the time of Waxman-Markey.
How big a step forward is the IRA?
The IRA is a very big step forward in the fight against climate change—by far the biggest step that the federal government has ever taken—but we still need more. The ultimate goal of international climate change mitigation under the Paris Agreement is to reach net-zero worldwide emissions by 2050. So far, most countries are nowhere near that path and have instead focused on setting and achieving interim targets for 2030. The Biden Administration's 2030 target would reduce emissions by at least a 50% from 2005 levels, leaving 20 years to tackle the remaining 50%, which presumably will be even more difficult.
Without the IRA, the U.S. was projected to reduce emissions to 27% below 2005 levels by 2030, so the country is a little more than halfway to the Biden goal. The IRA is projected to boost that reduction to roughly 42% by 2030—closing the gap between the pre-IRA trajectory and the 2030 goal by more than half. (Princeton University's REPEAT Project has a great graph of these trajectories; other models reach generally similar results.) That still would require the U.S. to cut 8% or more of 2005 emissions in the next eight years to meet the Biden Administration's target, but at least IRA puts the country within shouting distance. These remaining reductions will mostly need to come from further policy development and regulatory actions at all levels of government, as well as ongoing private sector efforts. It is also likely that the IRA will create economic ripple effects that reduce GHG emissions but are difficult to model.
In terms of federal spending, $369 billion is certainly a big number. But it's important to remember that that amount is spread over 10 years, making it roughly $37 billion annually. For comparison, Americans spend over $30 billion each year on dietary supplements, and the Defense Department budget is over $700 billion each year. In this light, spending $37 billion a year to address an existential threat to the human race seems like a bargain.
What are the major goals of the legislation?
To put the U.S. on the best possible path toward net-zero by 2050, the legislation makes progress on at least five related fronts.
1. Decarbonize electricity production. The goal is to reduce the use of powerplants fueled by coal and natural gas as quickly as possible, with the aim of 100% clean electricity by mid-century. This task will require quickly ramping up electricity generation from GHG-free resources, including both renewables (wind, solar, hydropower) and nuclear. The U.S. will also need a corresponding increase in energy storage in order to level out the variable output of renewables. At the same time, there is widespread recognition of the need to greatly expand the nation's high-voltage transmission grid so as to move clean electricity from mostly rural wind and solar farms to the more densely populated load centers.
To accomplish this goal, the IRA does away with Congress's habit of extending the tax incentives for renewables for just a few years, which repeatedly created artificial fire drills for project developers rushing to commence construction before the tax incentives expired. Instead, the IRA tax incentives will be available to projects that begin construction within the next 10 years1 (or later, depending on when the electricity sector achieves aggressive emission reductions), giving developers a much longer planning runway. The IRA also provides credits for new technologies, including stand-alone energy storage.
The new legislation transitions in 2025 from having different tax incentives for each renewable technology to a system that provides similar tax incentives to any technology that produces electricity without emitting GHGs.2 This technology-neutral approach makes far more sense in a world where reducing GHG emissions is the goal and the nature of the renewable resource has become largely irrelevant.
The new legislation also permits the monetization of credits by providing certain taxpayers with a direct-pay option and others with the ability to transfer credits in exchange for cash.
2. Use clean, reliable electricity to meet as many of our energy needs as possible (in short: electrify everything). Targets for transitioning from fossil fuels to electricity include residential and commercial buildings, the transportation sector, and the industrial sector, each with its own technical and economic challenges. For example, the legislation includes a $7,500 tax credit for purchasing a new electric vehicle (EV), subject to income and EV price limits. The legislation also includes a credit of up to $4,000 for purchase of used EVs. But the legislation also imposes complex domestic content and assembly requirements that could stymie broad availability of the tax credit for years to come.
The industrial sector is perhaps the hardest to crack. For example, electricity is not generally effective at providing the extremely high sustained temperatures needed for steel manufacturing. To address this and a range of other challenges, the legislation provides $6 billion for grant and loan programs aimed at reducing emissions in connection with the manufacturing of steel, cement, and chemicals.
3. Encourage emerging technologies. The Washington Post analyzes some of the technologies the IRA supports with new or significantly expanded incentives: direct air capture of carbon dioxide; manufacturing facilities that retrofit their operations to reduce GHG emissions by 20% (for example, lowering emissions in producing cement, currently responsible for 8% of human GHG emissions); "clean" hydrogen produced through the use of renewable energy; and small modular nuclear reactors.
4. Accomplish the first three goals by building U.S. industrial capacity and creating good-paying clean energy jobs. Congressional Democrats could have created tax incentives sufficient to spur development and left it at that. But they went much further (in some cases, reportedly at Senator Manchin's insistence) and structured the incentives so as to achieve other complementary goals: (a) creating good-paying jobs, including apprenticeship programs; (b) increasing the production and assembly of clean energy products (e.g., solar panels and EV batteries) within the U.S; (c) increasing the domestic supply chain for the critical metals essential to clean energy products; and (d) encouraging the siting of clean energy projects in "energy communities," essentially defined as communities that have historically been dependent on fossil fuel industries and now have high unemployment rates, places where coal mines and power plants have closed, and brownfield contaminated sites.
For example, the investment tax credit (ITC) and production tax credit (PTC) (including the new technology-neutral ITC and PTC) give project developers a base credit (equal to 20% of the full credit) that increases to the full credit if the developer pays the prevailing wage and includes apprentices sourced from a certified apprenticeship program.3 In addition, a developer that uses steel, iron, or manufactured products that are produced in the U.S. will receive a 10% domestic content bonus credit and another 10% if the clean energy project is located in an "energy community."
5. Weave environmental justice into the overall strategy. In the last few years, environmental justice (EJ) has moved from the periphery to the center of climate policy. For example, as a result of effective legislative advocacy by EJ proponents, EJ plays a significant role in the cap-and-trade statute enacted in Washington State in 2021,4 as well as another potentially far-reaching Washington statute focused entirely on EJ.5 The IRA now follows suit. There's some debate as to how much money the IRA directs toward EJ, but it's somewhere between $47 billion and $60 billion and includes a very wide range of projects. Among other things, it includes tax incentives for developing solar and wind facilities for low-income residential buildings, or located in low-income communities, or on "Indian land" (as defined in the Energy Policy Act of 1992), and block grants to mitigate climate and health risks from urban heat islands, extreme heat, and wildfire events.
We hope that this blog post has at least familiarized you with the key themes of this landmark legislation. In subsequent posts, we'll dig into these and other provisions more deeply. So please stay tuned.