A Guide to Understanding What the Inflation Reduction Act Means for Energy and Climate Change
On August 16th, President Biden signed the Inflation Reduction Act (IRA) into law. The sweeping bill, historic by many standards yet intriguingly named, addresses healthcare costs, tax reform, and climate change. The bill has broad goals and incentives to decarbonize the economy while increasing the country’s energy security and reducing the federal deficit. Overall, it focuses more on providing investment incentives than creating punishing regulations (i.e., more carrots than sticks). However, both the incentives and the regulatory changes will significantly impact the energy sector.
The IRA is expected to put the U.S. on a path to achieve a 40% reduction in carbon emissions by 2030, as measured to a 2005 baseline. This is a big step toward the White House’s stated goals of 50% emissions reduction by 2030 and Net Zero carbon neutrality by 2050. Overall, the IRA includes $369 billion in investments toward climate and energy, making it the single most significant climate bill ever passed in the U.S. and the world. So what’s in the bill from an energy standpoint? Keep reading for our analysis below.
IRA Bill Carrots
With over 100 different energy incentives and programs in this massive bill, you can understand that industries are still absorbing the full impact of the bill and baking its provisions into new financial models. As of this writing, the industry is still waiting on the IRS’s finalized tax guidance on the IRA.
Among the highlights of the bill are various incentives for renewable energy. The bill solidifies confidence in the availability of some of the most popular tax credits for renewable generation projects, including easier access for non-profit institutions. These credits typically make up roughly 15% of a project’s value, and they have historically been difficult to expect beyond a given calendar year. As such, the large rush to install generation projects in Q4 to take advantage of these credits may now instead be spread more evenly throughout a given year.
Some of the value of these tax credits have now been tied to domestic manufacturing requirements and certain labor practices (e.g., paying a prevailing wage), and they’ve been made easier to access for developers. It’s still unclear how much these incentives will impact the cost structure of on-campus solar, as much will depend on how domestic manufacturing of equipment such as solar panels can compete against global pricing and tariffs.
The bill does not solely focus on energy production; some elements concentrate on energy efficiency in buildings. Funding is provided to the Department of Energy for programs tackling energy efficiency, electric transmission, and energy rebates. This includes a tax credit of $2.50 to $5 per square foot for energy efficiency improvements.
Affordable housing programs are also eligible for a $1 billion grant to “improve energy or water efficiency, enhance indoor air quality or sustainability, implement zero-emission electricity generation, low-emission building materials or processes, energy storage, or building electrification strategies, or address climate resilience.” Eligible facilities include assisted living programs, housing for those with disabilities, and housing assistance programs. There is also funding for states and local governments to adopt and implement energy-efficient building codes.
Other parts of the bill cover clean vehicle incentives. Incentives for clean vehicle manufacturers, their supply chain, and their customers (those buying the vehicles) are continued and strengthened. Additional funds are made available to build the necessary infrastructure to support E.V. charging, which is still a sore point in convincing consumers to go electric. An enhanced infrastructure will likely accelerate the use of electric school buses, mail trucks, and cars on the road.
For those with Scope 1 and Scope 2 emissions reduction targets, this bill will help you passively meet them. Additionally, the available grants and incentives may allow you to accelerate your progress in reducing these kinds of emissions.
IRA Bill Sticks
On the regulatory side, the bill also looks to crack down on methane leaks, which are notoriously underestimated in the natural gas extraction industry. Methane is one of a few different kinds of greenhouse gases known to contribute significantly to climate change. This bill codifies the EPA’s charge to regulate greenhouse gasses (GHGs) like methane and carbon dioxide. The EPA’s ability and obligation to regulate GHGs had been upheld by a Supreme Court decision in 2007 (Massachusetts v. EPA), but the scope of that was recently called into question by a decision from the Supreme Court in 2022 (EPA v. West Virginia). While this direction to regulate GHGs doesn’t lead to immediate regulations, it creates an expectation of regulations down the line. Importantly, this bill sets aside some funds for compliance with these expected regulations as an attempt to lessen any potential cost increases. And therein lies the name of the bill: all parties acknowledge that this bill is unlikely to have an impact on inflation in the short term (the 18 months). But it represents an attempt to keep inflation in check for the back half of this decade. Is the IRA poorly named? In our opinion, yes. But we’re not politicians, and no one asked us!
The IRA’s Carrot on a Stick
One item in the bill gaining out-sized attention is largely being painted as a necessary compromise to get buy-in from Senator Joe Manchin (D – W.V.), who hails from a state with economic dependence on fossil fuels. That “concession” is this: any federal land auctioned for renewable development (e.g., offshore wind) must be accompanied by an auction for natural gas and/or oil development. The net impact of this paired-auction system may be to drive up supply for both fossil fuel and renewable energy sources. Downstream factors, such as the price of electricity, will depend on how this supply stream changes and how various demand drivers will evolve in response to other elements of the bill. Additionally, there’s a question of whether the auctioning agency will choose to prioritize high-value, high-resource parcels in equal measure or show a preference for one side or the other. Of note, the output value of offshore wind leases is outpacing oil and gas leases, so future economics will favor renewable energy development.
The Inflation Reduction Act is a sweeping bill that targets numerous aspects of the energy industry and moves the U.S. toward a carbon-neutral future. It is rightfully being called the largest single bill on climate change that’s ever been passed. Environ is a full-service energy consulting and management firm focusing on customized energy solutions for sustainability, energy efficiency, energy resiliency, energy procurement, and carbon reduction. We are fully prepared to help organizations navigate the Inflation Reduction Act and what it means for their business.
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