A Brief Summary of the Climate and Energy Provisions of the Inflation Reduction Act of 2022
The Inflation Reduction Act (IRA), which was signed into law in August 2022, will cut Americans’ energy costs, create good jobs and transform U.S. efforts to address the climate crisis. It is the largest single step that Congress has ever taken to address climate change. The IRA includes in investments in disadvantaged communities, prioritizing projects that repurpose retired fossil fuel infrastructure and employ displaced workers, setting the U.S. on a course toward a fair, equitable and economic clean energy transition.
Recent highlights the substantial emissions reduction impact of these provisions. Under a business-as-usual scenario (without the IRA), the U.S. would be expected to reduce greenhouse gas (GHG) emissions by between 24% and 35% by 2030 compared to 2005 levels. This reduction is a far cry from the 50-52% reduction target set in the latest U.S. nationally determined contribution (NDC). With the passage of the IRA, GHG reductions are expected to reach 31% to 44% by 2030. When combined with renewed ambition from executive agencies like the EPA and Department of Agriculture, as well as states and cities, the Rhodium Group’s modeling suggests that the U.S. can meet its NDC commitment.
The Inflation Reduction Act builds on the initial climate funding opportunities passed into law in the Infrastructure Investment and Jobs Act (IIJA) to support projects across electric vehicle (EV) charging, power infrastructure and climate resilience. The legislation provides new funding to accelerate the growth of clean energy and support consumer rebates for home electrification and EVs, and it dedicates significant resources to support American-made products to boost domestic manufacturing.
The IRA’s revised clean electricity tax credits will become “technology-neutral” in 2025 – driving the expansion of all zero-carbon electricity sources without preferring any one over another. These will include wind, solar, geothermal, nuclear, etc., along with tax credits for generation from existing nuclear plants and for electricity storage technologies. The IRA provides the first-ever 10-year runway for energy tax incentives. This will extend credits at their full value for at least 10 years, giving investors, manufacturers, utilities and developers enough time and confidence in the economic feasibility of clean energy to plan and build new manufacturing facilities and projects into the 2030s. Deployment of clean energy options will be further bolstered through a $250-billion expansion of financing authority in the U.S. Department of Energy’s Loan Programs Office.
The IRA will support U.S. manufacturing by expanding production tax credits for the manufacture of solar panels, wind turbines, batteries and critical minerals processing by $30 billion. It includes an additional $10-billion investment tax credit for clean energy manufacturing, with nearly $6 billion allocated to help existing heavy manufacturing — such as steel and cement — significantly reduce emissions. It establishes bonus credits if components are produced domestically, with a new clean electricity investment tax credit (ITC) for investment in qualifying zero-emissions electricity generation facilities or energy storage technology. The base ITC is 6%, with the rate increased to 30% for facilities that pay prevailing wages and meet registered apprenticeship requirements. Furthermore, the IRA enhances tax credits for carbon capture (combined with either utilization or storage and for direct air capture and storage) and creates a new 10-year incentive for clean hydrogen production. Finally, the IRA provides for an enhanced ITC and PTC for projects which are built in communities where coal was an economic driver, or in disadvantaged communities where the unemployment rate was at or above the national average in the previous year.
Not only does the IRA incentivize industry, but it also provides direct incentives for American families to decarbonize their homes through the conversion of furnaces and/or water heaters to heat pumps, the installation of rooftop solar and energy-efficient retrofits of homes, apartments and affordable housing.
Additionally, the IRA has specific provisions to address equity and environmental justice and to reduce pollution in low-income and disadvantaged communities. It includes a $3 billion allocation for environmental and climate justice block grants, which can be used for community-led monitoring and remediation, mitigating the effects of urban heat islands and facilitating community engagement in federal and state policymaking. The IRA also establishes the Greenhouse Gas Reduction Fund – a $27 billion green bank – which provides funding to support rapid deployment of low- to zero-emission technologies. Of this, $7 billion is allocated for rooftop solar and air-pollution abatement technologies in disadvantaged communities; $8 billion is allocated for financial and technical assistance for clean energy projects benefitting low-income and disadvantaged communities; and $12 billion is allocated for direct and indirect investments in renewable energy projects nationwide.
The IRA has the potential to reshape transportation, building on the EV infrastructure investments within the IIJA and by providing EV tax credits to families for the purchase of both new and used cars. According to modeling by the Rhodium Group based on the anticipated rebates, EVs were expected to move from 2% of all light-duty vehicles (LDVs) sold in 2020 to up to 52% of all LDVs sold by 2031. However, this analysis pre-dated the final IRA; its domestic content and assembly requirements may limit the effectiveness of the incentives. For LDVs to qualify, they will have to be assembled in North America. Further, half of the total credit relates to the battery’s components. To qualify, greater than 50% of the battery’s components must be manufactured or assembled in North America in 2023 (and 100% by 2029), in countries with which the U.S. has a free trade agreement, or the minerals must be recycled in North America. By 2027, this increases to greater than 80%. Starting in 2024, no credit can be granted if battery components are manufactured or assembled in a foreign entity of concern. Starting in 2025, no credit can be granted if the vehicle’s battery contains critical minerals that were extracted, processed or recycled by a foreign entity of concern (e.g., China).
Finally, the Inflation Reduction Act devotes $20 billion to resilience and conservation solutions.