The Inflation Reduction Act was signed into law August 16th and we thought it would be a good opportunity to talk about how this law affects the energy industry and the country’s larger environmental goals. The full text of the law can be found here. While a lot of the bill focuses on tax reform and prescription drug prices, we’re going to focus on the energy and environmental aspects specifically.

Most of the energy provisions are broken down into Investment Tax Credits (ITCs), which allow companies to deduct a portion of the cost of a project from federal taxes, and Production Tax Credits (PTCs), which are variable credits based on metrics, and direct cash investments. The ITC provisions include 30% credit for investments in electric vehicles, wind turbines, solar panels, storage, biogas, and microgrid controllers. The law also includes a 10% bonus for renewable investments in low income communities, and an ITC for clean hydrogen that also has a PTC option up to $3/kg for hydrogen that produces less than 0.45kg of CO2 per kg. PTC options include an extension of the Renewable Energy PTC which covers generated electricity from solar, wind, and geothermal, as well as a credit up to 1.5c/kwh on zero-emission nuclear energy, $35/kwh for battery cell manufacturing, up to 1.5c/kwh for net-zero generation and storage, and an extension of the advanced energy project credit ranging from 6%-30% (qualification for advanced energy project is defined here).

In terms of direct investments, a whopping $27 billion is going to the Greenhouse Gas Reduction Fund which is largely about investing in new decarbonizing technology and allowing local organizations and authorities to do the same, (further broken down here). Additional investments include $2 billion going to rural energy loans and programs, mostly focused on renewables, $9.7 billion to cooperatives, $3.6 billion to expand the DOE loan programs office plus $40 billion in loan guarantee authority, $5 billion in energy infrastructure reinvestment financing, $2 billion in transmission facility loans, and $2 billion in national laboratory infrastructure. Tens of millions are also being invested in tribal energy loan guarantees, tribal and Hawaiian resilience and grid electrification investments, tribal drought protection, uranium, offshore wind, establishing fees on excess methane emissions, and heat pumps. The reason these investments are in the billions is because there is a three-pronged approach here to replace aging grid infrastructure to make it more resilient, create funds for investing in renewables, and create an environment of innovation to help solve some of the final tech problems in the energy transition. 

There are also some compromise provisions that require the Department of the Interior to conduct oil and gas lease sales each year for a decade, while increasing the royalty rate from 12.5% to 16.5%. These provisions are antithetical to the carbon goals the bill is founded on but were required to help get the bill to 50 votes in a narrow Democratic Senate. 

Taken as a whole though, the money heading to the energy sector specifically makes clear the priorities of the legislation through the targeted investments and tax incentives. The aim of the law is carbon reduction through further investment and onboarding of renewables supplemented with storage and energy efficiency. This set of investments is meant to assist greatly with the burden of cost often used as the reason for slow progress on decarbonization. Time will tell if these investments prove adequate and how much the coal and gas provisions will offset it.

Regarding the other climate sectors the IRA targets, there’s just shy of $16 billion for land management including cleaner agriculture, conservation for forests, coasts, and other public lands, as well as fish and wildlife investments. The law’s building provisions include both commercial and residential tax credits for clean energy generation and energy efficiency as well as $8.8 billion in rebates for energy efficiency and home electrification. There are also affordable housing and federal building renovation/resilience investments totaling $2.25 billion. The EPA now has $5 billion in climate pollution reduction grants as well as $3 billion in Environmental Justice block grants, which are targeted to reduce pollution and improve climate resilience in low-income areas. 

Transportation, in general, is a big target of the law. $3 billion has gone into transportation equity grants; here is a good idea of the kinds of organizations this sort of grant goes towards. Individually, citizens can now get a $7500 tax credit for a new electric vehicle, or $4000 for a used one. The law also allocates $4 billion in loans and grants for domestic EV manufacturing. There are tax credits for production of biodiesel and alternative fuels, sustainable plane fuel, and cleaner ports. The postal service has also received $3 billion to electrify its fleet.

Within the Inflation Reduction Act there are billions more allocated dollars for climate priorities that I have not cataloged here, as well as all the previously mentioned tax and drug price reforms that were central to the thesis of the bill (as well as paying for it). The law is 725 pages long, a behemoth of legislation and the largest climate bill in US history. The work of meeting climate goals is daunting and at times can seem impossible with the magnitude of tasks. While this law doesn’t fix all the problems on its own, it’s the first earnest effort we’ve seen from the government in decades and we have more of a fighting chance for a sustainable grid than we would have without it. I encourage you to check out the text of the law or other summaries if you want to judge for yourself what the money and incentives can do if you have the time. Hopefully there are further steps the nation will take to address the ongoing climate crisis but given the circumstances this is a tremendous first step.