Deflating climate change through the Inflation Reduction Act

Deflating climate change through the Inflation Reduction Act

By Ohana Medeiros

One of the key pillars of current US President Joe Biden’s 2020 presidential campaign was implementing a more efficient means to fight climate change. Two years later, this promise came to fruition through the Inflation Reduction Act (IRA). A $430 billion bill was signed into law on August 16, 2022, establishing a clean energy package, a reduction of drug prices, and an increase in corporate taxes. For the environmental aspect, the legislation aims to cut carbon emissions by incentivizing both industry and households to take measures for a greener future.

The main goal of the Inflation Reduction Act:

A primary goal of the law is to reduce greenhouse gas emissions by about one gigaton, or a billion metric tons, in 2030. The White House claims the act to have 10 times more climate impact than any other single piece of legislation ever enacted. Therefore, the law will affect not only households but also industry. 

From an industry perspective, those who produce clean energy products can benefit twice over by getting tax credits and selling goods related to this type of energy.

Starting from studies, the IRA addresses $60M for information technology, research, and evaluation regarding energy efficiency, water efficiency, climate resilience, or affordable housing, to remain available until September 30, 2030. Funding such as this can not only support fruitful studies about tools and technologies to shift to cleaner energy but also shows a solid commitment to long-term solutions for climate change fighting.

The foreseen benefits of the Inflation Reduction Act:

The legislation expands tax credits for energy-efficient commercial buildings, new energy-efficient homes, and electric vehicles (EVs). It establishes “Made in America” provisions for using American-made equipment for clean energy production and provides expanded clean energy tax credits for wind, solar, nuclear, clean hydrogen, clean fuels, and carbon capture, aiming to build clean energy supply chains. 

A strong benefit of a tax credit is having the actual amount of tax owed fully reduced. For example, if a solar panel costs $15K and $5K of this amount is due to taxes, then the consumer will only pay $10K.  

Energy communities will also benefit from the legislation if clean energy projects promote economic development and create jobs in communities that have previously relied upon conventional energy sources, such as coal, oil, or natural gas. 

An energy community is defined as an operationalized as a brownfield site, a metropolitan statistical area, or a non-metropolitan statistical area that has or, at any time during the period beginning after December 31, 2009, had 0.17 percent or greater direct employment or 25 percent or greater local tax revenues related to the extraction, processing, transport, or storage of coal, oil, or natural gas, and has an unemployment rate at or above the national average unemployment rate for the previous year. 

The climate focus of the Inflation Reduction Act sets a goal of reducing emissions to 2005 levels. The major sponsors of the Inflation Reduction Act, Democrat senators, expect a 40% reduction of carbon emissions by 2030. The legislation takes a two-prong approach to target both the public and corporations. It is designed to encourage immediate investment in renewable energy sources by gradually decreasing tax benefits for renewables over time, rewarding both the public and businesses who are struggling with higher energy costs.

How the Inflation Reduction Act might support American families:

According to the White House, an average of 7.5 million families will save more than $1K per year through clean energy and electric vehicle tax credits as well as tax credits for renewable energy sources. 

For homeowners, tax credits for home solar panels installation will be eligible for 30% credit in case of property placed in service after December 31, 2021, and before January 1, 2033; it drops to 26% for property placed in service after December 31, 2032, and before January 1, 2034, and 22% for property placed in service after December 31, 2033, and before January 1, 2035. 

To meet the goals by 2030, it is estimated that 950 million solar panels; 120,000 wind turbines, and 2,300 grid-scale battery plants will be installed over the US.

The Inflation Reduction Act’s impact on oil and gas companies:

Methane emissions

Oil and gas companies will be rewarded with a new Methane Emissions Reduction Program if they slash their gas emissions. The Inflation Reduction Act offers funding of $850M, to remain available until September 30, 2028, as incentives for Methane Mitigation and Monitoring. 

On the other hand, charges will be imposed and collected on the reported metric tons of methane emissions from such facility that exceed 0.20 percent of the natural gas sent for sale from such facility; or 10 metric tons of methane per million barrels of oil sent for sale from such facility, if such facility sent no natural gas to sale.

Green hydrogen production

Also, in a short-term action, until 2024, the legislation extends a 30% investment tax credit for fuel-cell applications and a technology-neutral credit beyond 2025 to incentivize the manufacturing of hydrogen fuel cell products. This benefit makes green hydrogen cheaper than grey hydrogen in all industrial applications, as any generation facility that begins construction before 2033 will be granted a tax credit of up to $3/kg for ten years.

Land management

The legislation pushes the Bureau of Land Management (BLM) to raise royalty rates for the oil and gas leasing industry to produce on public lands and waters, requiring to collect a fee of at least $5 per acre from any person who nominates federal land and raises minimum bids and the lowest positive incremental rate per barrel from $2 an acre to $10. 

The law also increased the minimum royalty rate to 16.66%. But this is not a complete roadblock for the oil and gas leasing program. The Inflation Reduction Act requires the Department of Interior to expand offshore oil offerings, reinstating within 30 days the 2,700-square miles of Gulf leases and ensuring companies will have the chance to expand.

The Inflation Reduction Act’s commercial and financial impact at the State level:

Other energy provisions included in the law are expanding energy efficiency in commercial buildings by including tax credits, grants, and loans for companies that rein their emissions from oil and gas. 

Clean energy technology is also a point of interest as a $27B incentive is addressed toward green banks and financial institutions’ mission, driven to accelerate the transition to clean energy and fight climate change through innovative financing for this purpose. Although this legislation will be a considerable step towards the US target under the Paris Climate Agreement, it will be necessary for each state to establish its regulations for power plants, car pollution, and methane to ensure the presidential goal. 

For the methane emissions standards, it will be considered as complying with the law if each State meets equivalent or greater emissions reductions as would be achieved by the rule. The key point to realizing the full climate potential of the IRA is through planning, siting, and permitting projects, as well as rate setting taking by the States, local, or tribal governments. 

In addition, the law supports technologies such as hydrogen, nuclear, and carbon capture, but State agencies and utility regulators will have to encourage viable developments while protecting ratepayers and residents from more costly or unproven technologies. Cities will be able to require the installation of solar and other renewable energy technologies in homes and buildings.

Similar proactive approaches adopted by the European Union:

Other countries are also taking a proactive approach to mitigating climate change. A similar regulation was implemented by the European Union (EU) that used the 1990 levels on July 29, 2021, setting a goal to reduce net greenhouse gas emissions by at least 55% by 2030. Known as the European Climate Law, the regulation uses the 1990 levels as a benchmark and sets an expectation that all sectors of the economy and society are included. The European Climate law establishes a European Scientific Advisory Board on Climate Change that provides independent scientific advice. 

Other measures to achieve its goals are having EU Member States ensure that:

  • accounted greenhouse gas emissions from land use, land use change, or forestry are balanced by at least an equivalent accounted removal of CO2 from the atmosphere in the period 2021 to 2030; 
  • all airlines operating in Europe, European and non-European alike, are required to monitor, report, and verify CO2 emissions; 
  • new cars and vans from 2030 onward must have targets set for CO2 emissions. 

Each EU member shall adopt and implement their own strategies and plan to adapt and meet the standards, but the European Parliament did commit to providing stronger provisions on adaptation to climate change.

Key takeaways:

In comparison to the European Climate Law, the Inflation Reduction Act has a lot more to offer to its stakeholders and supports a greener future by giving benefits. The first step to complying with the IRA is acknowledging weakness in clean energy, whether in a family house/car or in supply chains. The tax credits incorporated in the US law provide pathways toward a cleaner, more sustainable future. 

The key point is to take advantage of the tax credits to find the most efficient resources to reduce gas emissions and generate green energy, as well as implement those measures in all possible areas, so we all have a cleaner future.

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