By Perry Bryant
The US Senate has historically been the place where climate legislation has died: cap and trade legislation in 2009, the Kigali Agreement phasing out hydrofluorocarbons, etc. Not this time. The Senate passed and President Biden has signed into law the Inflation Reduction Act (IRA), providing almost $370 billion in funding over the next ten years to significantly reduce America’s greenhouse gas emissions.
Princeton University’s Zero Lab projects that the IRA will cut the United States’ emissions by 40% by 2030. Without the IRA, our emissions would only have been reduced by 27% by 2030. The 40% cut in emissions puts the US close to meeting our Paris climate goals of a 50 to 52% reduction in emissions by 2030.
As important as these reductions in US emissions are — and they are vitally important — the IRA also reasserts American world leadership on climate issues increasing the chances (although there’s certainly no guarantee) that China, India and other countries will up their commitment to fighting the climate crisis during the upcoming November UN Conference of Parties in Egypt.
There’s a lot to the IRA. This article will summarize the major energy and environmental provisions and then provide some details on the tax credits that are available to individuals for purchasing an electric vehicle (EV) and the rebates available for retrofitting homes for energy efficiency.
For homeowners who install a solar array or a wind turbine, there is a 30% tax credit for the cost of installing these systems, and that tax credit is available for the next ten years (until 2032). Battery storage, which currently does not qualify for investment tax credits, becomes available for the 30% tax credit in January and is also available over the next ten years.
Utility-grade solar, wind, geothermal, and batteries will also qualify for the 30% investment tax credit if the developer pays prevailing wages and has an apprenticeship program. These solar and wind projects can qualify for additional tax credits if they are located in “energy communities” that include brownfield sites, communities with high unemployment, and census tracts where a coal mine closed after 1999 or a coal-fired power plant retired after 2009. Altogether it appears that a facility could qualify for a 40% tax credit if it met all these add-ons including using domestically produced material in construction of the facility.
By 2030, the amount of solar energy produced in the US is expected to increase fourfold; wind energy threefold; and battery storage fourteen-fold. The IRA could well make the 2020s the decade of renewables. That is not too soon for addressing the climate crisis.
Electric Vehicles (EVs)
Transportation is the largest source of greenhouse gas emissions in the country. Moving to electric vehicles (EVs) is an essential step towards reducing these emissions. During the negotiations on the IRA, Senator Manchin expressed concerns about providing incentives that would encourage EV purchases with batteries made in China and reliance on critical minerals mined in countries outside North America. The final version has significant restrictions on the EV tax credits that reflect his concerns about importing batteries and minerals from China and other countries.
If you are considering buying an EV, or want to understand the restrictions on EV tax credits, the details of these tax credits are outlined at the end of this article. Both the tax credits and the restrictions on the EV tax credits are significant and may well impact how successful the EV tax credits will be in promoting the sale of electric vehicles.
The IRA revives a tax credit program for homeowners installing energy efficiency measures and establishes two new rebates to help pay homeowners to retrofit their homes to make them more energy efficient. The tax credit program, now called the Energy Efficiency Home Improvement Credit had lapsed. The benefits are now made retroactive to 2022 although it will only pay 10% of the improvements. Beginning in 2023, the benefits increase to 30% and annual and lifetime caps are improved.
The new rebate program promoting electrification (tax credits for electric heat pumps, e.g.) is income based. While one almost always wants higher income levels so more people qualify for these rebates, the income levels are not unreasonable, in my opinion.
The second new program – Home Owners Managing Energy Savings (HOMES) – provides enhanced benefits to low-income households, but is available to all households regardless of income. This program provides larger rebates depending on how much energy is projected to be saved from the retrofit. The details on all three of these energy efficiency programs, including eligibility guidelines and what each will pay for (they are extensive) are in boxes elsewhere in this issue.
Both of these new rebate programs will be run by the state. The state will need to submit a draft program to the US Department of Energy for approval before benefits will be available. It is unclear how soon that will happen. By contrast the tax credit program, the Energy Efficiency Home Improvement Credit, is in effect now with enhanced benefits in 2023.
As the country transitions away from coal and towards renewables for electric generation, there undoubtedly will be additional loss of coal mining jobs. One the best alternatives to mining jobs is to provide a true or just transition by creating good-paying manufacturing jobs. The IRA provides $10 billion in tax credits for manufacturing clean energy components such as solar panels, wind turbines, parts for EVs, etc. This funding through section 48C of the IRS tax code provides a 30% tax credit for manufacturing clean energy components, and $4 billion has to be spent in “coal communities.” This includes communities where a coal mine has closed since 1999 or a coal-fired power plant retired after 2009. Funding for a specific 48C project isn’t assured; funding is awarded on a competitive basis. This is a golden opportunity to diversify the state’s economy, particularly in southern West Virginia. One can only hope that state government and manufacturers take advantage of this once-in-a-lifetime opportunity.
Methane is a very powerful greenhouse gas. Over a 100-year period, methane is 25 times more potent at trapping heat in the atmosphere than carbon dioxide (CO2). However, unlike CO2 which impacts the atmosphere for hundreds of years, methane dissipates in 10 to 12 years. So, reducing methane emissions can have some of the most immediate (in climate time) impact on global warming.
The oil and natural gas industry is a top source of U.S. emissions of methane. They emit methane at every step in the production of oil and natural gas: drilling, processing, and distribution.
The IRA imposes a fee on methane emissions of $900 per metric ton beginning in 2024. The fee increases to $1,500 per ton by 2026. The fee only applies to large methane emitters, exempting small operators who emit as much as 60% of all methane emissions according to the Congressional Research Service. The IRA provides the oil and natural gas companies with $1.5 billion in grants and other incentives to help them reduce their methane emissions. And if companies can comply with an anticipated EPA regulation on methane emissions, they will be exempt from the methane fee.
The IRA contains numerous provisions supporting low-income communities and communities of color. Listed below are just two examples of the environmental justice provisions in the IRA. The Greenhouse Gas Reduction Fund sometimes referred to as the “Green Bank,” provides $27 billion in funding to EPA. These funds are intended to leverage private funding to develop low- and zero-emission projects. $20 billion will be available to nonprofit financing institutions, and 40% of these funds ($8 billion) must be invested in low-income and disadvantaged communities.
The Environmental and Climate Justice Block Grants provide EPA with $3 billion for environmental justice projects for disadvantaged communities. Eligible activities include pollution monitoring, transportation emissions reduction, and pollution prevention.
The tax on the mining of coal that historically funded the black lung program expired last year. The IRA permanently restores the tax on coal mining to fund the black lung program.
The IRA reflects Senator Manchin’s “all of the above” strategy for energy development. For example, the bill prohibits the Interior Department from approving renewable energy development on federal property over a ten-year period unless it also opens lands to oil and gas development.
Specifically, in order for the Interior Department to issue rights-of-ways on federal property for solar and wind development, they are required to lease as much as 2 million acres onshore each year and at least 60 million acres offshore each year for oil and gas development. (Inside Climate News, July 28, 2022.) There is leasing reform along with this leasing. These reform measures include, “raising royalty rates and rental rates to hold a lease, eliminating non-competitive bidding, (and) raising bonding requirements.” (West Virginia Rivers Coalition, August 9, 2022.)
The IRA also provides enhanced benefits for carbon capture and storage (CCS). CCS is a technology that removes CO2 from emissions from the flue gases at coal- or gas-fired power plants or industrial facilities (e.g., cement or steel plants). CCS technology is not currently economically viable and demonstration projects have struggled or failed. The IRA increases the amount of tax credits that a company can claim from the current $50 per ton of CO2 to $85 per ton of CO2.
Senator Manchin secured agreement from legislative leaders to also pass permitting reforms as part of his support for passing the IRA. See related story on page 6.
Agriculture and Forestry
The IRA provides $20 billion to help farmers reduce and store greenhouse gases. There is an additional $14 billion to help rural electric co-ops to transition to renewable forms of energy production.
The US Forrest Service will receive $1.8 billion to reduce fuel in the wildland-urban interface, as well as $50 million to complete an inventory of old-growth forest and to protect old-growth forest.
Whew. There is a lot in the IRA, and this review only touches on some of the more important provisions. One weakness of the IRA is that it does not require action by individuals or most industries. There are plenty of carrots in the IRA but few sticks. Developing the sticks will fall on President Biden’s shoulders. One can only hope that the combination of the IRA carrots and President Biden’s regulatory action will be enough to make the monumental transition away from fossil fuels to renewables; a transition that the International Energy Agency, the world’s energy experts, has called the most difficult in human history.
In making this transition, the IRA is foundational. It is the most significant and comprehensive climate legislation ever passed by Congress. It creates the opportunity for the US to lead the world on climate reform and conceivably hold global warming to an increase of 1.5 degrees Celsius — a very daunting challenge. But at least we have an opportunity to meet this challenge thanks to the IRA.