The Inflation Reduction Act could be the crown jewel of US climate policy

Energy & Commodities

As temperatures soar across the globe, Democrats in Congress have woven together a party-line package to help achieve President Biden’s goal of a 50% reduction in greenhouse gases by 2030. The Inflation Reduction Act (IRA), likely to emerge from Congress this summer assuming Democrats can manage their fragile 50-vote Senate majority, has the potential to complete a trifecta of climate policies working to accelerate decarbonization. US climate policy – once thought of as a meandering afterthought, - is evolving in three arenas: regulatory pressure on fossil industries applied by the Environmental Protection Agency (EPA); deployment of innovative low-carbon technologies authorized by the 2021 Infrastructure, Investment, and Jobs Act (IIJA); and now proposed clean energy tax credits and programs to accelerate zero carbon energy development. The climate impact of these strategies in concert is greater than the sum of its parts.

The IRA proposes US$369 billion in clean energy tax credits and energy transition programs. Importantly, provisions include direct pay and transferability for many of the tax credits enabling developers to receive the full credit amount by avoiding the cumbersome and expensive tax equity market. This is particularly beneficial to small and mid-sized developers. The IRA financial incentives would accelerate and expand the rapid growth in zero-carbon generation sources. These tax credits would combine with over $72 billion in energy innovation and commercialization grant and loan programs already being deployed by the Departments of Energy and Transportation from the IIJA to bring new technologies to market and commercialization. These economic tools would attract more new financing to the energy transition, which will already be bolstered by a regulatory regime under development at the Environmental Protection Agency (EPA) designed to lower emissions from the oil and gas, transportation, and power sectors. EPA’s emerging regulations will place additional costs and constraints on traditional fossil fuel generation and transportation, tipping the scales further toward clean-energy alternatives.

The IRA also includes an array of climate programs designed to help accelerate the build-out of zero-carbon electricity; increase penetration of electric vehicles (EVs); elongate needed transmission lines to bring green energy to load centres; spur green hydrogen production; increase credits for direct air capture projects; and concentrate efforts to increase clean energy and green jobs in historically disadvantaged areas. This bill, if it crosses the finish line, would be the single largest climate-related package in U.S. history. While the Infrastructure Investment and Jobs Act acted as a vehicle to build out infrastructure and foster new technology development and commercialization, the IRA takes financing one step further by providing predictable and material incentives, lowering total project costs. The result would be a meaningful contribution to the net zero goals. Specific tax and other incentive provisions in the draft legislation include:

  • A 10-year extension of existing wind and solar tax credits, as well as energy efficiency projects
  • Expansion to include stand-alone energy storage, clean hydrogen production, existing nuclear generators, biomass, geothermal, landfill gas, trash, energy efficiency, qualified hydropower
  • Expansion for lesser-known technologies including dynamic glass, linear generators, micro-grids
  • Increases in tax credit amounts for carbon sequestration, including carbon sequestration utilization and storage (CCUS) as well as direct air capture technologies
  • EV purchase incentives for new and used EV vehicles and manufacturing grants
  • Clean energy manufacturing incentives and clean fuel production, biofuel, and aviation alternatives

For full tax credit projects to meet wage and other requirements, credit adders are available for wind and solar facilities located in low-income and disadvantaged areas. The technology-specific individualized tax credits will morph into a tech-neutral production tax credit paradigm at the end of 2024. This evolution will alleviate the need to legislatively expand the list of eligible technologies as innovation spurs new zero-carbon tools. Most credits phase out in 2032, some when emissions levels are achieved.

These proposed policies are particularly important to US climate goals given the backdrop of an aggressively conservative US Supreme Court. In the West Virginia v. EPA case decided last session, the Supreme Court adopted jurisprudence dubbed the 'major questions doctrine', which enables the Court to strike down agency efforts to address new problems with existing tools if the agency’s authority is not explicitly authorized by legislation. Thus, several regulations are at risk of litigation under this new legal precedent.

Perhaps the most surprising climate provision in the IRA is the methane fee, which would fine oil and gas operators $900 for each metric ton of methane in excess of a specific emissions threshold beginning in 2027. Emissions sources include both production and midstream operations. These fees would dovetail with EPA’s methane regulations for new and existing operators expected to be finalized later this fall. Toward this effort, the IRA authorizes EPA to apply $1.5 billion to assist companies with methane reductions. Oil and gas giants have decried the methane fee as duplicative of EPA’s proposed national requirements. Once EPA’s rule is finalized, it is bound to be challenged in court. Thus, the fee structure in the IRA would provide an important insurance policy to control the steadily increasing amounts of highly potent greenhouse gases from the oil and gas sector. The IRA includes also increases onshore and offshore leases and royalty rates for extraction on federal lands.

The always-unpredictable reconciliation process is likely to play out in a matter of weeks in the halls of Congress. The bill's passage is likely but certainly not assured. Its impacts would provide an oversized role in climate policy, working in concert with EPA’s regulatory efforts and the IIJA demonstration funds, to bring about meaningful change in the greenhouse gas intensity of the US economy.


The views expressed in this note can be attributed to the named author(s) only.