Bringing the Inflation Reduction Act into Focus

Historic Legislation Expected to Increase Demand for Clean Energy Technologies

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The Inflation Reduction Act (IRA) was signed into law on August 16, 2022. With the stroke of a pen, President Biden set into motion an initiative of historic proportions, accelerating programs to help Americans save energy and reduce the nation’s carbon footprint.

The IRA is a pared-down version of the Build Back Better Act, a $2-trillion social spending package that stalled in the U.S. Senate last year. It is a voluminous bill (274 pages) with sizeable objectives to match, projected to raise $738 billion in new revenue and authorizes $369 billion in spending for energy security and climate change initiatives. There are also subsidies for the Affordable Care Act, reforms to lower prescription drug prices, and corporate tax increases aimed at reducing the federal deficit by approximately $300 billion. But most notably, the IRA is intended to make unprecedented investments to combat climate change, with the goal of reducing greenhouse gas emissions nearly 40% by 2030.

$270 billion of the law’s climate action investments are embedded in the federal tax code. The laundry list of tax credits includes, but is not limited to, extending the solar investment tax credit for 10 years, $13 billion in electric vehicle incentives, $14 billion for home energy efficiency upgrades, $22 billion toward home energy supply improvements, and investment tax credits for property investments in energy storage technology – all of which are intended to reduce consumer energy costs, increase energy security and reduce greenhouse gas emissions.

In addition to consumer tax credits, funds will be allocated to the states in the form of grants and loans to implement a myriad of programs, including those that target disadvantaged communities to address transportation and infrastructure needs, and those targeting rural communities to address racial and economic justice in farming. These and other programs have been delegated to federal agencies to administer and the funding is just beginning to trickle out of Washington. The spigot is not fully open yet, and it will take some time before these monies reach their intended destinations.

Industries and businesses that presently occupy the clean energy space, or want to, expect demand for their products will increase over time due to the consumer tax credits. There are also opportunities for the manufacturing sector to benefit directly, via incentives such as Clean Manufacturing Tax Credits (Section 48C), Advanced Manufacturing Production Credits (Section45X) for production of wind, solar, and battery components, Clean Hydrogen Tax Credits (Section 45V), Carbon Sequestration Tax Credits (Section 45Q), as well as others.

The transition to a clean energy economy is viewed by proponents as a once-in-a-generation opportunity to invest in America’s workers. It is not just historic climate policy; it has the potential to facilitate historic levels of jobs creation – provided the tax credits incentivize manufacturers to meet certain labor standards that include paying workers prevailing wage rates and enrolling them in apprenticeship training programs. There are a lot of moving parts, and it will take a year or more before anyone is able to render a preliminary assessment. Will the IRA spur clean energy manufacturing in the U.S., and will it lead to a reduction in energy consumption? Presently, there is considerable enthusiasm for both outcomes, but only time will tell whether these investments will bring about the desired results.

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