How the Inflation Reduction Act addresses climate crisis
By Joe Holman, HLB USA
The Inflation Reduction Act (IRA), a slimmed-down version of the Build Back Better bill, is a spending bill that aims to cut greenhouse gas (GHG) emissions and spur investment in renewable energy. The bill, recently signed by U.S. President Joe Biden into law on August 16, 2022, represents the largest climate investment in the country's history, allocating nearly $400 billion to programmes to mitigate the impact of climate crisis over the next 10 years. Here are some notable climate provisions in the IRA:
1. Allocation of climate and environmental justice block grants
The law allocates $3 billion for climate and environmental justice block grants for community-led projects in disadvantaged communities. These grants go toward community initiatives that track and fight urban heat and air pollution, fund climate resiliency, and invest in clean energy, such as community solar.
2. Reduction of U.S. emissions
It's expected that the act will reduce the country’s GHG emissions to about 40% by 2030 compared to 2005 levels, putting the U.S. within reach of its nationally determined commitment to the Paris Agreement.
3. Increase in incentives for clean energy
The IRA offers numerous targeted tax credits and other financial incentives to promote the development and production of renewable energy. Those benefits include:
- 30% tax credit for solar and wind energy: The IRA offers up a 30% tax credit for rooftop solar panels, small wind electric systems, geothermal heat pumps, plus accompanying battery storage. The tax credit will start its step-down process in 2033 at 26% and then reduce to 22% in 2034.
- New loan/grant programmes to decarbonise grids: The IRA aims to boost the clean energy supply in the country by incentivising domestic production of clean energy technologies and by providing tax incentives for companies to manufacture products such as offshore wind components and carbon capture systems. The IRA also provides industrial decarbonisation financing and grants, as well as funding for procurement from the government for clean energy products.
- New credit for qualified nuclear facilities: The IRA also offers a production tax credit for existing nuclear plants, which starts with three cents ($0.03) multiplied by the kilowatt hours of electricity that the plant produces. It also provides tax credits for both production and investment for advanced reactors generating electricity. The credit is for at least $25 per megawatt-hour for the first 10 years the plant is in operation, adjusted for inflation.
- Clean hydrogen production tax credit: The act also includes a tax credit for the clean production of hydrogen worth up to $3 per kilogram of hydrogen generated in a way that doesn't emit any GHG. The tax credit is available for 10 years.
- Advanced manufacturing production credit: The IRA offers a new tax credit for producing goods or components used in renewable energy equipment made in the United States. These include photovoltaic cells and wafers, certain polymeric materials, solar grade polysilicon, solar modules, torque tubes, structural fasteners, battery modules, battery cells, electrode active materials, and certain related critical minerals.
4. Incentives for clean motor vehicles and refuelling/recharging property
Consumers who purchase a new electric vehicle are eligible for a tax credit worth up to $7,500. Used vehicles qualify for up to $4,000. Consumers may also qualify for additional electric-vehicle incentives from local and state governments or utility providers.
In addition, the IRA offers a tax credit for commercial clean vehicles of up to $7,500 for vehicles that weigh less than 14,000 pounds and $40,000 for vehicles greater than 14,000 pounds. It also provides credit for the installation of electric vehicle charging stations.
5. New sustainable aviation fuel credit
The act also provides a tax credit for sustainable aviation fuel mixtures, which is $1.25-per-gallon of sustainable aviation fuel in a qualified mixture, including the applicable supplementary amount with respect to such sustainable aviation fuel. The applicable supplementary amount refers to the amount equal to one cent for each percentage point that the fuel decreases the lifecycle GHG emissions by over 50% compared to petroleum-based jet fuel.
6. Investments in agriculture, forestry, and rural communities
The IRA also makes investments to tackle the climate crisis, reduce costs, and create good-paying jobs through targeted grant programmes in agriculture, forestry, and rural communities. These grant programmes include:
- Climate-smart agriculture: The IRA will invest $20 billion to give ranchers and farmers the tools they need to address the climate crisis.
- Wildfire protection and climate-smart forestry: The law will invest $5 billion to protect communities from wildfires while mitigating the effects of the climate crisis and supporting workers through climate-smart forestry.
- Rural power and clean energy: The IRA will also spend $14 billion to reduce costs for families and support good-paying clean energy jobs in rural communities.
7. Financial incentives for households and businesses
Individuals that make certain upgrades to their homes are eligible for either the nonbusiness energy property credit or the residential clean energy credit. The former offers a 30% tax credit to help defray the costs of installing energy-efficient skylights, insulation, windows, and exterior doors, for example. The latter also offers a 30% tax credit, but it applies to the installation of solar panels or other equipment that harnesses renewable energy like geothermal, wind, and biomass fuel.
The act also offers rebate programmes tied to clean energy and efficiency. One programme—the HOMES rebate programme—pays homeowners who were able to reduce their energy consumption via efficiency upgrades like HVAC and insulation installations. Overall savings depend on household income level and energy reduction.
In addition, the act expands the tax deductions for energy-efficient commercial buildings. For instance, if a commercial real estate owner cuts a building's energy use by 25%, they're eligible for a deduction of $2.50 per square foot. This can go up to $5 per square foot if the owner decreases energy use by 50%.
Develop and embed strategy for sustainability
The Inflation Reduction Act presents great opportunities for businesses across multiple industries to deliver on carbon reduction and sustainability commitments. It's also a great opportunity to drive growth that may affect every corner of your company—from finance, tax, and sustainability to supply chain, operations, product development, and risk management.
Want to know more about how the IRA can benefit your company? Get in touch with us today. HLB specialises in developing and embedding sustainability strategies for businesses to gain a competitive edge through business growth, compliance, managed business risk, and business optimisation.