PoV #4: Inflation Reduction Act in the Act: A Year in Review and the Climate Revolution it Promised

A year has elapsed since the Biden administration, in collaboration with congressional Democrats, enacted the Inflation Reduction Act (IRA) during a period of political division in Washington.

Contrary to its title (title remorse?), the IRA emerges as a comprehensive federal spending blueprint, laden with incentives to propel the U.S. towards a sustainable future.

“I wish I hadn’t called it that, because it has less to do with reducing inflation than providing alternatives where we generate economic growth,” - President Joe Biden

Following the passage of an infrastructure bill that enhances electric vehicle (EV) charging facilities, the IRA has further solidified President Biden's stature as a leading figure in global climate change efforts. Distinctively, the IRA shuns heavy reliance on mandates or penalties. Instead, it provides 'carrots' like financial incentives and tax benefits to encourage the adoption of clean energy technologies.

While we commemorate its inaugural anniversary, certain questions persist about the IRA's execution. The effectiveness of its transformation largely depends on how federal agencies interpret and implement specific provisions. This intricate dance between policy and action is evident in measures concerning energy communities, EV tax credits, and the 45V tax credit for clean hydrogen production. Yet, many Americans grapple with understanding the intricacies of the IRA, especially regarding tax benefits for EVs, solar energy, and other renewable energy avenues.

Zooming into the Hydrogen Fuel Scenario:

The IRA unveiled the 45V tax credit to stimulate hydrogen production. The value of this credit varies based on the carbon dioxide emitted during production, culminating in the top tier reserved for 'green' hydrogen. This hydrogen is generated using electrolysis powered by zero- or low-carbon electricity. Simultaneously, the law enhances the 45Q tax credit's value for carbon capture, utilization, and storage—essential for 'blue' hydrogen production.

These provisions potentially supercharge the Regional Clean Hydrogen Hubs program overseen by the US Department of Energy. Currently, the agency is weighing applications for blue and green hydrogen production, supported by the 45Q and 45V tax credits, respectively. Yet, debates loom around the 45V tax credit, particularly its definition of 'clean' electricity. This ambiguity, combined with the Treasury's delay in providing guidelines, leaves the hydrogen sector uncertain.

Transition in the Power Sector under the IRA:

The IRA aims to electrify a power sector responsible for a quarter of U.S. greenhouse gas emissions. Such endeavors necessitate long-term planning, with outcomes not instantly apparent. But the IRA's incentives, by catalyzing positive market dynamics and spurring other sectors, present a vast opportunity for wide-scale decarbonization.

Recent tours of various EV, solar, and battery production centers highlight the ongoing economic shift in the U.S., primarily driven by the IRA and related policies. Given the escalating financial implications of climate change, this domestic clean energy resurgence is both opportune and essential.

Available data suggests that the IRA has catalyzed more than 200 clean energy projects with a combined investment of $86 billion. These projects are poised to create 74,000 jobs across 39 states. The IRA's tax benefits, designed for longevity, promise lasting impact.

The EPA's Initiative:

The EPA has put forth a proposal emphasizing the reduction of greenhouse gases from power plants. The objective? By 2030, coal-powered plants operating past 2040 should capture 90% of their carbon emissions. The tax incentives within the IRA significantly enhance the viability of this proposal.

IRA's Approach to 'Energy Communities:

The IRA proposes a tax credit for 'energy communities'—areas that have historically depended on fossil fuels. While the definition provided by the law is expansive, it might not target the most at-risk regions. Transitioning to clean energy necessitates a multifaceted approach, encompassing job creation, diverse revenue sources, and holistic sectoral development.

Strengthening the Incentive Framework of the IRA:

Following the IRA's introduction, the federal government rolled out significant environmental regulations, inclusive of carbon dioxide emission limits. A few standout initiatives include:

Vehicle Emissions:

New benchmarks aim to reduce greenhouse gases from new vehicles by about 50% from 2026 to 2032. With the IRA's backing for EVs and associated infrastructure, demand for light-duty EVs is projected to rise sharply. A Bank of America report predicts a declining phase for gasoline-powered vehicles, with EVs expected to take the lead in new model introductions by 2027. Concurrently, the Biden administration is urging industry giants to extend the EV charging network, aligning this expansion with federal benefits.

The IRA's focus also includes medium and heavy-duty EVs, offering substantial incentives. Nevertheless, potential hurdles, such as supply chain interruptions, still exist.

New Era for Clean Energy Manufacturing

Celebrating a year since the IRA's inception, there's a marked increase in efforts to rejuvenate clean energy manufacturing in the U.S., even as the federal government refines regulations tied to the act's generous tax benefits.

The American Clean Power Association notes that since President Joe Biden's endorsement of the IRA on August 16, 2022, 83 new or upgraded clean energy manufacturing facilities have been announced. This count excludes facilities dedicated to EV battery and component production, implying that total investments over the past year surpass this figure.

The IRA's influence is palpable, triggering a renaissance in American manufacturing. It guarantees tax benefits for various clean energy resources, effective for at least a decade, aligning with the administration's goals of reducing carbon emissions across the economy. Moreover, the legislation extends incentives for domestic production of key elements vital for the clean energy transition, such as solar panels and wind turbines.

This renewed commitment to clean energy manufacturing is evident across sectors: semiconductors, automotive, utilities, and oil and gas. This federal commitment to the climate not only addresses environmental threats but also fortifies the U.S. economy for years to come.

Companies like Boston Metal are capitalizing on these incentives, embarking on innovative ventures like the Molten Oxide Electrolysis (MOE) green steel production platform. Such endeavors signify a gradual shift from over-reliance on imports, particularly from nations like China and Russia.

For the general public, the IRA extends significant savings via rebates on energy-efficient appliances and offers like the 25C tax credit for residential upgrades. However, the comprehensive rollout of these benefits has been somewhat protracted, mainly due to some rebates falling under state jurisdiction.

The IRA has undeniably left its mark on the EV market. Prospective buyers can avail notable discounts on new or second-hand EVs, with certain eligibility criteria. Furthermore, the emphasis on renewable energy, especially solar power, brings added benefits, including reduced carbon footprints and cost-effectiveness.

A deeper dive into the data reveals that over 50 manufacturing facilities announced post-IRA focus on solar component production. Companies are also bolstering their investments in the mature U.S. wind energy sector and battery storage solutions.

However, the journey is not without its obstacles. Clarifications for certain technologies are available, but emerging sectors like fuel cells seek further directives. Concerns about maximizing the PTC, which permits direct cash transactions, also persist. Components produced after 2032 will no longer qualify for tax benefits, urging manufacturers to accelerate their initiatives.

The IRA also projects the creation of over 9 million jobs in the next decade. But challenges arise with an aging workforce and existing labor shortages in certain regions. The U.S. also faces stiff competition from global contenders, notably China, a leader in clean energy supply chains.

Another concern is the complex and lengthy permitting process in the U.S. Issues?like land acquisition, local opposition, and stringent federal reviews can lead to unforeseen delays in project completion.

Summary and the Road Ahead

In essence, the IRA is a forward-looking legislation, strategically designed to catalyze the transition to a cleaner, more sustainable U.S. economy. It presents opportunities, attracts investment, and fosters innovation. As with any comprehensive law, challenges are anticipated, but the IRA's framework offers an extensive set of tools to address them.

The coming years will define its ultimate impact, particularly as the U.S. strives to cement its position as a global leader in clean energy. Amidst a rapidly evolving geopolitical landscape, the Biden administration's focus on building resilient supply chains, investing in technology, and emphasizing domestic production underscores the nation's commitment to a brighter, sustainable future.

While the initial achievements of the IRA are commendable, the journey is far from over. It will require unwavering dedication, robust public-private partnerships, and a clear vision to steer the U.S. towards a green future.