The United States has just passed arguably its most significant and meaningful legislative instrument on climate change and clean energy. It is intended to have positive implications for climate and clean energy markets around the globe. On Sunday, August 8, 2022, the US Senate passed the Inflation Reduction Act of 2022 (the Act). The Act was then passed by the House of Representatives on Friday, August 12, 2022, and President Biden signed it into law today (Tuesday, August 16, 2022). The Act represents a central pillar of President Biden’s policy agenda and is extremely ambitious in scope, with significant implications for healthcare, taxes, and climate change. It authorizes approximately US$430 billion in spending, with approximately US$369 billion of that sum directed to clean energy and addressing climate change. This bulletin highlights the central climate and energy provisions of the Act.
It is noteworthy that Senate Democrats estimate that the Act will raise US$739 billion in new revenue through measures such as increasing the IRS’s enforcement of tax evasion, and a new 15% minimum tax rate applicable to corporations with profits of $1 billion or more. These new revenues are intended to more than offset the expenses resulting from new programs, resulting in a projected reduction in the federal government’s deficit. The Senate was the critical hurdle for the Act, with approval remaining in doubt until its final passing by a vote of 51-50 (along strict party lines with Vice President Harris casting the 51st and tie-breaking vote).
Senate Democrats indicate that the climate change provisions of the Act will result in a 40 percent reduction in carbon emissions by 2030 compared to 2005 levels when fully implemented. While this falls short of America’s updated Paris Target of a 50-52% reduction from 2005 GHG emissions by 2030, it constitutes meaningful progress toward that goal.
The climate and energy portions of the Act aim to: (i) reduce consumer energy costs; (ii) increase American energy security; and (iii) substantially reduce GHG emissions. The Act addresses these objectives through the following measures:
Reduce consumer energy costs. The Act provides for financial incentives to increase the energy efficiency of homes and includes $9 billion for consumer home energy rebate programs to electrify home appliances and for energy efficient retrofits, as well as 10 years of consumer tax credits for residential clean energy expenses, including items such as heat pumps, rooftop solar, electric HVAC and water heaters. Credits apply to 30 percent of eligible expenses through 2032.
Support for electric vehicles. Electric vehicles also receive significant support. The Act provides for a $4,000 tax credit for individuals with incomes below a certain threshold to buy used clean vehicles, and up to $7,500 for new clean vehicles. However, some commentators have noted that vehicle eligibility may be difficult to attain.
Increase American energy security. The Act promotes American energy security and reduces GHG emissions through its financial support for green domestic manufacturing and clean energy production. The Act attempts to limit the extent to which the United States will need to rely on foreign sources in the future by promoting the growth of clean energy and manufacturing over the coming years. Tax incentives are a central pillar in facilitating a clean energy transition. The incentives overcome the precarity of historical tax credits for the wind and solar power industries, which have typically expired after a term of one or two years. The current proposal includes renewable power tax credits with a term of up to 10 years, and provides companies with a much more certain and predictable financial incentive to support planning, financing, and development of renewable energy in the US.
The renewable energy credits include: (i) production tax credits estimated at $30 billion to facilitate the production of solar panels, wind turbines, batteries and critical minerals processing; and (ii) investment tax credits estimated at $10 billion to build clean technology manufacturing facilities for electric vehicles, wind turbines and solar panels. The Act also provides for certain full or partial direct payments in lieu of a reduction in tax liability through the use of the tax credit, although eligibility for “direct pay” is limited to certain tax exempt and governmental entities for most of the eligible tax credits. Tax credits where “direct pay” is permitted include the
- Clean Hydrogen Production Tax Credit;
- Nuclear Power Production Tax Credit;
- Extension of Renewable Electricity Production Tax Credit;
- New Clean Electricity Investment Tax Credit;
- Advanced Energy Project Tax Credit;
- Extension of Alternative Fuel Refueling Property (Charging Stations) Credit; and
- Carbon capture and direct air capture (limited provisions)
Canadian entities should note that the ability to access direct pay for certain credits is dependent on the satisfaction of domestic content requirements, and decisions to access direct pay are made on a facility-by-facility basis.
The Act also includes a variety of other financial supports for clean manufacturing and energy, primarily consisting of loans and grants. For example, the Act provides for: $2 billion in grants to retool existing auto manufacturing facilities to manufacture clean vehicles; up to $20 billion in loans for new clean vehicle manufacturing facilities; $2 billion for energy research; and $20 billion for programs to cut emissions in the agriculture sector.
Environmental Justice. The Act also includes a significant equity lens, assigning $60 billion for projects in disadvantaged areas ($8 billion of this amount will be administered by the newly established National Climate Bank, which will receive a total of $27 billion from various pools of funds in order to spur investment in clean technologies).
For further information or to discuss the contents of this bulletin, please contact Lisa DeMarco at firstname.lastname@example.org.