It’s the 1-year anniversary of the passage of the historic and landmark Inflation Reduction Act (IRA) by the Biden administration (1). It contains the largest ever investment by the United States in climate change mitigation and resilience building efforts. According to national polls, however, many Americans do not understand the IRA or its provisions for businesses and consumers. It is so large and the scope so wide that it is hard even for the experts to predict or understand how different parts of this act will come together to transform our energy infrastructure. But transform it will, in major ways!
Since the 1800s, coal has been the major source of energy for the United States and the rest of the industrialized world. It is one of the dirtiest fossil fuels, and for the last 150 years it has literally fueled everything from trains and ships to lighting our homes and fueling iron, steel, and cement production. However, the greenhouse gas emissions (GHGs) resulting from burning coal and other fossil fuels have been slowly but consistently heating our planet. United States is the second largest emitter of GHGs globally (Fig. 1)
According to climate scientists and the Intergovernmental Panel on Climate Change, our atmosphere has already warmed up by 1°C as compared to the preindustrial temperatures. We now know that we cannot have the planet heated much beyond 1.5°C and still be able to adapt to the changes and prevent a total collapse of our ecosystems. The current 1°C warming is already manifesting in the form of intense heat waves, droughts, and wildfires, or torrential rains and flooding the world over. These extreme events are causing untold suffering and a huge fatality rate among those caught in the middle of these crises, as seen in the tragic loss of life in Maui last week. Moreover, these events are also costing the world economy many billions of dollars every year. Therefore, it makes a lot of sense that we invest in preventing these events and loss of life and property than reacting to them after they have already occurred.
Many of the greenhouse gases, resulting from burning of fossil fuels, stay in the atmosphere for at least a hundred years, so even if we stop using them today, we will still experience their heat trapping effects for a long time to come. Therefore, we need to take drastic measures now to significantly curb emission of these gases.
This is where the Paris Climate Accord, signed by 197 nations in 2015 (2), and the climate section of the IRA, signed into law by the United States Congress in 2022 (1), come in. The Paris Accord provided targets that must be met by all nations to cut global GHG emissions by 50% below 2005 levels by 2030. This is essential to reach net-zero GHG emissions by 2050 and to prevent an overall increase of atmospheric temperature significantly above 1.5°C. Net-zero implies that the amount of GHGs produced will be offset by an equal amount of these gases removed either by using sequestration technologies or reforestation efforts.
The IRA is the first major investment that is expected to help the United States reach the climate targets set by the Paris Accord. It contains $500 billion in new spending and tax breaks to boost clean energy, reduce healthcare costs, and increase tax revenues. This bill will be largely funded with a minimum 15% tax on corporations, and according to the Congressional Budget Office, it is also expected to lower the government deficit by $237 billion over the next 10 years!
How will the IRA achieve its climate goals?
The IRA aims to curb GHG emissions in the United States by incentivizing clean energy transition at every imaginable level ranging from deployment of renewable energy power plants to the consumer and to spurring innovation in carbon capture and other related technologies. The energy portion of the IRA contains $369 billion in climate mitigation and resilience building efforts.
As I see it, there are 9 main areas where the IRA will have a major impact:
1. Clean energy production by deploying solar, wind, and geothermal power plants and by continued support of the hydrothermal and nuclear plants until 2032.
2. Investment in clean Hydrogen technologies.
3. Investing in America’s clean electricity grid, upgrading transmission lines, and making permitting of energy infrastructure more efficient.
4. Manufacture of electric vehicles (EVs), batteries, charging stations, and solar panels.
5. Innovations in reducing emissions from hard to decarbonize heavy industries, including cement, steel, and glass.
6. Innovations in carbon capture and sequestration technologies
7. Innovations in climate-friendly agriculture methods, soil enrichment programs, and use of nature-based solutions to develop resilience to climate change.
8. Investments in historically underserved communities to mitigate pollution and build resilience.
9. Incentives for individual consumers for electrification of their cars and homes, with special incentives for low and moderate-income households.
It is estimated that by taking these actions, coal will form less than 10% of the fuel for power plants in the U.S. by 2030, and the GHG emissions will be cut by about 42% below the 2005 levels. The remaining reduction in emissions needed to reach the 2030 goal is expected to come from the President’s executive actions and independent actions taken by individual states.
Delivery of IRA Funds to corporations
The IRA funds will be delivered through several mechanisms, including tax incentives, rebates, grants, and loan guarantees. Much of the climate funding is, however, in the form of tax credits, and corporations are the largest recipient of these credits. This is important because public investments in the private sector are expected to catalyze huge private investments in renewable clean energy, transport, and manufacturing. Many of the tax incentives are direct pay, which means that an organization can receive the full amount even if it owes less tax than the credit (3). This approach of the IRA relies mainly on providing incentives for clean energy rather than imposing penalties. For example, the latest EPA rule (4) proposed on May 11, 2023, under the Clean Air Act, announces new carbon pollution standards for the fossil fuel-based power industries, but, importantly, it capitalizes on these IRA incentives that can make new technologies affordable for the power plants.
Incentives for Consumers
A very large percentage of the GHG emissions in the U.S. (about 42% of total) come from vehicles and buildings (Fig. 2; 5). Emissions from passenger cars and homes together amount to about 23% of total U.S. emissions (Fig. 3; 5). Therefore, individual consumers have a big role to play in curbing emissions.
The IRA will incentivize electrification of both cars and homes by providing tax credits for the next 10 years to individuals for purchase of qualifying EVs, home EV chargers, and for qualifying home improvements, including rooftop solar panels, installation of battery for solar power storage, and swapping gas appliances with electric machines. Tax credits for weatherizing homes, e.g., putting in insulation, better sealing of homes, and for renovations, including new circuit breakers and circuit panels, are also available. The newer electric machines (heat pumps and electric water heaters) are about 3-4 times more efficient than their fossil fuel counterparts and therefore use much less energy. The consumer pays the upfront cost but can take advantage of tax credits at the time of filing taxes if they owe taxes to the federal government. In early 2024, rebates will be rolled out which will reduce the upfront cost of making these changes (see below).
The key term to note here is ‘qualifying’ EVs and ‘qualifying’ home improvements to make them eligible for credits and subsidies. This means that there are strings attached to receiving tax credits for manufacturers and for consumers. For example, the IRA requires that to receive the full EV consumer credit, a percentage of critical minerals in the battery must be recycled in the U.S. or North America or extracted or processed in a country that has a free trade agreement with the U.S. This is meant to boost manufacturing in North America, to build talent pool for the future clean energy economy, and to ensure that these industries follow regulations and do not cause further harm to the environment.
Starting in 2023, qualifying EVs are eligible for a tax credit of up to $7500 and $4000 for new and used vehicles, respectively. According to one analysis, the IRA credits will allow electric passenger vehicles and light-duty trucks to achieve total cost of parity with internal combustion engine vehicles between 2023 and 2025.
Qualifying home improvements, specifically solar panels, solar water heaters, and battery storage, are eligible for a tax credit up to 30% of the total cost with no annual maximum or lifetime limit between the years 2022-2032. Other energy efficient home improvements, including air conditioners, water heaters, insulation materials, etc. are also eligible for tax credit up to 30% of the total cost, but are capped at $1200 per year, and heat pump credit is capped at $2000 per year (3). The law also includes a $1000 tax credit for home EV charging stations. To avail of these tax credits, the annual household income is capped at $300,000 for a family and $150,000 for an individual.
Together these changes will ensure that American homes and transport modes are both fully electrified, become more efficient, and produce zero carbon pollution. In the process, these improvements will save customers money and make their homes free from pollutants that result from burning gas. The beauty of these changes is that electrified homes become energy producers instead of being energy consumers. It is estimated that taking advantage of the IRA could save the average US household $1800 on its energy bills each year and reduce pollution as well as GHG emissions.
Low- to Moderate-income households and Historically Underserved Communities
Of the money allocated for individual consumers, billions of dollars are reserved in rebates for low- and moderate-income households to help them retrofit their homes with heat pumps and electric water heaters. These rebates will become available in early 2024 and will lower the upfront costs of solar panels and EVs as they are not tied to tax credits. According to NPR (Plugged-In program), homes that make less than 80% of the area median income will have 100% cost to electrify homes covered, up to $14,000.
The IRA also drives critical economic investments in historically underserved communities and those living with legacy pollution through direct grant programs, bonus credits, and by setting aside money to clean up ports and heavy industry. It advances the President’s Justice40 initiative, an executive order signed by the President in 2021. It commits to delivering 40% of the overall benefits of certain Federal investments in climate change, clean energy, clean transit, affordable and sustainable housing, training and workforce development, remediation of pollution, and development of clean water and wastewater infrastructure to marginalized and overburdened communities. These environmental justice goals will be accomplished by close collaborations with the states. In fact, under the IRA, more than $50 billion in rebates will flow through the states and green banks, which may provide a grant, a cheap loan with no interest, or a loan with a very low interest rate. The states will need to apply for these rebates in early 2024. There will be money for the state energy offices to implement or facilitate the flow of money to consumers, underserved communities, municipalities, and tribal governments (6).
The IRA and the BIL
When combined with the $1.2 trillion Bipartisan Infrastructure Law (BIL) signed into law in 2021, which will invest billions into upgrading and hardening the nation’s electric grid, the IRA becomes the greatest investment in energy programs in the history of this country. The BIL aims to modernize the grid, shift the grid to 80% clean electricity by 2030, and make it more resilient by undergrounding power lines to prevent disruption from extreme weather events, elevating roads, and building cocoons or improved community centers in underserved, low-income, and tribal communities. Furthermore, the BIL also aims to build a nation-wide network of EV chargers, strengthen the battery supply chain, and expand public transit and rail systems. Together, these two bills are expected to transform the transportation sector in the U.S. ranging from delivery vehicles to freight trucks to passenger cars.
According to the Department of Energy estimates, together the IRA and the BIL could reduce GHG emissions by a billion tons a year by 2030.
What has the IRA achieved in the one year that it has been in effect?
Most states are racing to take advantage of clean energy funds available in the IRA. This already involves 272 new clean energy projects (including battery, EV, wind turbine and solar panel factories) in 44 states with a total investment of $272 billion (7,8). A total of 170,000 new green jobs have been announced.
According to NPR, 10 million homes in the US have been electrified since the Biden administration took office. The number of EV sales has tripled, and the number of charging stations has doubled nationwide. In California, one out of four cars sold now is electric.
But it is still very early days for the American people to feel the change that is coming. The $50 billion in rebates for low- and moderate-income households remain to be rolled out in early 2024 through the states and the green banks. Whereas tax credits help wealthy folks, rebates do not rely on paying taxes, therefore one doesn’t need to owe the federal government money to take advantage.
Even though the IRA passed without Republican support, the impact of the IRA has been bipartisan. Investments in Georgia are at the top, second only to Michigan, with 22 new clean energy projects, $18 billion in investment, and 16,000 new good-paying clean energy jobs in the last one year. For a breakdown of the IRA investments in the top 10 states, see reference #8.
Concerns and Constraints of IRA
While the IRA is the most consequential legislation for clean energy, it is not perfect and is tied to compromises, such as more offshore drilling for oil and gas as well as more drilling leases on federal lands. This is because nothing of this magnitude can pass muster in the U.S. congress without some horse trading. The fact that any climate bill passed the current congress is totally surprising after the long-drawn-out negotiations on the Build Back Better bill initially proposed by the Biden administration. Experts argue, however, that the overall reductions in GHG emissions will far outweigh the small increases in emissions resulting from more fossil fuel leasing (9).
There are also other concerns and constraints, such as supply chain issues and availability of critical minerals for electric batteries that could slow progress. Moreover, there is also local opposition in some states to clean energy projects, and there are at least four states that are disallowing IRA money to flow into these states, thus depriving their citizenry and industry of being able to take advantage of financial incentives provided by the IRA.
Finally, a large percentage of Americans are not aware of the provisions of the IRA. Education about the IRA’s opportunities is essential to galvanize the new work force for clean energy industries and to drive participation of individual citizens in taking advantage of the IRA.
Summary and Role of Individual Action
In the final analysis, the IRA incentivizes a major clean energy transformation in the US. It will also spur innovation and manufacturing in America and create good-paying jobs while cutting pollution, dealing with climate crisis, and creating a new economy based on clean energy, American-made products, equity, and environmental justice. A public investment of this magnitude in clean energy in the U.S. is expected to attract hundreds of billions of dollars in private sector clean energy investments. Moreover, the IRA is also expected to serve as a catalyst for pushing other countries towards cleaner fuels, so it is very likely to have a world-wide impact.
Since everyday decisions made by individuals are responsible for a large portion of all GHG emissions in the U.S. (5), each one of us can make a huge impact towards mitigation of climate crisis by taking advantage of the subsidies provided by the IRA.
In short, the IRA empowers individuals to act, and it cannot fully succeed without us all participating. Until the passage of the IRA, I remember feeling hopeless as an individual to make any real difference in the global climate crisis. Beyond recycling and composting or driving a hybrid car, which are all important, there was not much else an individual could do. But a public investment of this magnitude now enables us to take actions that will have a much bigger impact on a global scale.
There’s something for everyone in the IRA, and it includes homeowners, renters, and those living in condos and multifamily buildings. The IRA also supports community solar projects, i.e., in a field, farm, or a garage, which households could access. Taking the time to educate ourselves is the key.
Resources for Consumers
Here are a few resources for finding information on rebates, tax credits, finding contractors, and how to get started on electrifying your home and car:
rewiringamerica.org
homes.rewiringamerica.org
CleanEnergy.gov
Final Word
A few weeks ago, in this blog, on the World Environment Day, I wrote about international efforts to mitigate climate change, and those are agreements and treaties that most countries have signed on to. Whether these agreements will be honored by different countries and to what extent remains to be seen. This blog entry is about ‘real’ action by the United States, and the first of its kind.
The overarching goal of the IRA and the BIL is to achieve a clean electric grid (powered by renewable energy sources, without generating greenhouse gases) together with electrified buildings, vehicles, and industry. This will be revolutionary, and our children and grandchildren will have a chance at a sustainable future. Therefore, despite all the calamities and heartbreaks we have endured in recent years, the latest being the wildfires and tragic loss of life in Maui, and despite all efforts on the contrary by the conservatives, I am still hanging on to hope that there are parallel, even more powerful, undercurrents of progress and that there might yet be hope for life on this planet.
4. New EPA rule
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