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August 12, 2022

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$369 billion in Inflation Reduction Act climate investments: How does this compare to Build Back Better?

Build Back Better returns as the rebranded Inflation Reduction Act…but how does it compare on climate investment and impact?

The Inflation Reduction Act, which Senate Democrats hope to bring to a vote as soon as this week, budgets $369 billion for energy security and climate change investments. Understandably, most coverage of the bill has focused on what is in it, including fossil-fuel-friendly provisions that helped secure support from Senator Joe Manchin (D-WV) and changes to the tax treatment of carried interest that may yet cost the support of Senator Kyrsten Sinema (D-AZ). By any measure, it’s a massive investment likely to incentivize a whole range of climate action from private companies, public agencies, and individuals across the country. (Check out our summary and analysis of the bill here). It’s also significantly smaller in scale and scope than the expansive proposal President Biden and Congressional Democrats dubbed “Build Back Better.” The climate-related spending in the Inflation Reduction Act totals $186 billion less than the $555 billion called for in Build Back Better. Fiscal concerns and worries about inflation (the new title is no coincidence) compelled the new bill’s drafters to scale back the package. Understanding what programs and policies survived unscathed, which were slimmed down, and which were dropped entirely can paint a clearer picture of the political realities that shape the likely future of climate policy. Major thematic changes include:

Funding for climate resilience and mitigation is far less prominent in the new bill. For example, $20 billion in new funding for AmeriCorps programs (The Corporation for National and Community Service and the National Service Trust) and for climate resilience and mitigation-related workforce development are absent from the IRA proposal.

Agriculture and conservation would receive less additional funding under the IRA than under BBB (but still more than current levels). The IRA’s funding proposals in these areas total at least $35 billion less than BBB’s, with some programs now slated to receive only modest increases (e.g., just over $2 billion for restoration of the National Forest System instead of over $17 billion) and others missing from IRA entirely.

Unlike BBB, IRA does not propose to increase the individual tax credit for the purchase of new electric vehicles. IRA would make a number of changes to eligibility for these credits and would create a new credit for the purchase of used electric vehicles, but it does not increase the new vehicle credit amount from $7,500 to $12,500 as was proposed in BBB. (As a tax credit, this is not a provision that requires a new appropriation. The aggregate budgetary impact is not clear at press time.)

Funding for projects and programs that advance environmental justice is lower but still significant. Exactly which programs are plausibly linked to environmental justice goals is a matter of debate, but some estimates claimed that Build Back Better would entail over $160 billion to advance environmental justice priorities. Senate Democrats claim that the new bill would allocate $60 billion to such goals.

The table below outlines many of the major differences in climate-related spending and tax policy between IRA and BBB. While not comprehensive, it gives an indication of the types of changes made.

 

Climate Investment Comparison: Build Back Better vs. Inflation Reduction Act


Build Back Better

Inflation Reduction Act


% change

Total climate investment

$555 billion*

$369 billion*

33% ↓

Energy and natural resources

Extension of the Advanced Energy Project Credit

$5 billion*

$10 billion

100% ↑

Grants to Facilitate the Siting of Inter-state Electricity Transmission Lines

$800 million

$760 million

5% ↓

Interregional and Offshore Wind Electricity Transmission Planning, Modeling, & Analysis

$100 million

$100 million

0% =

Climate Pollution Reduction Grants

$5 billion*

$5 billion*

0% =

Lead Remediation Projects

$9 billion*

N/A

X

Funding for Water Assistance Program

$225 million

N/A

X

Electric vehicles, transportation, and infrastructure

Credit for the purchase of new EVs

$12,500

$7,500

40% ↓

Consumer rebates for electric home appliances and energy-efficient retrofits

$9 billion*

$9 billion*

0% =

Domestic manufacturing conversion grants

$3.5 billion

$2 billion

43% ↓

Community Climate Incentive Grant Program

$4 billion

N/A

X

Passenger Rail Improvement, Modernization, and Emissions Reduction Grants

$10 billion*

N/A

X

Climate Resilient Coast Guard Infrastructure

$650 million

N/A

X

Agriculture and conservation

National Forest System Restoration

$17.1 billion*

$2.15 billion

87% ↓

Investing in Coastal Communities and Climate Resilience

$6 billion*

$2.6 billion

57% ↓

Non-Federal Land Forest Restoration and Fuels Reduction Projects & Research

$6 billion*

N/A

X

Rural Water Grants for Lead Remediation

$970 million

N/A

X

Rural Energy Savings Program

$200 million

N/A

X

Assistance for Certain Farm Loan Borrowers

$1 billion

N/A

X

USDA Assistance and Support for Underserved Farmer, Ranchers, & Foresters

$1.4 billion

N/A

X

Department of Agriculture Research Funding

$2 billion

N/A

X

Soil Conservation Assistance

$5 billion*

N/A

X

Pacific Salmon Restoration and Conservation

$1 billion

N/A

X

Environmental justice

Neighborhood Access and Equity Grant Program

$4 billion

$3 billion

25% ↓

Grants to reduce air pollution at ports

$3.5 billion

$3 billion

14% ↓

Improving Energy or Water Efficiency or Climate Resilience of Affordable Housing

$2 billion

N/A

X

Strengthening Resilience Under National Flood Insurance Program

$20.5 billion*

N/A

X

Qualified Environmental Justice Program Credit

$1 billion

N/A

X

GHG reduction

Greenhouse Gas Reduction Fund (Green Bank)

$29 billion*

$27 billion*

7% ↓

Methane emissions reduction program

$775 million

$850 million

10% ↑

Other

Corporation for National and Community Service and the National Service Trust

$15.2 billion*

N/A

X

Workforce Development in Support of Climate Resilience and Mitigation

$4.3 billion

N/A

X

Climate Education

$20 million

N/A

X

*indicates investments valued at or over $5 billion

 

It’s also worth noting that the Infrastructure Investment and Jobs Act (IIJA) includes funding for at least some programs envisioned in BBB but left out of IRA. For example, BBB designated $2 billion of the newly-proposed Greenhouse Gas Reduction Fund to fund infrastructure and charging equipment for zero-emission vehicles. The Greenhouse Gas Reduction Fund features in IRA, but the provision for charging infrastructure does not. However, the IIJA does include $7.5 billion in related funding. Similarly, while BBB proposed $10 billion in grants for passenger rail improvements that are not included in IRA, IIJA directs $66 billion for similar purposes.

Perhaps the most important comparison between BBB and IRA regards the expected impact each would have on emissions. With all due caveats about the myriad assumptions and uncertainties inherent in long-term projections of policy impact, early analysis suggests that IRA could lead to a 40% reduction in U.S. greenhouse gas emissions by 2030 (relative to a 2005 baseline). That’s less than the 50-52% BBB was projected to achieve, but the reduction in proposed new climate spending (33% less in IRA) is greater than the proportional decrease in emissions impact.

 

Inflation Reduction Act Relative Efficiency

Build Back Better

Inflation Reduction Act

% change

GHG emissions reduction goal for 2030, from 2005 levels

50-52%

40%

~20%

Climate investment value

$555 billion

$369 billion

~33%

 

It seems that IRA may be a more efficient allocation of resources, at least if emissions reduction per dollar of federal government spending is a relevant measure. However, a few questions loom:

  1. Are federal incentives even the right tools? IRA is heavy on carrots and light on sticks. This is not a bill that mandates emissions reduction or penalizes climate-unfriendly behaviors. Instead, it aims to change the investment calculus for companies and individuals throughout the economy. Debates about the relative merits of such market interventions are beyond our scope here, but still relevant. What is clear is that incentives will change if IRA is passed, and business leaders would do well to think through those changes well in advance.
  2. What do the diminished ambitions to address adaptation and mitigation concerns signal about the government’s priorities? Economic competitiveness and geopolitical considerations weigh in favor of the clean-energy focus of IRA, but the negative physical impacts of already-locked-in levels of climate change on businesses and individuals will require attention at some point—if nothing else, through emergency response funding.
  3. Is a 40% reduction in emissions by 2030 enough (probably not), a good start (most definitely), or the limit of our collective political willpower (not necessarily, but uncertain)? IRA, if passed, is surely not the final legislative word on climate. But whether it represents true momentum or a temptation to rest on laurels is unclear.

Here at The Climate Board, we’re watching the legislative give-and-take as policymakers push toward a vote on IRA. If—when—things change, we’ll be here to help you and your teams understand what’s happening, what it means, and what you should be doing in response. Be sure to sign up for updates and let us know what kinds of policy research and analysis would help you most.  Reach out at www.theclimateboard.com/contact

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