What Passage of the Inflation Reduction Act Means for Businesses

On Friday afternoon, the Inflation Reduction Act passed in the House of Representatives along party lines, advancing the country’s most significant climate legislation to date. The Act, which raises $700 billion through corporate tax increases and prescription drug savings and offers nearly $370 billion on climate and clean energy investments, can tip the scales in favor of climate action for those who are poised to seize the opportunity.

Last week, The Climate Board published a summary of key themes and provisions of the Inflation Reduction Act (IRA), with a particular focus on the implications for the private sector—follow this link to access our nine-page briefing. To recap, the Act’s climate provisions are concentrated on renewable energy incentives, electric vehicle purchasing, decarbonization of key domestic industries, and improving environmental justice and equity for disadvantaged communities. The private sector should be aware of which provisions it is eligible to utilize.

Key Themes and Implications

Renewable energy. The IRA the scope of major federal tax credits for the investment and production of renewable energy and battery storage. In addition, manufacturing tax credits will incentivize production of major clean energy components and critical minerals on U.S. soil. These credits will be most advantageous for companies in the energy technology value chain. Not only will they be eligible for the credit, but their customers will be better able to afford new energy systems. While the energy investment and production credits are capped well below utility-scale projects, smaller facilities may benefit from renewable energy systems within the capacity limit and see shorter payback periods than if the credits continued to sunset. Additionally, companies may be able to pursue tax equity strategies to invest in small-scale renewable energy systems. These energy-related credits will likely have more impact on Scope 2 emissions in areas of the country where the grid still relies heavily on fossil fuels, and on companies that choose to generate their own renewable energy rather than participating in utility-managed PPAs.

Electric vehicles. The Act added EV manufacturing incentives and made sweeping changes to the existing federal EV tax credit program, increasing the incentives for both purchasers and manufacturers of EVs. Along with funding for manufacturers to retool automobile facilities and a redesign of the consumer-facing EV credits, the Act establishes a commercial clean vehicle credit of $7,500 for vehicles weighing under 14,000 pounds and $40,000 for vehicles over 14,000 pounds. The commercial clean vehicle credits would significantly bring down the cost of fleet electrification, especially for vehicles over 14,000 pounds (for example, a Tesla electric semi-truck would come down in price from $150,000 to $110,000). Progress toward full commercial fleet electrification has been hamstrung by high costs, lack of scale, and limitations on electric alternatives for more specialized vehicle types. To combat these obstacles, the IRA will increase production and lower sticker prices, accelerating the EV transition.

Decarbonization of domestic industries. Another undercurrent of the Act is a focus on the strengthening and development of key domestic industries and infrastructure. Through billions in funding and a variety of credits, the IRA incentivizes investments in agriculture, construction with low-carbon materials, biofuels and sustainable aviation, and heavy/advanced industrial processes, like production of steel and glass. Companies in these industries now have the opportunity to retool factories, ramp up production and use of lower-carbon material options, and communicate with customers about new timelines. For those purchasing large amount of agricultural and industrial products, Scope 3 emissions reductions could be on the horizon.

Environmental justice. Organizations that serve or operate in low-income and disadvantaged communities may be qualified to take advantage of the IRA’s provisions on environmental justice. Some programs are entirely dedicated to environmental justice outcomes, such as $3 billion to Environmental and Climate Justice Block Grants. Others—including the clean energy tax credits, technology accelerator, and consumer home energy rebate programs—are not exclusively directed to environmental justice initiatives but contain incentives to drive investments in disadvantaged communities. For example, the extension and modification of energy credits offers a 10 percent bonus credit for clean energy projects in low-income communities. While many of the funds are eligible for use only by non-profit organizations and government entities, some are accessible for private sector use.

The Big Picture 

With the exception of the fee imposed for methane leaks on the oil and gas industry, the IRA is largely designed as a package of incentives rather than penalties. Realizing the projected 40% reduction in greenhouse gas emissions by 2030 will require businesses to take full advantage of these credits and programs to further their own decarbonization. Rather than waiting for mandates and penalties, the private sector must work proactively to make use of the IRA’s incentives.

Taken alongside the CHIPS Act, which passed a few weeks ago with provisions for energy R&D, these bills serve as a massive development finance push that has the potential to nurture domestic production of advanced energy technologies. By ensuring U.S. businesses are at the forefront of new climate and energy solutions, this legislation opens the door for companies to partake in the windfall that will accrue to early actors in the energy transition. It will not happen immediately, and businesses should not expect major changes to rapidly take shape. Like any take-off, progress will begin slowly and accelerate with time.

The Climate Board is offering custom consultations for companies interested in learning how the IRA’s provisions can and should impact corporate climate action decision-making and investments. Though this service is currently only available for our members, we’ll continue to share insights and developments relating to the IRA. Stay tuned for more updates from our team by subscribing to our blog and joining our mailing list, or feel free to reach out to inquire about an IRA mapping consultation.

 

 

 

 

 

Just Released: Sustainable Debt Primer: Four Steps to Follow Before Entering the Market.

The Climate Board is proud to announce the release of its latest report, Sustainable Debt Primer: Four Steps to Follow Before Entering the Market. Addressed to those who are new to the sustainable debt space, this primer provides a framework to help business leaders maximize their sustainable debt opportunity. Corporate sustainability leaders who are seeking additional financing and working to integrate ESG goals within company strategy will find the outlined steps helpful.

The report following this primer (to be released in Fall 2022) will take a deeper dive into what a borrowing company can do to maximize advantages, with insights and recommendations from issuers, institutional investors, and more.

Four steps from the primer:

  1. Understand the market, including overall growth trends, popularity of each green debt tool, supply and demand characteristics, and the potential impact of inflation.
  2. Decide which sustainable debt tool is right for you, based on each instrument’s type, use of proceeds, and purpose.
  3. Know the circumstances that could advance your company’s financial standing, reputation, project alignment, and insulation from financial volatility.
  4. Assess upfront monetary and non-monetary costs to determine the appropriate budgeting and resource allocation decisions.

Content includes: Snapshots and case examples that highlight practices and conditions associated with successful green debt offerings.

Intended audience: Finance and sustainability leaders of companies interested in entering the sustainable debt market to support their companies’ sustainability strategies and green projects.

Download the Executive Summary

For information on joining The Climate Board and gaining access to the full report and our complete library, contact us at www.theclimateboard.com/contact

$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

The Inflation Reduction Act of 2022: Key Provisions and Implications for Corporate Climate Action

On Wednesday, July 27, Senator Joe Manchin (D-WV) shocked policy observers and policymakers alike by announcing his support for a new version of the Democrats’ massive reconciliation bill. Manchin, thought to represent the critical 50th vote for the bill in the Senate, had been opposed to earlier versions, and that opposition seemed to have doomed hopes for major climate-related legislation in this Congress. Manchin’s sudden reversal—not yet fully explained—means the bill, and climate policy momentum, have new life.

In its current form, the bill comprises over 700 pages of legislative text. In addition to climate provisions, it contains important changes to health care and tax policy, including an increase of the minimum corporate tax rate to 15%. Further changes are possible as the bill moves to a Senate vote as soon as next week, and, if it indeed passes there, to the House of Representatives.  While the Senate’s version is pulled rightward by the centrist tendencies of Manchin and Arizona senator Kyrsten Sinema (whose position on the revised version is still unknown), progressives in the House may attempt to pull it leftward, especially given several fossil-fuel-friendly additions that may have been what brought Manchin into the fold.

As with any major legislation, passage and signing is only the beginning. Many of the important programs this bill would establish or expand depend on agency-level rulemaking, a process which takes time and sustained political will. Nevertheless, should the Inflation Reduction Act of 2022 be enacted as law, the outlook and strategic calculus for corporate climate action will be significantly improved.

The Climate Board reviewed the details of the proposed legislation and identified four major themes and important climate-related provisions in the bill as it currently stands, along with implications for corporate climate action.

Theme 1: Extensive support for expansion of clean energy will change the calculus for producers and purchasers alike.

Theme 2: Expanded but targeted subsidies will push the electric vehicle market over the tipping point.

Theme 3: Targeted efforts to decarbonize foundational industries will cascade through value chains.

Theme 4: The bill’s focus on community and environmental justice aims to generate much broader political and social momentum for climate action.

Click here to read more about the most important climate-related provisions and what they mean for your company’s climate action plan.

The Climate Board will continue to monitor the legislative progress of the Inflation Reduction Act and any other climate-related legislation that may follow. Our member organizations enjoy direct access to our experts to discuss these developments and the specific implications for their businesses and climate action plans. For more information, reach out at www.theclimateboard.com/contact.

 

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