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.