Senator Joe Manchin, a Democrat from West Virginia, pulled a fast one yesterday. After months of opposing major climate legislation, citing inflation risks, he suddenly changed his tune. Last night, climate legislation was back on the table, and the odds of it passing had gone up considerably.
While not as large, in terms of dollars, as President Joe Biden’s Build Back Better plan, the Inflation Reduction Act of 2022 still stands as one of the most significant pieces of climate legislation proposed in the U.S. It would put $369 billion toward clean energy, electric vehicles and a range of other climate programs.
Senate Democrats say that the bill could cut emissions by 40% (most likely below 2005 levels, a benchmark the Biden administration has used in the past). That’s not enough to keep warming to 1.5 degrees Celsius, the globally agreed upon level that would limit most catastrophic outcomes, but it’s close. According to Climate Action Tracker, the bill would bring the U.S. from “insufficient” to “almost sufficient,” increasing the chances that the world can keep global average temperatures from rising more than 2 degrees Celsius.
The bill, at 725 pages, goes into great detail outlining how the hundreds of billions of dollars should be spent. I’ve skimmed through the entire text, reading the most relevant pages and picking out the key points. If the bill is signed into law, here’s what will be driving climate policy in the U.S. for the foreseeable future.
Where the bill invests
At a high level, the Inflation Reduction Act allocates funds into a few major buckets. There’s $60 billion for clean energy manufacturing, $27 billion for a federal “green bank” that will help finance clean energy projects and $20 billion to help slash emissions from agriculture. A total of $60 billion is earmarked for environmental justice initiatives, which should focus on addressing the higher levels of pollution experienced by people of color and low-income communities. There’s also over $4 billion for forest management and $2 billion to improve the grid.
That money, and more, should help further encourage the rollout of renewable and nuclear power, as well as develop the supply chains and workforce needed to install and maintain them. Electric vehicles also get some attention, and the new tax credit scheme should help make EVs more accessible to people with more modest means.
Electric vehicles
The legislation extends the $7,500 tax credit for new EVs and opens it to all manufacturers, including Tesla, GM and Toyota, which have used their allocation under the previous cap of 200,000 vehicles. To qualify, the batteries would have to be made using critical minerals mostly recycled in the U.S. or mined and processed in the U.S. (or any country with which it has a free trade agreement). Most of the final assembly of the battery packs has to take place in North America, too. Both requirements are phased in over three years starting in 2024.
It also adds a $4,000 credit (or 30% of the purchase price) for used EVs, something that will help boost access to EVs for people with lower incomes. Dealers would also be able to offer the credits to buyers at the time of purchase, a significant change given that, today, people don’t get the credit until after they file their taxes.
Tax credits wouldn’t apply to all vehicles, though — new trucks, SUVs and vans have to retail for less than $80,000, and cars and other EVs for less than $55,000. Couples earning more than $300,000 or individuals earning more than $150,000 wouldn’t qualify for any of the credits. For used EVs, income limits drop to $150,000 for couples and $75,000 for individuals.
Renewable and nuclear power
On the energy side, the Inflation Reduction Act would extend tax credits for solar, wind and geothermal through 2024. New projects that use American-made materials and components would be eligible for a 10% tax credit, which would increase to 20% for offshore wind. The bill also offers an additional 10% bonus for renewable energy projects located in “energy communities,” which the bill defines as brownfields, old coal mines or near existing fossil fuel infrastructure. Wind and solar projects in low-income communities get a bonus of up to 20%.
The bill also boosts biogas, biofuel, hydrogen, microgrid and energy storage projects, and it extends tax credits for carbon capture and sequestration through 2032. Direct air capture is perhaps the bigger winner, getting a higher tax credit than CCS systems hooked up to point sources like power plants or ammonia production plants.
Hydrogen producers would get access to additional tax relief if they install and use renewable power, and for those that make gray or blue hydrogen, which is made from natural gas, the bill sets carbon emissions limits to weed out the most polluting producers.
Built environment
Residential and commercial buildings account for about a third of U.S. carbon emissions, and the bill takes strides to make them more efficient and eliminate their dependence on on-site fossil fuels.
First off, residential solar and energy storage tax credits, which were due to expire next year, get extended through 2034. They also get a nice bump from 26% to 30%. Electrochromic glass, which can change opacity dynamically to heat or cool a building, would also qualify for the credit.
Next, there’s a top-line 30% tax credit for small, targeted energy efficiency improvements, like installing better windows or more tightly sealing doors. The amount is limited to $1,200 per year, which will help around the edges but isn’t significant. Home energy audits would be eligible for a $150 credit.
The more significant program is called the HOMES rebate program, which makes $4.3 billion available to states to administer to individuals and companies. If a retrofit reduces energy use by 20% to 35%, the homeowner or aggregator is eligible for up to $2,000 per dwelling. For retrofits that save more than 35%, it goes up to $4,000. That will help, but compared with the discounts available for solar, for example, it’s relatively small. Major energy retrofits can cost tens of thousands of dollars. Four grand is nice, but it probably won’t be the thing that convinces people to go forward with a deep retrofit.
The good news is the same credits apply to new multifamily housing, which may help inspire some property owners and managers to move forward with energy efficiency upgrades, especially if they’re on the hook for some or all of the utilities. The credit is capped at $400,000 per building. The bill directs states to prioritize low-income housing, which will greatly benefit the occupants since they tend to spend a greater percentage of their income on utilities.
Heat-pump HVAC systems, heat-pump hot water heaters and induction stoves are also eligible for rebates, ranging from $800 for induction stoves to $8,000 for HVAC systems. Given prices for those items today, those are significant rebates that will probably move the needle on adoption.
The workers who install these systems and all other projects incentivized under the bill would have to be paid the prevailing wage, a significant boost to a growing sector of the labor market.
Bigger picture
Independently, these are all largely incremental changes with a few bits that stand out from the rest. But taken together, they represent a significant down payment that will help put the U.S. on the path toward reducing emissions in a meaningful way.
The political maneuvering required to get here was unusual, to say the least. It could be that Manchin was holding out to extract concessions either in this bill or others. (Word has it that he’s been promised a bill that would streamline permitting for energy projects like wind and solar but also gas pipelines like one he’s been championing in West Virginia.)
It could also be that Manchin and Senator Chuck Schumer, Democrat of New York, have been close to an agreement for a while but were holding off until the semiconductor-focused CHIPS and Science Act passed the Senate with bipartisan support. Senator Mitch McConnell, Republican of Kentucky, was reportedly pressing GOP senators to vote against that bill while any reconciliation measure (like the Inflation Reduction Act) was on the table. The timing of the Inflation Reduction Act announcement suggests McConnell’s hard line played a significant role.
However it happened, though, is somewhat inconsequential compared with the impact the bill could have. (Before it lands on Biden’s desk, it still has to pass the Senate — though Manchin’s approval strengthens the likelihood of its success — and the House, where the Democrats have more breathing room.)
By itself, the bill is not enough to keep warming below 1.5 degrees Celsius, but it doesn’t have to do that. It simply has to get the ball rolling. Once people see how incentivizing climate tech can be beneficial — not harmful — to the economy, their appetite for greater investments is almost certain to grow.