On August 16, 2022, President Biden signed the Inflation Reduction Act (IRA) into law. The IRA includes a host of programs aimed at addressing climate change and energy production. These include, for example, major new or expanded funding to reduce emissions of greenhouses gases (GHGs) such as methane and hydrofluorocarbons (HFCs), to encourage a domestic supply chain for electric vehicles and energy storage systems, to promote agricultural practices that capture carbon dioxide in soils, to expand offshore production of energy (both fossil and wind), and to provide federal support for energy efficiency. The IRA also includes dozens of new and extended tax credits for renewable energy, electric vehicles, electric transmission, and related industries. The IRA is by far the most significant federal initiative to address climate change.
Although it significantly pares back both the spending and substantive provisions of the companion Build Back Better bill passed by the House of Representatives in November 2021, the IRA nonetheless is the largest federal response to climate change in history and will set the course for substantial changes in how the nation produces energy over the next decade. Major provisions include:
The IRA also includes major revisions to the nation’s system of tax credits for renewable energy production, carbon capture and sequestration, and advanced manufacturing. It extends the existing system of Investment Tax Credits (ITC) and Production Tax Credits (PTC), and it maintains or increases tax credits for construction using labor that is paid prevailing wages with qualifying apprenticeship programs. The IRA also creates several new tax credits, such as for renewable aviation fuels and clean hydrogen. Finally, after 2025, the IRA phases out the existing system of credits in favor of a new system that awards credits for any technology that produces carbon-free energy and keeps that system in place until the nation’s electricity sector reduces its GHG emissions to 25% of 2022 levels.
The IRA is the long-delayed legislative companion of the bipartisan Infrastructure Investment and Jobs Act (IIJA), the major infrastructure package adopted in November 2021 with significant Republican support in the Senate. On August 7, the IRA – the Senate response to the more ambitious Build Back Better legislation passed by the House – was adopted by the Senate on a strictly party-line vote using “reconciliation” rules that permit legislation to be passed without facing a filibuster, but limit the subject matter of such legislation to fiscal matters. The House of Representatives passed the IRA on Friday, August 12, and it was signed into law by President Biden on Tuesday, August 16.
Like the IIJA, the IRA addresses a range of issues related to energy production and climate policy, and sets the stage for major federal involvement in the energy industry aimed at accelerating the transition to low-carbon and carbon-neutral systems of electricity production and electrification of the nation’s transportation system. Many of the provisions also earmark or steer funds toward low-income and disadvantaged communities, building on key environmental justice themes of the Biden-Harris campaign and administration. In addition, many provisions include domestic content requirements aimed at boosting U.S. industries, as well as “prevailing wage” and apprenticeship requirements aimed at promoting union jobs and increasing pay for blue collar workers.
The IRA includes a variety of grants, loans, and appropriations to federal agencies aimed at reducing GHG emissions, speeding the transition to a decarbonized economy, promoting environmental justice, supporting energy- and climate-related research and development, and improving climate resiliency.
The provisions fall into several categories:
A. Offshore Wind and Federal Oil & Gas Offshore and Onshore
The law expressly predicates, for the next decade, future onshore and offshore federal wind leases on first holding onshore and offshore oil and gas lease sales with minimum offered acreage in the preceding 120 days onshore or one year offshore. The law also reinstates OCS Lease Sale 257 that was vacated by a federal district court, and directs that three other lease sales which had been scheduled under the 2017-2022 OCS leasing program be held within the next year, notwithstanding that the U.S. Department of the Interior (DOI) had previously cancelled those leases and (for the first time in history) allowed that prerequisite five-year OCS leasing program to expire with no replacement.
Regarding OCS wind, the law authorizes DOI to grant leases, easements, and rights-of-way pursuant to the Outer Continental Shelf Lands Act (OCSLA), 43 U.S.C. § 1337(p)(1)(c), in areas of the Atlantic coast withdrawn from leasing by two prior executive orders. It also mandates that the Secretary issue calls for information and nominations for proposed OCS wind sales by September 30, 2025 near U.S. territories including around Puerto Rico, Guam, American Samoa, the U.S. Virgin Islands, and the Northern Mariana Islands.
Regarding oil and gas, the law makes several key changes to OCSLA and the Mineral Leasing Act to increase minimum royalty rates, bonus bids, and rentals for newly-issued leases. The law creates a new per-acre fee for submissions of expressions of interest for onshore oil and gas leases. Also for onshore federal oil and gas, the law eliminates noncompetitive leasing and increases onshore bonding requirements for both new and existing leases.
Finally, for all future leases, the law specifies that royalties must be paid on all gas produced from leases on federal lands and on the OCS that is consumed, or that is lost by venting, flaring, or negligent releases through any equipment during upstream operations. The law codifies existing royalty-free exceptions for gas vented or flared for not longer than 48 hours due to emergencies, gas used on the lease, unit or communitized area for its benefit, and any gas that is “unavoidably lost”—which the legislation does not define and continues to be a point of contention in certain cases.
B. Air & GHG Emissions. The IRA includes a variety of provisions addressing emissions of both GHGs and traditional “criteria” air pollutants.
Increased funding for EPA GHG programs, including under Clean Air Act (CAA) Section 115. The IRA includes EPA funding to pursue GHG reduction programs under nine different provisions of the CAA. EPA has already begun to pursue reductions of GHG emissions under several of these provisions. Section 111 was the source of authority for (among other GHG rules) the Obama EPA’s Clean Power Plan and the Trump EPA’s Affordable Clean Energy Rule, and the Biden Administration is widely expected to be developing its own regulation for GHGs from power plants under the same authority following the West Virginia v. EPA decision. Likewise, the law increases funding for EPA programs adopted under other provisions related to mobile sources, renewable fuels, and HFCs in other parts of the CAA. But the IRA’s reference to work “with respect to greenhouse gases” under Section 115 is particularly notable. That provision relates to “international air pollution” and has thus far not been a tool that EPA has publicly explored as a way to pursue significant GHG reductions under the CAA.
Air pollution monitoring. The IRA appropriates millions of dollars for various EPA-administered grants under the CAA. These include grants related to air toxics and community monitoring (including fenceline air monitoring), and for multipollutant monitoring stations expand the number of monitors for criteria pollutants under the National Ambient Air Quality Standards (NAAQS) program. A subset of these funds are earmarked for air quality sensors in “low-income and disadvantaged communities.” An expansion of air monitoring networks could provide EPA and state agencies with more detail about recorded concentrations of hazardous air pollutants and criteria pollutants, in areas where agencies currently use modeled emissions based in part on wind patterns. More precise data could have regulatory consequences during EPA’s residual risk and technology reviews under CAA Section 112, under the nonattainment area designation process for NAAQS pollutants under CAA Section 107, and under many other CAA programs.
Renewable Fuels Standard (RFS) funding, including for advanced biofuels. The law appropriates funds to EPA to carry out the RFS in CAA Section 211(o), including funding to study the health effects of fuels and fuel additives, to support lifecycle GHG emissions analysis of certain fuels, and effects of pollution on low-income and disadvantaged communities. EPA is also able to issue new grants to industry to support investments in advanced biofuels.
Clean heavy-duty vehicles. The IRA funds administrative programs related to clean heavy-duty vehicles. This includes money to replace eligible vehicles located in nonattainment areas under the CAA. It also provides grants and rebates to cover incremental costs of replacing a high-emission vehicle with a zero-emission vehicle; infrastructure needed to charge zero-emission vehicles; workforce development and training to support zero-emission vehicles; and planning and technical activities to support zero-emission vehicles.
Grants to reduce air pollution at ports. The IRA creates a “general assistance” fund for port authorities to install zero-emission port equipment, conduct planning or permitting in connection with such zero-emission port equipment or technology, and to develop qualified climate action plans. Additional funding is available to award rebates and grants to eligible recipients to carry out the same activities in nonattainment areas under the CAA.
New “Greenhouse Gas Reduction Fund.” The IRA amends the CAA to create a “Greenhouse Gas Reduction Fund.” The Fund will provide financial and technical assistance grants to states, tribal governments, and others to enable low-income and disadvantaged communities to deploy or benefit from zero-emission technologies (e.g., distributed technologies on residential rooftops). The new Fund can also be used to provide general financial and technical assistance, with a sizable sum set aside specifically for low-income and disadvantaged communities.
Other emission grants and funding. The IRA provides grants, rebates, and loans to reduce diesel emissions in low-income and disadvantaged communities to address the health impacts of such emissions on those communities. The law provides for other EPA-administered CAA grants to address emissions from wood heaters and to monitor methane emissions. With respect to vehicles, EPA has grant money for states to support GHG and “zero-emission standards” under CAA Section 177. Additional EPA grants provide technical assistance for schools in low-income and disadvantaged communities to address environmental issues, renovate buildings, and mitigate “ongoing air pollution hazards” in the school environment.
C. Methane Emissions Reduction Programs. To address emissions of methane, a potent GHG, the IRA provides funding to support EPA efforts under existing statutory authority and also creates a new methane fee program.
Fee on methane waste emissions. The IRA authorizes a fee on excess methane emissions that exceed a defined emissions waste threshold. The IRA sets the fee by multiplying the number of metric tons of excess methane emissions by $900. This multiplying figure increases each year, from $1,200 in 2025 to $1,500 in 2026. This charge applies to many industries, including offshore and onshore petroleum and natural gas production; onshore natural gas processing and transmission compression; underground natural gas storage; liquefied natural gas storage, import, and export equipment; onshore petroleum and natural gas gathering and boosting; and onshore natural gas transmission pipelines. This new methane fee could have significant consequences for the Biden-Harris Administration’s methane strategy, particularly with respect to the economic analysis calculating the costs and benefits of new rulemakings.
D. Agriculture & Forestry. The IRA includes multiple provisions targeted at the agricultural and forestry sectors, including programs aimed both at reducing GHG emissions from these sectors and promoting agricultural and silivcultural carbon sequestration. Unlike industrial facilities and vehicles, the GHGs associated with the agricultural sector are more diffuse and not readily controlled with technological requirements. The IRA provides funding for several agricultural conservation purposes, including to improve soil carbon uptake and retention, to reduce nitrogen losses, and to reduce GHG emissions. The funding could also be used for capturing GHG emissions associated with agricultural production. Hundreds of millions of dollars are also available for grants to increase the sale and use of agricultural commodity-based fuels. The IRA provides over $2 billion for the National Forest System to support vegetation management projects and the protection of old-growth forests.
E. Electric Transmission. The IRA includes major provisions aimed at expanding the nation’s electric transmission system, widely recognized as one of the keys to achieving deep decarbonization of the electricity sector.
Interregional and offshore wind electricity transmission planning, modeling, and analysis. The IRA provides funding for offshore wind electricity transmission planning. This includes research into using non-transmission alternatives, energy storage, and grid-enhancing technologies and for community economic development.
F. Advanced Manufacturing and Decarbonization. The IRA provides financial assistance to industrial manufacturers to install, retrofit, or implement technology designed to accelerate GHG emissions reduction at manufacturing facilities, like those that produce iron, steel, steel mill products, aluminum, cement, concrete, glass, pulp, paper, industrial ceramics, chemicals, and other energy intensive industrial processes.
G. Alternative Fuel and Low-Emission Aviation Technology Program. The IRA establishes a grant program with nearly a quarter-billion dollars available for projects relating to the production, transportation, blending, or storage of sustainable aviation fuel, plus nearly $50 million for projects relating to low-emission aviation technologies.
Canal improvement projects. The IRA funds grants to cover water conveyance facilities with solar panels to generate renewable energy, or for other solar projects associated with Bureau of Reclamation projects that increase water efficiency and assist in the implementation of clean energy goals.
J. Environmental Permitting and Reviews.
Environmental and climate justice. Climate and environmental justice are key features of the IRA, primarily focused on directing funding to disadvantaged communities. The IRA appropriates $2.8 billion in Environmental and Climate Justice Block Grants to community-based nonprofits and other partnerships for a range of climate-based activities, specifically for disadvantaged communities, including:
In addition, the IRA funds a $1.893 billion “Neighborhood Access and Equity Grant Program” for the Federal Highway Administration to, among other aims, improve walkability, safety, and affordable transportation in disadvantaged or underserved communities. There is an additional nearly $1.1 billion allocated for projects in economically disadvantaged or underserved communities.
Council on Environmental Quality (CEQ) engagement. Another provision sets aside $30 million to the CEQ for, among other goals, improving stakeholder and community engagement during the environmental review process.
Endangered Species Act (ESA). Recovery plans under the ESA receive attention from the IRA, with $125 million appropriated to develop and implement recovery plans. Further, $121.25 million is designated to rebuild and restore units of the National Wildlife Refuge System and state wildlife management areas facing invasive species and increasing damage from weather events.
L. Tax Credits. Some of the most transformative aspects of the IRA operate through the tax code, with a series of new, expanded, or otherwise modified tax credits to incentivize zero-carbon energy and energy efficiency. For many of these tax credits, a “direct pay” provision authorizes payment of the tax credit directly to the taxpayer in situations where a taxpayer doesn’t have sufficient tax liability to fully utilize the tax credit. The current system, which provides tax credits to specific energy production technologies transitions to a new technology-neutral system starting in 2025, which will continue until the emissions from the nation’s electricity sector reach 25% of 2022 levels. Some of the most significant tax changes are as follow:
For businesses involved in the energy industry, the IRA and the administrative processes that will be necessary to carry out its many mandates bear careful scrutiny because they will profoundly affect how the industry does business, both by increasing the regulatory and tax burden faced by the industry and by creating major new business opportunities to obtain federal support for expanded industrial activity. For manufacturing and high-technology industries, the IRA creates major new opportunities for funding or tax breaks to support advanced manufacturing, energy efficiency, and new opportunities to achieve climate and sustainability goals.
DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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