After months of intense, and at times acrimonious, negotiations among the Democratic caucus, the United States Senate on August 7, 2022, passed the Inflation Reduction Act (IRA). 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. If adopted by the House of Representatives and signed by President Biden, as expected, the IRA will be 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 would extend the existing system of Investment Tax Credits (ITC) and Production Tax Credits (PTC), and it would maintain or increase tax credits for construction using labor that is paid prevailing wages with qualifying apprenticeship programs. The IRA would also create several new tax credits, such as for renewable aviation fuels and clean hydrogen. Finally, after 2025, the IRA would phase out the existing system of credits in favor of a new system that would award 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 2021with significant Republican support in the Senate. The IRA – the Senate response to the more ambitious Build Back Better legislation passed by the House – was adopted 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 has scheduled a vote on the IRA for Friday, August 12, where it is expected to pass and to be signed into law by President Biden shortly thereafter.
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
B. Air & GHG Emissions. The IRA includes a variety of provisions addressing emissions of both GHGs and traditional “criteria” air pollutants.
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.
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 would provide 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 would also be available to provide grants to increase the sale and use of agricultural commodity-based fuels. The IRA would provide 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.
F. Advanced Manufacturing and Decarbonization. The IRA would provide 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 would establish 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.
J. Environmental Permitting and Reviews.
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.
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 would authorize 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 are likely to 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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