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All You Need to Know About The US Inflation Reduction Act

by Martina Igini Americas Aug 17th 20225 mins
All You Need to Know About The US Inflation Reduction Act

On Tuesday, US President Joe Biden signed into law the biggest climate bill in the country’s history. But the Inflation Reduction Act of 2022 is more than just “a win for Democrats” ahead of midterm elections in November. It is a major and urgently needed step forward in the global fight against climate change from the world’s second-largest polluting nation. Here’s all you need to know about this historic bill and how it will help shape a greener future in the US.

Where Does the Money Come From?

The Inflation Reduction Act of 2022 (IRA) includes a landmark US$369 billion to fight the climate crisis, the single largest investment in climate and energy in the US to date. But where will the government get the money from?

The cost of the legislation is covered through a series of tax changes, which are expected to bring in hundreds of billions of dollars of revenue for the US government. Those changes include a 15% corporate minimum tax on certain large corporations, expanded energy-related tax credits, and a new 1% excise tax for companies on purchases of their own shares – set to take effect in 2023. The bill also includes enhanced enforcement from the Internal Revenue Service targeting high-income households, with the goal of bringing in $124 billion in tax revenues currently lost to fraudulent tax returns.

These and other provisions in the Act will allow the government to raise enough money in revenue to balance out new investments in clean energy and reduce deficits over the next decade.

Renewable Energy

According to an independent analysis from the US Energy Information Administration, renewable energy currently accounts for approximately 12% of the country’s energy mix. The Inflation Reduction Act of 2022 includes significant investments in renewables, particularly solar and offshore wind, as well as new credits for nuclear power production and clean hydrogen and incentives to develop more facilities that produce clean energy inputs, components, and finished products.

The IRA also promotes vital technologies such as battery storage. Up until now, such projects were ineligible for tax credits unless they were directly related to solar power. The new law removes these requirements, providing all battery storage projects with the same tax credit that covers 30% of the size of the investment.

Through these incentives for investments in clean energy, the government hopes to push consumers to make more sustainable choices and make their homes more energy efficient.

The costs of solar and wind energy have plunged significantly in recent years. The first has recently become the cheapest source of electricity in history, according to the International Energy Agency (IEA). The increased support for renewable projects and hefty investments to boost the national manufacturing of solar panels and wind turbines will lead to an unprecedented expansion of clean energy across the country, driving costs further down.

Carbon Capture Technologies

The Inflation Reduction Act provides huge incentives for carbon capture, utilization, and sequestration (CCUS) projects and expands eligibility for carbon capture and sequestration credits, with the deadline for the beginning of construction extended to 2033 from the current 2026. Besides supporting technologies that capture and store carbon dioxide released during power generation and industrial processes, the new bill also seeks to drive the deployment of direct air capture technologies, which extract CO2 directly from the atmosphere.

Tax credits for capturing carbon dioxide at industrial facilities and power plants will increase from the current $50 per ton to up to $85 per ton if the carbon is stored. If the carbon is used instead for oil drilling, the credit will increase from $30 to $60 per ton. Credits for capturing carbon from the air via direct air capture will experience the highest jump, from $50 to $180 per ton if the carbon dioxide is stored and from $35 currently to $130 per ton if used.

You might also like: Carbon Capture Technologies We Can Scale Up to Meet Net Zero

Electric Vehicles

The Inflation Reduction Act will provide tax breaks to make electric vehicles (EVs) more affordable and help low-income households to make the switch from gas-powered to electric vehicles. However, there’s a catch.

With the new bill, most electric vehicles no longer qualify for the full $7,500 federal tax credit that supported millions of buyers with upgrades in recent years. This is because EV batteries – the majority of which are produced with minerals, components, and battery cells imported from China – must now be made in North America. More precisely, the new law stipulates that at least half of all car batteries must come from the US, Mexico, or Canada by 2024, rising to 100% by 2028.

Moreover, the Act introduced new price and income caps, effectively excluding those whose whole income exceeds a certain threshold and forcing them to select a vehicle within a certain price point.

You might also like: ​​Why Electric Cars Are Better for the Environment

Community Support

The US Environmental Protection Agency (EPA) described the new Act as a “game-changer for the American people” that will “reduce harmful air pollution in places where people live, work, play, and go to school” as well as “empower community-driven solutions in overburdened neighbourhoods.” Indeed, the bill moves to ensure that low-income and minority communities across the country that have long borne the brunt of pollution can finally benefit from climate spending.

The bill is expected to bolster climate resilience and strengthen the nation’s infrastructure, protecting cities and their people against heat, flooding, and other global warming-triggered extreme weather events.

What About Fossil Fuels?

Several provisioning of the Inflation Reduction Act will affect fossil fuel industries, increasing oil and gas royalties, rental rates, and the minimum required bid in onshore lease auctions. Despite these strict leasing terms, the bill includes some oil and gas provisions, provided that companies invest in new carbon and methane capture technologies. It also includes the mandate of new oil and gas lease sales on federal lands and water, including a commitment to open up federal lands and offshore waters that are utilised for renewable energy development to analogous onshore and offshore oil and gas drilling.

Heavier taxes on the oil and petroleum companies will also provide revenue for the Superfund programme, used to pay for the clean-up of the country’s most heavily-polluted industrial sites. 

Targets of the Inflation Reduction Act

According to several studies, the new bill will help the US reduce its greenhouse gas emissions by around 40% below 2005 levels by the end of the decade – a significant improvement over the current projections of 27%. This will undoubtedly put the country within the hailing range of its pledge to cut emissions by at least 50% by 2030 and reach carbon neutrality by 2050. Some experts also expressed hope that the US transition will put the country on the path to keeping the Paris Agreement goal of limiting global warming temperatures to 1.5C possible.

EO’s Position: The latest IPCC report clearly shows that the world is rapidly losing sight of being able to stay under the 1.5C limit of global temperature rise. We need to phase out fossil fuels immediately and scale up renewable energy generation to avoid the catastrophic impacts of climate change. Our planet has already warmed around 1.2C since pre-industrial times, and we are still on track to exceed 1.5C of warming within the next two decades. Unless the world at large drastically stops adding greenhouse gases to the atmosphere, record-high heatwaves and other extreme weather conditions will become even more frequent, threatening millions more lives around the world.

You might also like: Biden’s CHIPS Act Will Finance Climate Research, Help Boost US Net-Zero Transition


About the Author

Martina Igini

Martina holds two BA degrees, in Translation/Interpreting Studies and Journalism, and a MA in International Development from the University of Vienna. After working at the United Nations Global Communication Department in Vienna, she joined a newspaper in Italy as a reporter before moving to Hong Kong in 2020. Her interests include sustainability and the role of public policy in environmental protection with a focus on developing countries.

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