August 10th, 2022—I started my career in climate shortly after the failure of the American Clean Energy and Security Act of 2009, also known as Waxman-Markey after its two Congressional authors, which would have established a federal cap on GHG emissions but ultimately died after a threatened Republican filibuster in the Senate. Thirteen years later, and for the first time since Waxman-Markey, the federal government is poised to pass legislation that could meaningfully address the climate crisis. *Stands by to pop Champagne
The Rundown
On Sunday, Senate Democrats voted to advance the Inflation Reduction Act, a monumental hurdle that has hamstrung previous federal climate action:
It would unlock $369B of federal funding over 10 years to promote clean energy technologies.
Rhodium Group’s preliminary independent analysis shows that with the IRA in effect, the U.S. will reduce greenhouse gas emissions 31-44% below 2005 levels by 2030, a roughly 10% decrease from the status quo. This represents a gigaton of additional carbon reduction relative to business as usual.
The IRA draft was a result of a compromise between the progressive and moderate wings of the democratic caucus, but is still a monumental milestone for climate action:
The IRA’s total climate-related funding was less than the $550B proposed by House Democrats in 2021.
The compromise reached with Senator Manchin includes increased permitting for oil & gas infrastructure.
The bill pays for itself and is expected to reduce the deficit by several hundred billion dollars over the next decade through a combination of a 15% minimum tax on corporations making over $1B in profits, a 1% excise tax on stock buybacks, prescription drug price reform, and increased IRS enforcement.
Even better, the bill includes specific frameworks towards ensuring a just transition for communities currently reliant on the fossil fuel industry for jobs, tax revenue, and economic activity, including prevailing wage, apprenticeship, and regional purchasing and investment benchmarks.
For better or worse, the IRA makes it clear that federal climate policy in the United States will be largely based on tax policy:
The act extends and expands tax credits for sectors including clean energy generation, energy storage, electric vehicles (EVs), carbon management, and the built environment.
It also expands the DOE Loan Program Office by $250B and proposes a $27B national Green Bank to provide financing for low carbon technologies.
While the full 750-page act is worth a read (or at least some targeted “Control + F” searches), the following are some of the provisions we’re most jazzed about.
Investment and Production Tax Credits for Clean Energy Generation and Storage
The IRA extends and expands the current solar investment tax credit (ITC) and wind production tax credit (PTC), while adding a new PTC and ITC that are broadly applicable to clean energy generation and storage technologies. Several new technology-specific PTCs for technologies including nuclear, hydrogen, and advanced manufacturing are also included.
Changes to the current ITC and PTC:
The current ITC initially covers 30% of up-front investment costs and is extended to solar, energy storage, qualified biogas, and microgrid controllers, as well as domestic EV, wind, and solar manufacturing.
The current PTC initially provides $26/MWh for the first 10 years of generation and is extended to electricity generated from solar, wind, and geothermal.
Importantly, solar developers can elect to claim the PTC instead of the ITC, which will likely be attractive as the capital costs of solar systems continue to decrease.
New technology neutral ITC and PTC starting in 2025:
The current ITC and PTC are replaced with a technology-neutral ITC and PTC for clean energy generation and storage facilities starting in 2025.
The new ITC will provide a 30% credit.
The new PTC will provide a $25/MWh credit for the first 10 years of generation.
The technology-neutral nature of these credits will be very beneficial to other clean energy technologies that were previously unable to claim an ITC/PTC.
However, the expanded ITC does not include transmission, which was in previous drafts of the bill.
Prevailing wage requirements and bonus tax credits:
The PTC and ITC provisions have prevailing wage and apprenticeship requirements, and impose an 80% reduction of the credits if these requirements are not met.
Furthermore, there are two bonus tax credits, which each provide a 10% increase to the ITC/PTC for qualifying projects.
The first applies to projects that meet domestic content requirements (e.g., sourcing materials and the majority of manufactured products from the US).
The second bonus applies to investments in Energy Communities, which are communities that have had a high share of employment in fossil fuel extraction, transport, or processing. These communities are disproportionately communities of color, and the Energy Communities bonus is anticipated to drive $200B into these communities over the next decade, helping to facilitate a just transition.
These provisions are expected to significantly increase investments into solar and wind deployment, with an estimated deployment of 130 GW of solar and 30 GW of wind in 2031 alone. This is compared to 30 GW of total new electricity generation capacity added in 2020 (the majority of which was solar and wind).
Electric Vehicles
The current federal EV tax credit of $7.5K per passenger vehicle has helped to reduce the cost of new EVs for individuals; however, the tax credit is currently capped at 200,000 cars per manufacturer, and several automotive OEMs — including Tesla and General Motors — are no longer able to apply the tax credit to their vehicles.
The IRA removes previous manufacturer caps and expands these credits:
For businesses, the Credit for Qualified Commercial Clean Vehicles subsidizes purchases of medium- and heavy-duty EVs and fuel cell vehicles up to the incremental cost of the vehicle or 15% of the purchase price.
There is also a $7.5K credit for light commercial cars and trucks.
There are no domestic content requirements for the commercial clean vehicle credits.
For individuals, there is a 10 year extension of the $7.5K tax credit, and the per-manufacturer cap is removed.
However, there are several restrictions on the tax credits to individual EV buyers:
The individual credit is now tied to domestic materials and sourcing requirements to prevent the tax subsidizing cars that have battery components sourced from a country of “foreign concern” (e.g., China).
There is concern among many EV manufacturers that they will not have time to meet the domestic sourcing requirements before the IRA comes into effect, which could limit some of the benefits of the policy in the near term.
The individual tax credits also only apply to sedans below $55K and SUVs and pickups below $80K, so higher-end EVs are not eligible.
Carbon Management
The significant increase of the 45Q tax credit from $50/ton to $85/ton also promises to greatly expand the applications where carbon can be captured and sequestered in a cost-effective manner:
At the current $50/ton rate, carbon capture generally only makes economic sense where there are highly-concentrated carbon exhaust streams (e.g., gas processing plants, ammonia facilities, ethanol plants, etc.).
Preliminary analyses indicate that with an $85/ton tax credit, carbon capture becomes economical for steel, cement, and chemical processing plants, which greatly increases the market size for carbon capture technologies.
The increased 45Q is anticipated to enable an additional 100M tons of captured carbon by 2030.
Like the PTC and ITC, projects must meet prevailing wage and apprenticeship requirements to receive the full credit value.
Built Environment
The IRA also expands incentives for reducing carbon emissions from the built environment:
Increases tax credits for homeowners to buy heat pumps, upgrade circuit breakers, and conduct home audits from 10% to 30%, and extends these credits through 2032.
Increases the annual cap to $1,200 for most items and $2,000 for heat pumps.
Provides efficiency rebates ranging from $2,000-$4,000 for individual households.
Commercial buildings are addressed with an energy efficiency tax deduction.
Methane
Given the short-term warming potential of methane, it’s also exciting to see several measures aimed at reducing methane leaks:
$850M in grants to monitor and reduce methane leaks from the oil & gas industry.
Starting in 2024, the IRA also imposes a fee on methane emissions by oil & gas companies, which increases from $900/ton to $1,500/ton in 2026.
Next Steps and Anticipated Impact
By surviving the Senate’s vote, the IRA has already cleared its biggest hurdle. While it’s not over until President Biden is handing out the ceremonial pens, the house is expected to vote in favor of the bill this week, and President Biden is expected to sign the bill when it reaches his desk.
The economic impact:
If the IRA passes as currently written, it will be monumental in terms of not only the emissions reductions it makes possible, but also in terms of the domestic manufacturing and employment growth and the just energy transition it enables.
Furthermore, it’s expected that the IRA will contribute to a 30% growth in electricity demand over the next 10 years, driven by both EVs and building electrification.
We can expect this rate to increase even further after 10 years as the majority of consumers begin to prefer low-carbon electric technologies.
Since electricity demand has been relatively stable for the past few decades, this is nothing short of a seismic shift in the energy industry.
The climate tech impact:
The IRA provides immense value to the climate tech industry.
The provisions in the bill provide strong incentives for entire categories of businesses and consumers to decarbonize faster.
This will drive a spike in demand for the climate technologies that will be needed to unlock this decarbonization.
From clean energy generation and storage assets to EVs and advanced manufacturing, companies supplying hardware across the climate tech ecosystem will benefit from this increased demand.
Similarly, the software needed to finance, deploy, optimize, and manage these assets, as well as software that facilitates access & participation in these rapidly expanding markets will also experience significant tailwinds.
Closing Thoughts
I want to take a moment to reflect on the need to maintain optimism and hope throughout the energy transition. Many, including myself, believed that this bill would be a casualty of an era of hyper-partisanship and an inflationary economic environment. Absent such a meaningful action, it seemed unlikely that the US would be able to take a leadership position in the global energy transition during the decisive decade. Now, we have a much more plausible opportunity to limit some of the worst effects of climate change on both humans and natural systems.
To those on the inside, thank you. This would not have been possible without the tenacious efforts of those who have dedicated their careers to building an effective government, as well as those who have recently joined government. The entrepreneurs, investors, and climate leaders at corporations on the outside are here to meet the moment with this last-chance opportunity to get this right. Let’s do this.
Special thanks to co-author Gabriel VanLoozen, Senior Associate, Powerhouse Ventures.
Further Reading:
New US Climate Bill Seeks to Promote Domestic Content in Clean Energy Projects
Inflation Reduction Act of 2022 (IRA): Department of Energy Loan Guarantee Programs
Inflation Reduction Act’s $27 Billion in Green Funds Could Be Boon for Private Sector
The Electric Explainer: Key programs in the Inflation Reduction Act and what they mean for Americans
What the Inflation Reduction Act of 2022 would mean for climatetech
Clean energy would get big boost from new climate bill. Just how big?
Climate bill could spur ‘market transformation’ in home electrification