How Does the Inflation Reduction Act Address Climate Change?
Posted on August 4, 2022
Senate Majority Leader Chuck Schumer said the Senate plans to hold its first vote on Aug. 6 on the Inflation Reduction Act, surprising legislation that he and West Virginia Sen. Joe Manchin, a previous holdout, announced on July 27.
The budget reconciliation bill that the two Democratic senators have agreed upon aims, in part, to address inflation as well as to lower health care costs and prescription drug prices for millions of people. But if it receives enough votes to become law, most of the bill’s spending — an estimated $369 billion over the next 10 years — would go toward efforts to combat climate change while also investing in “energy security” for the United States.
The bill’s supporters have said it would reduce U.S. carbon emissions by roughly 40% from 2005 levels by 2030 — an estimate that is within the range of possible outcomes projected by at least two research firms that have analyzed the legislation in its current form. Last year, President Joe Biden announced that his administration would target between a 50% and 52% reduction in greenhouse gas emissions from 2005 levels by the end of the decade.
Assuming that every Senate Republican votes against the bill, as expected, Democrats would need the support of all 50 members of their caucus — and Vice President Kamala Harris to cast a tie-breaking vote — for the legislation to pass. But Democratic Sen. Kyrsten Sinema of Arizona, who has raised concerns about the bill’s provisions taxing corporations and investment income, has yet to publicly state how she will vote. (For more on those taxes, see “Sorting Out the Partisan Tax Spin on Inflation Reduction Act.“)
Here we review some of the climate-focused provisions in the bill.
Clean Energy Production
According to a Democratic summary, the bill includes over $60 billion for clean energy manufacturing in the U.S.
There is an estimated $30 billion in production tax credits geared toward increasing the manufacturing of solar panels, wind turbines and batteries, as well as the processing of critical minerals, such as lithium and nickel, used in electric car batteries. There is also $10 billion in investment tax credits for the construction of facilities where those and other clean technologies would be made.
The bill would make available $20 billion in loans to build new U.S. facilities to make clean vehicles, as well as $2 billion in grants to reconfigure existing car factories for the same purpose.
In addition, the bill includes $500 million for the production of heat pumps and minerals processing under the Defense Production Act, which can be invoked by the president. Heat pumps can be used to heat or cool homes and other buildings. The devices are considered more environmentally friendly than furnaces and air conditioners because they do not run on oil or gas and use less electricity.
Reducing Emissions from Various Sources
Numerous tax credits included in the bill aim to reduce emissions from transportation, industrial manufacturing, buildings, agriculture and the production of electricity.
About $30 billion in the bill is set aside for grant and loan programs for states and electric companies to speed up the transition to clean electricity. Another $6 billion is slated for a new Advanced Industrial Facilities Deployment Program to reduce emissions from chemical, steel and cement plants, which are some of the largest emitters.
The bill also increases the value of a tax credit for carbon capture and storage investments, which incentivizes sequestration projects that suppress or remove certain carbon emissions from the atmosphere.
In addition, $27 billion would go to a “clean energy technology accelerator,” or greenhouse gas reduction fund, that allows states to provide financial assistance to low-income communities to benefit from technologies such as rooftop solar installations.
As for agriculture, there is at least $20 billion to finance practices considered to be “climate smart,” according to one Democratic summary. For example, the Environmental Quality Incentives Program would get $8.45 billion in funding, which the agriculture secretary can use to improve soil carbon, reduce nitrogen losses or greenhouse gas emissions, or capture or sequester greenhouse gas emissions stemming from agricultural production.
Consumer Tax Credits and Incentives
The bill also seeks to lower energy costs and reduce utility bills for individuals through additional tax credits that encourage purchases of energy efficient homes, vehicles and appliances.
Notably, there is an expansion of an existing tax credit of up to $7,500 for income-eligible individuals who buy qualifying electric vehicles. For joint tax filers to be eligible, their adjusted gross income cannot be more than $300,000; for a head of household, it’s $225,000, and for other tax filers, it’s $150,000.
In addition, the bill offers a tax credit of up to $4,000 for purchases of certain used electric vehicles. To get the credit, joint tax filers must have an AGI below $150,000. For a head of household or other tax filer, the AGI cutoffs are $112,500 and $75,000, respectively.
There is also $9 billion for home energy rebate programs aimed at retrofitting homes and appliances to be more energy efficient.
Oil and Gas Leasing
At the same time, however, the legislation would facilitate more domestic energy production from fossil fuels, including oil and gas drilling — which would offset some of the emissions reductions resulting from other climate-related provisions in the bill.
That’s because it requires the Department of Interior to conduct a number of sales for oil and gas leases in the Outer Continental Shelf, which includes the Gulf of Mexico. The department would also have to periodically make a minimum amount of federal land and offshore waters available for leasing by oil and gas companies before the agency can grant or sell leases to renewable projects using wind and solar energy.
But the bill would also impose fees on the operators of oil and gas facilities with annual methane emissions of more than 25,000 metric tons of carbon dioxide equivalent. The fee would start at $900 per metric ton of reported methane emissions over the allowable threshold for calendar year 2024. That would increase to $1,200 for excess emissions in 2025 and $1,500 for excess emissions in 2026.
Projected Emissions Reductions
Overall, some groups that analyze energy and climate policy have projected that the bill’s provisions could lead to more emissions reductions than projected under current law.
The Rhodium Group, a research firm, said its “preliminary estimate is that the IRA can cut US net greenhouse gas emissions down to 31% to 44% below 2005 levels in 2030 … compared to 24% to 35% under current policy.”
In addition, Energy Innovation, a think tank that produces customized research and policy analysis on how to reduce emissions, said its modeling found that the legislation – despite its oil and gas leasing requirements – “could cut greenhouse gas (GHG) emissions 37-41 percent below 2005 levels.” That is more than a projected 24% decrease in emissions by 2030 under a business-as-usual scenario that holds current policy constant, the think tank said.
What Happens Next?
As we mentioned, Schumer has said that he plans to bring the bill to the Senate floor for a vote this week. The Senate is scheduled to recess for summer break on Aug. 8 and would not reconvene until Sept. 6.
Before a vote can be held, the Senate parliamentarian has to rule on whether the bill’s provisions qualify for consideration under the budget reconciliation process.
In the Senate, that process allows bills to pass with a simple majority rather than the usual 60 votes needed to avoid a potential filibuster. There is also a limit on how long a bill can be debated, which is not to exceed 20 hours. To qualify for reconciliation, a bill’s provisions have to change revenues, spending or the debt limit.
Again, if all Republicans vote against the Inflation Reduction Act, Democrats would need yes votes from all 50 members of the Senate Democratic caucus so that the vice president could break the tie.
If the bill passes in the Senate, it would then have to be approved by the House of Representatives. At that point, Biden would be able to sign it into law.
Since 1980, reconciliation has been used 22 times to enact laws, according to the Congressional Research Service.
For instance, Democrats used the process to pass the Affordable Care Act in March 2010 and Republicans used it to pass the Tax Cuts and Jobs Act in December 2017. More recently, Democrats used reconciliation to pass the American Rescue Plan in March 2021.
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