Inflation Reduction Act Gives Nearly Everyone a Chance – and a Burst of Federal Money – to Help Fight Climate Change
September 12, 2022
The federal Inflation Reduction Act passed by Congress and signed by President Biden last month includes a huge and historic injection of money into the economy over the next 10 years to fight global warming, largely by electrifying transportation, buildings, and the power grid.
Even environmentalists who have worked in the trenches and gotten bitten by disappointment over and over by government inaction toward the climate crisis are nearly crowing over the act, along with the reductions in fossil fuel pollution that it aims to achieve.
“This is groundbreaking. The law is not perfect, but it is damn good,” said Larry Chretien, executive director of Green Energy Consumers Alliance (GECA) during a webinar Aug. 30 to unravel some of the questions about how the $369 billion in federal money will flow to climate-saving solutions.
The act and the investments it supports are expected to cut greenhouse gas emissions by 40% below the 2005 level by 2030. The United Nations states that keeping global warming to no more than 1.5°C – as designated in the Paris Agreement – emissions need to be reduced by 45% by 2030 and must reach net zero by 2050.
The act distributes federal money, mostly via tax credits, rebates, grants, and loans, toward a huge range of Americans. They include homeowners, buyers of cars and buses, manufacturers of buildings and vehicles, developers of solar and wind power, non-profits, people of low income, municipalities.
The sectors set to receive among the biggest injections of federal cash are electrical power ($214 billion), manufacturing (about $65 billion), building efficiency and electrification ($36 billion), and transportation ($29 billion).
Much is still not known about how the money will be distributed. Federal rules and protocols are still in the works, and the states will have to create procedures for pieces of the act whose funding they will manage.
Chretien urged interested parties from car buyers to builders, from school districts to transit authorities, and from non-profits to governments to get their ducks in a row for the moment that the money is released.
“The legislature has done its job; now it is up to the executive branch,” Chretien said. “This is a wake-up call for the states. We have got to get ready and learn what we can do to position ourselves to get as much as we can. Change your strategic plans to capture as much of the federal resources as possible.”
The exact amount Rhode Islanders can expect to see remains unknown, because of the bill’s swift passage through Congress. But the climate provisions should enhance a number of existing state programs and laws already on the books.
“While there’s still much more to do to lead the planet to safety in the race against climate change, this is by far the biggest step the United States has ever taken to lower emissions,” said Sen. Sheldon Whitehouse, D-R.I., in a statement after the bill’s Senate passage. “It is a good reason for hope.”
Chretien advised governments to hire experts to join city and town planning staffs, and to plan for workforce development – bearing in mind that some federal credits and loans are higher in places paying prevailing wages and apprenticeships.
“Start planning,” Chretien continued. “Identify sites, hire consultants, find partners, learn the rules of geographic eligibility.”
Similarly, homeowners and builders who are or might be interested in improvements like solar panels or heat pumps also can start doing their homework. Loie Hayes, energy efficiency coordinator for GECA and a presenter at the webinar, said, “Find out what your solar capacity is so you can get a sense of whether or not you could be a solar owner. Look at your fossil fuel uses [like appliances] and when they are likely to need replacing. Make a timeline of investments and when they need to get done.”
Transportation and EVs
Funding to reduce fossil fuel pollution from the transportation sector is one of the most visible parts of the act. Among the offerings are $20 billion in loans for new clean vehicle manufacturing plants, $2 billion in grants to revamp existing auto plants, $3 billion to electrify the postal fleet, $3 billion to install zero-emission equipment at ports, and $1 billion for zero-emission trucks and buses.
The part of the act that promotes production and purchase of electric vehicles will be fairly confusing for the first couple of years as it phases out at least one existing rule for car companies – a cap of 200,000 annual sales – and brings a new Clean Vehicle tax credit onboard, in stages.
Most EV tax credits get underway in 2023. However, from Aug. 16 this year, when the law was signed, to Dec. 31, new cars are eligible for the tax credit if the manufacturer has not yet reached the annual cap of 200,000 cars sold this year and if the car was assembled in North America. The second requirement – for North America assembly – actually reduces the number of vehicles eligible for the tax credit.
(Green Energy Consumers Alliance has a Drive Green form that describes how much each vehicle is eligible for through the end of 2022.)
For new cars, starting Jan. 1, 2023, the 200,000-vehicle sale cap on car makers will be removed, mainly affecting Tesla and General Motors. Clean Vehicle tax credits have income limits. To qualify for the credit an individual must earn no more than $150,000 a year; the income ceiling for joint filers is $300,000. The requirement of vehicle assembly in North America continues.
Prices of vehicles that qualify for the credit are no more than $80,000 for pickup trucks, SUVs, and vans; $55,000 for sedans. This provision blocks high-priced luxury cars from the tax credit.
For a $3,750 credit, at least 40% of the minerals in the battery must be mined or processed in North America or a country with a free trade agreement with the United States. A separate $3,750 credit is available if at least 50% of the value of the battery’s components are manufactured or assembled in North America. The full credit, if both conditions are met, is $7,500. The percentages ramp up over several years.
Starting in 2024, no battery parts may come from “foreign entities of concern,” a phrase that is understood to mean Russia and China.
Tax credit requirements about battery content and sourcing could be a gnarly business to figure out over the next few years, but experts say consumers should just stick with the task and keep themselves informed.
“In the short term, this is messy,” said Anna Vanderspek, electric vehicle program director for GECA. “In the long term, it will be huge.”
More information on what vehicles will qualify for Clean Vehicle tax credits is available from Consumer Reports.
Also, a list of 2022 and 2023 vehicles with final assembly in North America is available from the U.S. Department of Energy.
Plenty of car owners will never buy a new car in their lifetimes. So the act includes Clean Vehicle tax credits targeted toward used vehicles. The credit will be $4,000 or 30% of the vehicle’s cost, whichever is lower. Income limits are $75,000 for individuals and $150,000 for joint filers. Used cars must be at least two years old and bought from a dealer. The credit applies only for the first re-sale of the vehicle.
Starting in 2024, EV buyers may transfer the credit to the dealership at the point of sale, so that they won’t need to wait, maybe months, for their tax refund to feel the financial help.
A blog post by GECA offers more details, including makes of cars that will or will not qualify for the Clean Vehicle tax credit, depending on factors like the location of assembly, price of the vehicle, or battery requirements. A major unknown right now is exactly what vehicles will meet the battery requirements as of 2023.
All of those EVs on the roads obviously need to be charged. The act includes a 10-year extension of a 30% tax credit for installing EV charging. The credit for individuals is $1,000 or 30%, whichever is lower; for commercial installers, the credit is 30%, up to $100,000. This element of the act is meant to assist rural and low-income communities.
Solar and offshore wind power are big topics in Rhode Island. Tax incentives in the act will boost solar and wind development, help displace the use of natural gas, and reduce electricity rates across the country by 5 to 7%, said Chretien. Rates could go down even more in places that depend more heavily on natural gas.
About 35% of total greenhouse gas emissions come from residential, commercial, and industrial heating in Rhode Island, with more than 85% of the state relying on natural gas, heating oil or another fossil fuel to warm buildings in the winter.
The research firm Rystad predicts that the act will lead to installation of 155 gigawatts of additional solar and wind capacity in the country by 2030. That is a 35% increase in utility-scale solar and a 50% increase in land-based wind power.
With financial input through the act, the number of solar panels operating in the country could increase by four-fold, from 240 million in 2021 to 960 million in 2030, said Chretien. The act will double the battery storage on the grid and it will more than double the number of wind turbines in the country.
The mechanism to push these infrastructure investments is tax credits to developers, as well as non-profits and municipalities. Nationally, $51 billion has been allocated to both the Renewable Energy Production tax credit and to the Clean Electricity Investment tax credit. These credits are for 30% of the cost through 2032 and for smaller percentages into 2034.
A 20% bonus credit may be available to projects located in low-income communities or beneficial to low-income people.
“This gives developers and investors plenty of time to organize themselves,” Chretien said. “These credits will change the game tremendously.” A feature called direct pay makes it easier for tax-exempt entities like non-profits and municipalities to “harvest” the credits.
Loans and grants to upgrade transmission facilities exceed $2.86 billion.
A U.S. Department of Energy Loan Guarantee program will offer $3.6 billion, plus $40 billion in loan guarantee authority, for clean energy projects.
Also, a Green House Gas Reduction Fund of $27 billion will establish a national Green Bank designed to provide low-cost financing for clean energy infrastructure projects. This includes $7 billion for states and tribes to provide grants and loans for low-income and disadvantaged communities. Rhode Island’s existing Rhode Island Infrastructure Bank will be positioned to tap into this federal bank. The federal money also includes $12 billion for general assistance; and 8 billion for financing in low-income and disadvantaged communities.
Rystad, the research firm, does not see a big impact of the credits on offshore wind, an arena into which Rhode Island and New England are placing a lot of hope. Rystad wrote, “Because of the limited supply of wind turbine installation vessels,” the tax credits “are unlikely to encourage significant capacity growth beyond existing forecasts until the 2030s.”
Electrified, energy-efficient buildings
Turning to the topic of buildings, two big tax credit programs aim to help homeowners electrify their houses and perform other energy-saving work.
The Residential Clean Energy tax credit reserves $22 billion nationally, and also extends to 2034 a credit that was scheduled to expire. From now to 2032 people may get a credit of 30% to improve their houses with things like heat pumps, solar panels, solar water heating, home battery storage with or without solar. The credit percentage tapers down in 2033 and 2034.
Gov. Dan McKee has rolled out the state’s new High-Efficiency Heat Pump Program (HHPP), allocating $25 million to spur the installation of heat pumps and provide funds for workforce development in the HVAC sector.
The somewhat similar Residential Energy Efficiency tax credit, with funding of $12.5 billion, raises to 30% from 10% the credit people can get for windows, skylights, central air conditioning, furnaces, various types of heat pumps, and boilers. Importantly, the act removes a lifetime cap; homeowners may re-apply for the credit every year.
States will administer something call the HOMES Program, offering a national total of $4.3 billion in rebates for house rehabilitation that lead to energy savings. HOMES has no income restrictions, and it will rebate up to 50% of a project’s cost (80% for low-income families). The amount of the rebates is based on area median income, and states will set up income guidelines.
A second rebate program, the High Efficiency Electric Home Rebate Program, also administered by states, at $4.5 billion available across the country, also offers rebates for work on houses and multi-family buildings that improve energy efficiency. Also, $1 billion is aimed at energy-efficient upgrades in affordable housing.
Part of the act dealing with new construction, trainings, and federal buildings will extend $2 billion in tax deductions for contractors and developers of new houses, including mobile homes and multifamily homes. The building must be Energy Star or zero energy-ready. Also, there will be $362 million in tax deductions for contractors/developers of new commercial buildings, with bonuses for meeting prevailing wage/apprenticeship requirements.
The act has additional money for energy efficiency contractor training and for converting General Services Administration- owned or -managed buildings to high-performance green buildings.
It’s a lot to absorb. Hayes, of GECA, said homeowners can start their research with a basic Clean Energy Home Plan. Next up, look at the calculator offered online by Rewiring America. Punch in a few facts about your residence and income, and you can learn about upcoming household electrification incentives for which you may qualify. Because electrification means increasing your electricity usage, figure out your home’s potential solar PV capacity by registering at EnergySage. Any solar you produce is likely to be less costly than what you would pay a utility company over time.
Hayes said, “The tax credits can be taken in 2022, so a near-term priority could be finding a tax consultant who has already researched the details of these new tax credits.”
Also, Hayes said there are no places to apply now for the rebates that will be funded by the IRA. Those will be administered by the states and the earliest those funds will be available is January. “Knowing how state energy efficiency programs usually time a long time to plan, I wouldn’t be surprised if we were many months into 2023 before applications are taken for IRA-funded rebates,” Hayes said.
Keeping in mind that some of the grants are competitive, experts say it is important now for governments to adjust their state-level energy plans to accommodate the act; to get state projects into a shovel-ready condition; and to ramp up workforce training to be able to get higher credits for apprenticeships and for paying prevailing wages.
“It will become much cheaper to make projects happen,” said Chretien. “This should be exciting.”
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