Energy Provisions In The Inflation Reduction Act

Last week Congress passed the Inflation Reduction Act, which now heads to President Biden’s desk to be signed into law. The bill has been championed as a “climate change bill”, but it also allocates hundreds of billions of dollars over the next decade to several programs designed to reduce inflation.

Let’s discuss the energy provisions in the bill. (You can see the full text of the 730 page bill here).

The combined investments are aimed at putting the U.S. on a path to roughly 40% emissions reduction by 2030. They represent the single biggest climate investment in U.S. history.

Before reading through the bill, I like to get a feel for the kinds of energy programs it addresses. For example, a big part of our energy policy over the past decade has been ramping up the nation’s biofuel programs. But in this particular bill, the word “ethanol” only appears three times. “Biofuel” appears 11 times.

“Hydrogen”, on the other hand, appears 65 times in the bill, and “clean vehicle” appears 31 times. “Carbon capture” appears 28 times. “Nuclear” appears 25 times.

That gives a high-level idea of the kinds of programs the bill targets. Here are some specifics.

Incentives to consumers

The bill provides direct consumer incentives to buy energy efficient and electric appliances, clean vehicles, rooftop-solar systems, and invests in home energy efficiency. These investments include:

• $9 billion in consumer home energy rebate programs to electrify home appliances and for energy efficient retrofits.
• 10 years of consumer tax credits to make homes energy efficient and run on clean energy, incentivizing heat pumps, rooftop solar, and electric HVAC and water heaters.
• $4,000 consumer tax credit for lower/middle income individuals to buy used clean vehicles.
• Up to $7,500 in tax credits to buy new clean vehicles.
• $1 billion grant program to make affordable housing more energy efficient.

Investments in American Clean Energy Manufacturing

The bill includes over $60 billion to maintain clean energy manufacturing to the U.S. across the full supply chain of clean energy and transportation technologies. Provisions include:

• $30 billion in production tax credits to accelerate U.S. manufacturing of solar panels, wind turbines, batteries, and critical minerals processing.
• $10 billion investment tax credit to build clean technology manufacturing facilities, like facilities that make electric vehicles, wind turbines and solar panels.
• $500 million in the Defense Production Act for heat pumps and critical minerals processing.
• $2 billion in grants to retool existing auto manufacturing facilities to manufacture clean vehicles.
• Up to $20 billion in loans to build new clean vehicle manufacturing facilities across the country.
• $2 billion for National Labs to accelerate breakthrough energy research.

Reducing Carbon Emissions

The bill will target investments at reducing emissions in every sector of the economy, including electricity production, transportation, industrial manufacturing, buildings, and agriculture.

• Tax credits for clean sources of electricity and energy storage and roughly $30 billion in targeted grant and loan programs for states and electric utilities to accelerate the transition to clean electricity.
• Tax credits and grants for clean fuels and clean commercial vehicles to reduce emissions from all parts of the transportation sector.
• Grants and tax credits to reduce emissions from industrial manufacturing processes, including almost $6 billion for a new Advanced Industrial Facilities.
• Deployment Program to reduce emissions from the largest industrial emitters like chemical, steel, and cement plants.
• Over $9 billion for Federal procurement of American-made clean technologies to create a stable market for clean products, including $3 billion for the U.S. Postal Service to purchase zero-emission vehicles.
• $27 billion clean energy technology accelerator to support deployment of technologies to reduce emissions, especially in disadvantaged communities.
• A Methane Emissions Reduction Program to reduce the leaks from the production and distribution of natural gas.

Investments in Disadvantaged Communities

This package includes over $60 billion in environmental justice priorities to drive investments into disadvantaged communities, including:

• The Environmental and Climate Justice Block Grants, funded at $3 billion, invest in community led projects to address disproportionate environmental and public health harms related to pollution and climate change.
• The Neighborhood Access and Equity Grants, funded at $3 billion, support neighborhood equity, safety, and affordable transportation access.
• Grants to Reduce Air Pollution at Ports, funded at $3 billion, support the purchase and installation of zero-emission equipment and technology at ports.
• $1 billion for clean heavy-duty vehicles, like school and transit buses and garbage trucks.

Investments in Rural Communities

The bill also makes significant investments in clean energy development in rural communities, such as:

• More than $20 billion to support climate-smart agriculture practices.
• $5 billion in grants to support fire resilient forests, forest conservation, and urban tree planting.
• Tax credits and grants to support the domestic production of biofuels, and to build the infrastructure needed for sustainable aviation fuel and other biofuels.
• $2.6 billion in grants to conserve and restore coastal habitats and protect communities that depend on those habitats.

Fossil Fuel Provisions

Although this is being touted as a historic climate bill, some climate activists are upset at provisions aimed at the fossil fuel industry. Some of those were aimed at swaying Senator Joe Manchin, but the overall bill was still opposed by Republicans. On the other hand, some of the fossil fuel provisions are punitive, as they attempt to get fossil fuel companies to change certain practices. Some of the fossil fuel provisions include:

• Federal lands and offshore waters that are utilized for renewable energy development must also be opened up for oil and gas drilling.
• Incentives toward installation of efficiency upgrades and carbon capture solutions.
• Concessions that could streamline a West Virginia gas pipeline and ease permitting for new energy projects.
• New fees for natural gas extraction and methane leaks, and Superfund taxes on crude oil and its related products (but also incentives to oil companies that reduce methane leaks).
• New funds for air pollution monitoring, including for methane.
• A new tax on stock buybacks which is intended to encourage companies (not just oil companies) to invest cash back into their businesses.

Thus, even though the fossil fuel provisions were a mixed bag for the oil industry, they are finding general support from the industry. ExxonMobilXOM
CEO Darren Woods called the bill “a step in the right direction” in part because “This policy could include regular and predictable lease sales, as well as streamlined regulatory approvals and support for infrastructure such as pipelines.”

Winners and Losers

The biggest winners from this legislation should be:

• Wind and solar companies
• Utilities that are transitioning toward renewable energy
• Electric vehicle companies
• Companies that extract and process materials like lithium

Within the oil and gas industry, the benefits skew more toward the biggest companies that can 1). Afford to invest in new carbon and methane capture technologies; and 2). Spend billions developing new offshore leases. Smaller oil and gas companies may simply find an increase in their cost of doing business.

Losers will be those who have relied heavily on stock buybacks. But another loser may be the coal industry. Incentives are skewed strongly in the direction of building out new renewable power capacity, and that will likely further marginalize coal as an energy source. Natural gas should continue to fare well as a firm source of power, which meshes well with new renewable capacity.