The US Inflation Reduction Act has been hailed as a historic piece of legislation that will make waves globally.
This could be seen as chickens coming home to roost given the country has historically been one of the biggest contributors to climate change. It produced 5.99 billion metric tonnes of CO2 equivalent in 2020 alone, said the US Environment Protection Agency (EPA). To put this into context, the world produced 34.81 billion metric tonnes of CO2 in 2020.
After the four wasted years of the Trump administration, President Joe Biden has been left with the difficult task of both undoing the damage done and attempting to forge a new consensus at a time of division and contention.
It was always going to be a tall order to pass any suitably ambitious legislation through a split Senate. As the former Build Back Better bill steadily shrank from US$3.5 trillion to US1.75 trillion to US$740 billion, there was growing concern that Biden’s climate ambition was dead in the water.
But 7 August was a historic day. US Vice-President Kamala Harris broke a 50:50 tie in the Senate and the newly named Inflation Reduction Act (IRA) was passed. The 730-page bill has since made its way through the House, with Biden signing on the dotted line and cementing the IRA into the law books on Tuesday.
“The passing of the IRA sends a long-term signal to the investment market that the US is unambiguously committed to moving towards a clean energy future,” Bryan McGannon, Director of Policy and Programmes for the US Sustainable Investment Forum (US SIF), tells ESG Investor.
Crucially, the bill includes a planned US$369 billion in investment to reduce greenhouse gas emissions and fund the upscaling of domestic renewable energy sources. However, to get West Virginia Senator Joe Manchin onside, allowances for fossil fuel projects were made.
“The IRA is full of long-term grants, loans and tax advantages for clean energy, low carbon and clean tech which will be very attractive to investors,” says Tim Mohin, Chief Sustainability Officer at climate management and accounting platform Persefoni.
Research, data and analytics firm Rhodium Group has estimated that the IRA will cut US emissions by over 40% from 2005 levels by the end of this decade.
Although this still falls short of the country’s Paris-aligned commitments, it is a “crucial first step”, Mohin and McGannon agree.
Carrots not sticks
The IRA will utilise a range of substantial financial incentives to encourage carbon-intensive industries to decarbonise and upscale clean energy solutions.
“This creates more momentum and certainty for investors – the market-makers – to capitalise on,” Mohin says. “Even if the investor in question isn’t an environmentalist, they are going to realise that there is money to be made by supporting the domestic clean tech and low-carbon transition.”
The IRA includes a host of grants designed to bolster domestic climate resilience and adaptation. US$2.6 billion has been committed to the conservation and restoration of coastal habitats, US$5 billion towards supporting the upscaling of fire resilient forests, forest conservation projects and urban tree planting, and more than US$20 billion to the development of climate-smart agricultural practices.
The bill also introduces a number of attractive long-term tax incentives.
“This gives investors ten-year certainty around the development of mature clean energy technologies and projects, which isn’t something they have had in the past,” points out Zach Friedman, Director of Federal Policy at US investor network Ceres.
The IRA will offer US$30 billion in production tax credits to help accelerate the domestic manufacturing of solar panels, wind turbines and critical minerals processing. There will also be US$10 billion in investment tax credits available to build clean energy technology manufacturing facilities for sustainable products like electric vehicles.
“[Long-term tax incentives] allow for investments that might have otherwise been too risky; whether that’s a new technology or an energy project with a long pay-off period,” says Greg Hershman, Head of US Policy at the UN-convened Principles for Responsible Investment (PRI).
“This also makes it that much harder for companies to say investors are pushing them to transition too quickly. The funding is now there, and businesses should be looking to seize the opportunities this bill creates, or their competitors will.”
Just as it’s important to ensure energy companies transition to net zero, policymakers have included measures to protect vulnerable communities, thus ensuring a just transition.
“It’s very welcome that the IRA includes credit multipliers for low-income communities to ensure that the energy transition occurs in an equitable fashion,” says Lori Bird, Director of the US Energy Programme and the Polsky Chair for Renewable Energy at the World Resources Institute (WRI).
The IRA has dedicated US$60 billion to projects that are working to reduce climate impacts for under-served populations. This includes US$3 billion in environmental and climate justice grants, which will target community-led projects looking to address the disproportionate impact of pollution and climate change on local public health. The US$27 billion Greenhouse Gas Reduction Fund will also invest in emissions reduction projects in disadvantaged communities.
“All of this means that investors still holding fossil fuel assets that haven’t yet started thinking about the transition will now need to more seriously consider how the energy transition is going to affect their portfolios,” warns McGannon.
A bumpy curve
Passing any legislation requires compromise – especially when it’s an issue that continues to divide opinion.
“Traditionally, this is how legislating happens in the US – you get 70% of what you want and then trade-off to get the legislation through,” notes McGannon. “There was always going to be deal-making to get the IRA through, but I don’t think the agreed measures are going to be an impediment to any funding towards clean energy.”
Just a week before the IRA passed through the Senate, Senator Manchin publicly pulled his support for the bill. After private negotiations, Manchin won the compromise he was after, securing a stipulation that federal land and water offered to solar and wind developers must also be offered to fossil fuel producers. Previously cancelled offshore lease sales in the Gulf of Mexico and Alaska were then reinstated.
In addition, Democratic leaders in the Senate and House agreed to hold votes on a future piece of legislation that will speed the federal approval process for all energy projects, including natural gas export plants and fossil fuel pipelines.
This piece of legislation has yet to be written, but it could lead to the approval of the controversial Mountain Valley Pipeline, a gas line through the Appalachian Mountains.
“These concessions are small compared to what the bill will accomplish,” Persefoni’s Mohin says. “The world continues to consume fossil fuels, and it’s not ever going to be a case of just flipping the switch and stopping all usage. There needs to be a pragmatic phasing out; it’s not going to be a smooth curve, but a bumpy one.”
For every tonne of emissions from new oil and gas production in the IRA, 24 tonnes of emissions will be avoided because of the bill’s other provisions, think tank Energy Innovation noted in its analysis.
WRI’s Bird adds: “There’s a difference between offering leases on federal lands and actual oil and gas production. There are a couple of steps before that happens – for example, the producer needs to bid on these leases. There are no guarantees that there is actually going to be increased fossil fuel production because of this, but it is enabling the possibility.”
Rhodium Group also noted that “only a fraction” of public land acreage that is put up for sale ends up being purchased and “only a fraction” of leases sold then get developed.
While a compromise was reached on this legislation, the rocky road to the IRA being passed has highlighted the risk of politics slowing down action against climate change.
“Conservatives are attacking everywhere they can – not just on climate change, but any kind of ESG policy that companies and financial institutions are bringing forward,” says Mohin.
Most notably, the EPA had its authority to write greenhouse gas regulations curtailed by the Supreme Court in June.
“It’s really unfortunate that the whole area of sustainability has become a political football in the US. Fortunately, once the IRA is passed into law, it’s going to be very difficult to undo,” Mohin says.
With ambitious climate legislation finally in place, the US is now fully sitting at the net zero table with other countries, experts say.
“Cooperation with the rest of the world is essential, because climate change doesn’t recognise political parties – it’s real and tangible and deadly,” says McGannon.
With COP27 now just months away, Persefoni’s Mohin says that the US can enter into talks on the international stage with more bite. “The US has a credibility that it didn’t have at COP26,” he says.
However, there is tension brewing between the US and China, which could put a spanner in the works, Mohin adds.
China suspended climate talks with the US following US House Speaker Nancy Pelosi’s visit to Taiwan last week. China considers Taiwan its territory and has since launched large-scale military exercises near the island.
Considering they are two of the biggest global emitters, ensuring they are working together and committed to transitioning to net zero is key to ensuring the world limits global warming to 1.5°C by 2050. The extent of China’s withdrawal from climate discussions, and therefore the overall impact of this divide between the two countries, is not yet certain.
While diplomats mend cross-border fences, domestically, the path for investors is more clear.
“The IRA is a very important step in the right direction, but it’s not everything we need,” says Bird. “[Investors] need to continue in their efforts to work with policymakers and ensure more investments are driving the transition to clean energy.”