We cannot talk about investing in our planet this Earth Day 2023 without discussing the Inflation Reduction Act of 2022 (IRA). We’ve discussed the IRA previously here and here. In short, this historic piece of legislation directs nearly $400 billion in federal funding to advance a clean energy economy through a combination of tax incentives, grants, and direct loans/loan guarantees while also seeking to prioritize American workers, American businesses, and environmental justice.
Among other tax incentives, the IRA briefly extends existing clean energy production and investment tax credits for renewable resources through 2024 when they sunset in favor of a more general set of technology-neutral, emissions-based clean energy production and investment tax credits with a period of certainty that lasts at least until 2033. A decade of relative certainty for such credits, without the need for frequent or last-minute extenders, should help drive the significant climate investments that are the focus of the IRA. The IRA also creates tax credits for domestic manufacturing and critical mineral processing, provides a clean vehicle tax credit, extends and provides tax credits for low emission fuels, extends and expands the tax credit for carbon capture, utilization, and sequestration (CCUS) projects, and creates a hydrogen production tax credit. To promote employment and environmental justice goals, significant bonus credits are available for taxpayers meeting prevailing wage and apprenticeship requirements in the construction and installation of qualifying energy property; for locating projects in energy communities; for meeting domestic content requirements; and for locating projects in low-income communities.
In addition to tax incentives, the IRA provides various grant and direct loans/loan guarantee opportunities to support projects that advance clean energy, including transmission, and reduce greenhouse gas emissions, with a focus on mobile source emissions, methane emissions from the oil and gas industry, and emissions from certain other emissions-intensive sectors. The IRA also contains opportunities for funding the development of low emission fuels, projects to improve energy efficiency, projects to support sustainable agricultural practices, and projects that stimulate American manufacturing, such as of the clean vehicle supply chain. Finally, the IRA includes opportunities for funding to improve pollution monitoring and tracking. Consistent with the Justice40 Initiative, the IRA emphasizes projects that benefit low-income and disadvantaged communities.
Although dizzying in its breadth, the main takeaway from the IRA is that there are now a multitude of material financial incentives, spanning a broad range of the energy and industrial sectors that eligible entities can take advantage of to reduce greenhouse gas emissions and advance a clean energy economy. Entities that emit greenhouse gases and entities seeking to produce or invest in clean energy or related technologies, develop energy infrastructure, manufacture components along the clean energy or clean vehicle supply chain, produce lower emission fuels, or improve energy efficiency should be evaluating how they can take full advantage of the IRA, including bonus credits for prevailing wage and registered apprenticeship compliance, for projects that meet domestic content requirements, and for projects located in energy and low-income communities.
The IRA is crafted to play an important role in advancing the Biden Administration’s climate goals of a 50-52 percent reduction in greenhouse gas pollution (from 2005 levels) by 2030 and of net zero greenhouse gas emissions by 2050. Whether the IRA will be effective in reaching those goals will depend on how effective the incentives are in driving significant investment in clean energy and related technologies, how quickly and efficiently federal funds are disseminated, and how quickly projects can meet the myriad regulatory hurdles large investments require. This latter recognition is the driving force behind several efforts at regulatory streamlining that may hold the key to whether projects get off the launchpad or remain nascent projects.
As just one example, the lengthy process and associated uncertainty with having to secure siting authorization from multiple state regulatory commissions to develop interstate transmission lines and carbon dioxide (CO2) pipelines for carbon capture and sequestration may jeopardize the effectiveness of the IRA’s provisions encouraging investment in these projects. Similarly, efficient development of transmission and pipeline infrastructure will be necessary to fully utilize solar and wind resources, as well as transport captured CO2 to geological sequestration sites (see our article on CO2 Capture and Storage, CCS, here).[1] Another potential impediment is public opposition, some of which may stem from the perceived impact that IRA-driven projects will have on communities and ecosystems, and some of which may stem from concerns about the efficacy of certain emission reduction strategies.
Notwithstanding potential impediments, the IRA has made Earth Day 2023 an exciting time to invest in our planet. An August 2022 Rhodium Group report suggests the IRA could drive United States greenhouse gas emissions down to 32-42% below 2005 levels by just 2030, compared to 24-35% without these measures. Of course, we must invest smartly, which will require holistic, careful, community-involved planning that allows entities to navigate financing, permitting, and environmental reviews in a way that best minimizes legal risk, maximizes emissions reductions, and addresses community concerns.
We will continue to provide insights on how entities can take full advantage of the IRA, as well as strategically navigate potential impediments to efficient project development, on the Corporate Environmental Lawyer.
[1] The state-by-state siting of transmission lines may become easier for certain projects once the Federal Energy Regulatory Commission’s proposed rule to revise the regulations governing the Commission’s backstop siting authority is finalized.
