News and Views from the RFF Blog: Unpacking the Inflation Reduction Act

The Inflation Reduction Act represents a leap forward for US climate policy; the next steps will involve implementation of the law. Since the Inflation Reduction Act passed in August 2022, RFF scholars have offered insights about the law’s provisions on the Common Resources blog. Here are some excerpts from their recent blog posts, which collectively attracted more than 40,000 views.

The Inflation Reduction Act (IRA) marks a turning point for US climate policy. To accelerate US decarbonization, the IRA uses the carrots of incentives, rather than the sticks of climate regulations. Rather than putting a tax on greenhouse gas emissions, which many economists have long favored as an emissions-reduction policy, the law provides $370 billion for programs that facilitate mitigation and adaptation to climate change, plus tax incentives for qualifying technologies that reduce emissions.

Since the passage of the IRA in August 2022, scholars at Resources for the Future (RFF) have shared related insights on the Common Resources blog, RFF’s platform for commentary and analysis about pressing environmental and energy issues. In this article, we highlight the analysis from our experts, who offer thoughts on how decisionmakers can implement the IRA efficiently, effectively, and equitably.

CO₂ Much Support for Fossil Fuels?

In a Common Resources blog post published in August, RFF Fellow Brian C. Prest looks at the provisions in the IRA that affect federal oil and gas leasing.

“A key compromise that secured the vote of Senator Joe Manchin (D-WV) is the mandate of new oil and gas lease sales on federal lands and waters, including a commitment to tie future renewable energy development on federal lands and waters to analogous onshore and offshore oil and gas leasing,” says Prest. “At the same time, the bill imposes higher costs on companies that drill on federal lands—most importantly through higher minimum royalty rates, but also through higher rental rates, minimum bids, and the elimination of noncompetitive leasing.”

Prest notes the importance of placing the law’s oil and gas provisions in context: “My work to date suggests that the emissions reductions triggered by other provisions in the IRA would far outweigh the potential impacts of the oil and gas leasing provisions.”

Sparks Fly in the Electric Vehicle Market

The IRA contains provisions that aim to boost the adoption of electric vehicles (EVs) (Figure 1). In a pair of articles on Common Resources, RFF Fellow Beia Spiller examines the EV tax credits in the IRA and the requirements that EV manufacturers and buyers must meet to collect the credits.

Figure 1. Number of Electric Vehicles Projected to Claim Tax Credit under the Inflation Reduction Act

Spiller, who also serves as the director of RFF’s Transportation Program, analyzes the credits for medium- and heavy-duty EVs (MHD EVs) in one of her blog posts. “The IRA inherently incentivizes adoption of the smaller MHD EVs,” says Spiller. “Why does it look as though the credits favor relatively smaller vehicles? Smaller MHD vehicles, such as cargo vans or box trucks used for short-haul package delivery in urban areas, are cheaper and have more similar price points relative to their electric versions than larger MHD vehicles, such as long-haul tractor trailers.

“Why, then, are we still seeing so little adoption of these other types of small MHD EVs?” Spiller continues. “The reluctance to electrify may be due to range limitations, range anxiety, uncertainties about new technologies, misinformation, electric grid challenges, and other factors. It’s possible that the subsidies in the IRA will provide the necessary compensation to offset the negative aspects of fleet electrification—whether those negative factors are real or perceived.”

While the IRA doesn’t reinvent the $7,500 passenger EV tax credit, which has been in place for over a decade, the law does include significant changes to the existing credit. Spiller examines these changes in her other Common Resources blog post on the topic.

“The IRA … benefits lower-income individuals who previously didn’t have enough tax liability to take advantage of the full $7,500, as well as those who don’t want to wait until [tax season in] April to get the refund, by allowing these buyers to take advantage of the tax credit at the point of sale,” says Spiller.

Requirements for vehicle manufacturers, however, could limit the selection of vehicles that are eligible for tax credits. “The legislation disallows tax credits for vehicles with a majority of battery components and bodies that are imported (or, crucially, imported from ‘foreign entities of concern,’ such as China), but most battery manufacturing happens overseas … Specifically, the bill requires a percentage of the battery’s minerals and manufactured parts to be produced domestically (or by countries with fair-trade agreements, such as Chile and Australia), and increases that percentage every year—starting at 40 percent in 2023 and quickly ramping up to 80 percent in 2026,” says Spiller.

“Until auto manufacturers in the private sector make significant changes to their manufacturing processes and resulting vehicle price points, you—and most other car buyers in the market for EVs—may need to forgo the tax credit if you want to go electric,” Spiller concludes.

Ensuring that Inflation Reduction Act Subsidies Reach Their Equity Targets

In a blog post published on Common Resources in September, RFF scholars Daniel Raimi and Sophie Pesek look at a tricky provision in the IRA: the law’s financial incentives for clean energy projects that are located in so-called “energy communities.”

Ideally, say Raimi and Pesek, these incentives would support “energy-producing communities that may be most hard hit by changes in the energy landscape.” The authors investigate how the law’s definition of an energy community measures up to this ideal.

“Do these definitions in the IRA target the energy communities that are likely to be hardest hit by a transition to a net-zero energy system? Because of the imprecision of the selected geographies, and the overly expansive definition of ‘energy communities’ … the answer appears to be no.”

Big Incentives for the Smallest Molecule

The IRA builds upon measures in previous pieces of legislation. For example, the Infrastructure Investment and Jobs Act, which Congress passed in 2021, allocates $9.5 billion for clean hydrogen initiatives in the United States. In a blog post published a few weeks after the IRA became law, RFF scholars Aaron Bergman and Alan Krupnick discuss how the IRA augments the provisions for hydrogen that the Infrastructure Investment and Jobs Act originally put forward.

The tax credit for hydrogen production, known as the “45V” tax credit, subsidizes either investment in clean hydrogen production or hydrogen production itself. The value of the 45V credit increases as the life-cycle emissions associated with hydrogen production decrease (Table 1).

Table 1. “45V” Tax Credits Available for Hydrogen Producers through the Inflation Reduction Act of 2022

In the short term, the increased tax credit for carbon capture and sequestration, a credit known as “45Q,” also could have a large effect on reducing emissions associated with hydrogen production. “Our analysis suggests that the tax credits in the IRA already are sufficient to make hydrogen production from natural gas with [carbon capture and sequestration] competitive with current hydrogen production without [carbon capture and sequestration],” say Bergman and Krupnick.

Bergman and Krupnick also note that these tax credits, along with other provisions in the IRA, could be key to the success of the Regional Clean Hydrogen Hubs (H2Hubs) program, which is funded by the Infrastructure Investment and Jobs Act and has emerged as the largest hydrogen initiative to date. “While the Infrastructure Investment and Jobs Act alone had potential to leave the H2Hubs stranded without a path to sustainability, the incentives provided in the IRA can put the H2Hubs on a wider path to success,” they say.

On the other hand, RFF researchers have pointed out potential complications in disbursing the 45V tax credit, depending on how the life-cycle emissions are calculated for clean hydrogen production. Life-cycle emissions include not only what is emitted while producing hydrogen, but also all emissions up until the hydrogen leaves the production facility. For example, if hydrogen production is powered by a natural gas–fired power plant, the life-cycle emissions would be higher than a case in which clean energy drives production. In fact, hydrogen that is produced using electrolysis that is powered by electricity at the grid’s average carbon intensity is more carbon intensive than hydrogen that is produced by natural gas without carbon capture (through a process called steam methane reforming).

The US Department of the Treasury is responsible for determining how hydrogen producers can demonstrate that they satisfy the eligibility criteria for the 45V subsidy, which requires the calculation of their hydrogen’s life-cycle emissions intensity. In a Common Resources blog post published in October, Bergman worked with RFF scholars Brian C. Prest and Karen Palmer to examine the agency’s responsibilities. “These choices will be of vital importance for the competitiveness of green hydrogen, because the subsidy is available only if the emissions associated with the consumed electricity are extremely clean,” say Bergman, Prest, and Palmer. “The electricity consumed must have emissions that fall short of the current grid average by more than 80 percent to receive even the smallest level of subsidy. More recently, Bergman pointed out a potentially important trade-off: More careful emissions accounting may ensure that the 45V tax credit does not increase near-term emissions, though the stringency also may slow electrolysis deployment and cost reductions, limiting the future options and increasing long-term emissions.

“These types of decisions stray far from the usual expertise of the Treasury Department, which likely does not wish to be in the position of adjudicating complicated requirements,” the authors conclude.

A version of this article appeared in print in the Spring 2023 issue of Resources magazine.

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