On the one-year anniversary of the passage of the Inflation Reduction Act, researchers at Resources for the Future share insights on the progress and potential of the law’s climate provisions.
Last week marked the one-year anniversary of the Inflation Reduction Act (IRA) becoming law and allocating billions of dollars in federal funding for environmental and climate initiatives. In this blog post, Resources for the Future (RFF) researchers reflect on how the law may affect various aspects of the energy transition moving forward and what the law has done to change the climate-policy landscape of the United States.
Significance of the Inflation Reduction Act
RFF President and CEO Richard G. Newell: “The IRA is the most comprehensive climate bill in US history. Unlike any other major US environmental legislation to date, the IRA relies heavily on ‘carrots’—financial incentives such as tax breaks that encourage investments in clean energy technologies—rather than ‘sticks’ in the form of mandates or fees.
“With hundreds of billions of dollars allocated to incentives that aim to reduce emissions and boost domestic manufacturing, the law will have far-reaching effects on a range of important advancements in clean energy, energy efficiency, electric vehicles, and more. These ambitious investments could reduce US emissions between 43 and 48 percent below 2005 levels by 2035.
“How federal agencies decide to implement specific IRA provisions will, however, impact the pace of the transition to clean energy, as we’ve already seen with provisions for energy communities, tax credits for electric vehicles, and the 45V tax credit for clean hydrogen production.
“While the IRA alone is insufficient to meet national goals for a 50 percent emissions reduction by 2030, it has fundamentally shifted the US economy toward the goal of net-zero emissions, while addressing other economic and equity imperatives. To provide decisionmakers with the insights they need, RFF is hard at work assessing the effects of the IRA, informing its implementation, and identifying potential roadblocks to its success, such as siting and permitting and critical materials.”
The Inflation Reduction Act and Low-Carbon Hydrogen Fuel
The IRA created a tax credit, dubbed “45V,” for the production of hydrogen. 45V has four tiers of value, depending on the total amount of carbon dioxide that is emitted during the process. The most generous tier of the tax credit is for so-called “green” hydrogen, which is produced with electrolysis or an equivalent technology that is powered using zero- or low-carbon electricity. The law also significantly increases the value of another tax credit, “45Q,” for carbon capture, utilization, and storage, a technology that can reduce emissions of carbon dioxide from the power, energy, and industrial sectors and can be used to produce so-called “blue” hydrogen. Blue hydrogen is created using natural gas, but producers store the resulting carbon dioxide emissions. Storing the emissions allows blue hydrogen to have significantly lower carbon dioxide emissions than the most common method of hydrogen production, “grey hydrogen,” which is produced using the same process but without the capture and storage of carbon emissions.
RFF Senior Fellow and Industry and Fuels Program Director Alan Krupnick: “Both the 45Q and 45V tax credits, besides making decarbonization far cheaper, also could contribute to the success of the Regional Clean Hydrogen Hubs program, which the US Department of Energy launched with passage of the Bipartisan Infrastructure Law. The agency will award funding for 6–10 hubs across the country to develop regional networks of clean hydrogen producers and consumers. Right now, the agency is evaluating applications for the first phase of this funding and is considering proposals to produce blue and green hydrogen (which 45Q and 45V, respectively, could subsidize). I anticipate that the increased value of 45Q will have the greatest impact in the short run, because producers of grey hydrogen can use carbon capture, utilization, and storage to qualify.”
RFF Fellow Aaron Bergman: “The 45V tax credit is a big deal, with potentially billions of dollars at stake to jump-start a domestic clean hydrogen industry. But a lot of disagreement has arisen over the right way to implement the tax credit. I don’t think anyone expected we’d still be waiting for guidance from the US Department of the Treasury a year after the passage of the IRA, but still no consensus has developed among industry and the environmental community on the best way to determine whether electricity is ‘clean.’ A lot of research in this area has been conducted over the past year, but many uncertainties and open questions still exist, with no clear answers about the best path forward. Treasury recently delayed the release of this guidance until October, leaving the hydrogen industry waiting and in need of regulatory certainty to start its investments. October is already past the deadline for the guidance in the law, and Treasury will need to act soon, ultimately making a judgment call in the face of all this uncertainty.”
Decarbonizing the Power Sector
The electricity sector accounts for 25 percent of US greenhouse gas emissions. The IRA incentivizes the electrification of the power sector through tax credits for clean electricity, energy storage, and the maintenance of nuclear facilities, among other provisions.
RFF Senior Research Analyst Nicholas Roy: “Building clean power requires long-term planning, so we were never going to see the impacts of the IRA in the power sector right away. Energy projects take years to get off the ground due to permitting, siting, and availability of materials, among other factors that currently are slowing implementation. A few years down the road, we should have a much better picture of exactly how the incentives for the power sector in the IRA are materializing.
“However, the decisions we are making today will determine the overall impact of the IRA, and early signs are promising. Already, the IRA seems to have provided a powerful market signal to investors, companies, states, and grid operators. And incentives for other subsectors of the economy, such as EVs and hydrogen, are pressuring the electricity sector to build more generation. Depending on how these tax credits for other sectors are implemented, the power-sector credits could lead to more cheap renewable energy, instead of the addition of fossil fuel resources to meet that demand. Altogether, the comprehensive, multisector approach of the IRA encourages decarbonization in more than just the power sector.”
Supplementing the Carrots in the Inflation Reduction Act
The federal government has proposed several major environmental regulations since the passage of the IRA, including limits on emissions of carbon dioxide and other harmful pollutants.
RFF Senior Fellow and Electric Power Program Director Karen Palmer: “The US Environmental Protection Agency (EPA) proposed a regulation in May to limit greenhouse gas emissions from power plants. The regulation would require coal-fired power plants that are going to operate beyond 2040 to capture 90 percent of their carbon dioxide emissions by 2030; large natural gas plants that will continue to operate at full capacity beyond 2040 can adhere to the regulation in two ways: capture 90 percent of carbon dioxide emissions by 2035, or blend natural gas with hydrogen in increasing proportions. The agency argues that the policies in both the IRA and the Bipartisan Infrastructure Law make the proposed regulation feasible. These policies include the tax credits in the IRA that subsidize carbon capture and storage and the production of clean hydrogen.”
RFF Senior Fellow Joshua Linn: “EPA has proposed new standards for greenhouse gas emissions from passenger vehicles, as well. The standards would reduce emissions from new vehicles by around 50 percent between 2026 and 2032 and reduce overall US emissions by around 10 percent by 2050. These new standards may have a larger effect on the market share of EVs than fuel standards historically have, because the tax credits for EVs in the IRA incentivize the adoption of EVs.”
Opportunities for Electric Vehicles in and after the Inflation Reduction Act
The IRA includes provisions that subsidize the cost of passenger EVs for consumers and medium- and heavy-duty (MHD) EVs for firms, along with funding to develop infrastructure for EVs across the nation.
RFF Fellow and Transportation Program Director Beia Spiller: “Sales of passenger EVs have been increasing. But exactly how the IRA has been influencing this demand is less clear. For example, the law offers credits of up to $7,500 for EV purchases, but only a few EVs currently are eligible for the full credit, due to restrictions around the sale price and origin of the materials in the vehicle, among other conditions. The case may be that a relatively small fraction of new EV buyers will be able to take advantage of the full tax credit in the next few years. Regardless, the IRA also provides significant funds for investments in a broad network of EV chargers, and the proposed new vehicle efficiency standards from the federal government further promote more EV sales, so demand and supply for light-duty EVs should continue to grow.”
RFF Fellow Nafisa Lohawala: “The IRA takes significant steps to advance the adoption of MHD EVs. The tax credits, loans, and grants for MHD EVs included in the IRA provide a huge push for the electrification of large vehicles and can incentivize adoption and reduce production costs for this technology. However, questions remain about how effective and efficient these incentives will be; for example, unanticipated bottlenecks with the supply chain may arise. How far IRA funding ultimately goes in improving MHD EV adoption is therefore uncertain. Additional policies, such as reforms for electricity pricing, can complement the IRA and support further adoption of MHD EVs to reach US goals for decarbonizing the transportation sector.”
Supporting Energy Communities
The IRA creates a tax credit for “energy communities,” as defined by the law. This credit incentivizes firms to develop energy projects in places where the local economies historically have depended on fossil fuels. The Biden administration released guidance about eligibility requirements for the tax credit in April 2023.
RFF Fellow Daniel Raimi: “If the goal of the policy that targets ‘energy communities’ was to provide a bonus tax credit of 10 percent across large swaths of the United States, then I think the policy has done that. If the goal of the policy was to specifically target the most vulnerable energy communities, we have a lot more work to do.
“The definition of ‘energy community’ covers lots of places in the United States that are not now nor historically have been heavily dependent on fossil fuels. For the most vulnerable communities, clean energy development will not be a one-for-one replacement for jobs and tax revenue from the coal, oil, and natural gas industries. This provision for energy communities in the IRA helps, but substantial needs persist to create job opportunities, diversify tax revenue streams, and develop other economic sectors that can sustain these communities for the long term.”