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The Inflation Reduction Act: A breakthrough for lower energy costs and climate progress

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This post was authored by EDF policy experts.clean energy

Senate Majority Leader Chuck Schumer and Senator Joe Manchin on July 27 announced the Inflation Reduction Act of 2022 — an agreement that will improve Americans’ lives by fighting inflation, lowering healthcare costs, and making significant down payments on energy security and climate progress.

If passed by both the Senate and the House, this bill will be the largest investment in combating climate change ever passed by Congress — driving down carbon pollution 40% below 2005 levels by 2030. This will bring the U.S. substantially closer to President Biden’s goal of cutting climate pollution in half by 2030 and return the U.S. to a leadership role in the global fight against climate change.

These fiscally responsible investments will create good-paying clean energy and manufacturing jobs and boost U.S. energy security — all while saving families and businesses money. The bill also makes a historic down payment on environmental justice.

While the bill does contain some trade-offs, taken together, the Inflation Reduction Act of 2022 will greatly benefit our economy and our climate fight – now and for generations to come. Here are the key investments you should know and why they matter.

Clean energy

The bill includes more than $135 billion in clean energy tax credits — a game-changing package of incentives that will ramp up solar, wind and energy storage on the grid. Building a clean power sector is essential for driving down climate pollution, while helping consumers reduce their energy use and hedging against volatile natural gas prices. Previous estimates on energy investments, including clean energy tax credits, have shown they could save households roughly $500 a year in energy costs when fully implemented.

Furthermore, the 10-year extension on these tax credits gives renewable energy providers across the U.S. the certainty they need to build and expand clean energy projects in the long term. As utilities and renewable energy companies said in a letter to Congress earlier in July, “Our companies are proactively shifting to clean energy and investing in energy efficiency… But corporate action alone is insufficient to meet the scope and scale of the climate crisis and deliver benefits to all.”

In addition to clean electricity tax credits, there are significant investments in emerging and expanding climate solutions, such as green hydrogen, low-emissions sustainable aviation fuels, direct air capture and carbon storage — though it will be critical to monitor these investments as they move forward and put protections in place to maximize climate benefits and protect local communities and ecosystems.

Other notable clean energy investments include:

  • $27 billion for a “green bank” that will leverage more private dollars to finance deployment of clean technology, like solar farms and electric vehicles.
  • $9 billion for consumer home rebate programs that will reduce energy costs, particularly for lower income households.
  • $2 billion in funding to expand transmission lines needed to accelerate clean energy deployment.
  • $18 billion in additional DOE loan authority to support economic opportunities to tribes through energy projects.
  • $40 billion in loan authority to help innovative energy technologies, like energy storage, battery and building efficiency technologies reach commercial deployment.
  • $250 billion for new refinancing and investment tools to reduce consumer electricity costs through reinvestment at existing and retired energy infrastructure sites.
  • Bonus tax incentives to develop clean energy resources in low-income communities and areas experiencing a transition away from fossil fuels.
  • More than $10 billion to support renewable buildout in rural areas through loans and assistance for electric cooperatives.

Clean transportation

The Inflation Reduction Act takes aim at the largest source of climate pollution in the U.S.: transportation. Taken together with the infrastructure package passed by Congress last year, this bill has the potential to jumpstart the adoption of electric light-duty vehicles and provide a significant down payment on medium- and heavy-duty trucks and bus electrification.

The proposed legislation features a consumer tax credit of up to $4,000 for used clean light-duty vehicles and $7,500 for new purchases – though uptake levels may depend on our success in building out domestic supply chains. In addition, there is substantial funding for zero-emission trucks and buses — some of the biggest polluters on our roads. While they account for just 5% of vehicles, they are responsible for more than a quarter of all climate pollution from the transportation sector and nearly half the deaths from air pollution linked to transportation.

Passing the Inflation Reduction Act will be an important step forward in addressing this major – and growing – source of transportation pollution, while injecting new life into the economy by supercharging America’s manufacturing capacity.

Other notable clean transportation investments include:

  • Up to $40,000 tax credit for commercial ZEVs.
  • $1 billion in grants for class 6 and 7 heavy-duty vehicles, like school and transit buses and garbage trucks — $400 million of which is focused in areas of high air pollution.
  • Heavy-duty charging infrastructure tax credit, which increases incentive eligibility from $30,000 per property to $100,000 per item.
  • $3 billion for the U.S. Postal Service to purchase zero-emission vehicles and related infrastructure.
  • $3 billion in grants to reduce air pollution at ports, to support the purchase and installation of zero-emission equipment and technology at ports.
  • $60 million to reduce diesel emissions resulting from goods movement facilities, and vehicles servicing goods movement facilities, in low-income and disadvantaged communities to address the health impacts of such emissions on such communities.

Domestic manufacturing and decarbonizing industry

Through a range of investments and incentives, the bill will create good-paying clean energy and manufacturing jobs throughout the U.S. — positioning our country to take hold of the $23 trillion global clean energy market expected by the end of the decade. This includes $60 billion in investments for clean energy technology manufacturing that will help maximize American jobs building electric vehicles, solar, wind and more, while minimizing supply chain disruptions.

The industrial and manufacturing sector itself is also responsible for a quarter of U.S. emissions — and is expected to grow — but industry faces numerous challenges in deploying clean energy solutions. The bill helps fill this gap with nearly $6 billion in grants to help energy-intensive industrial facilities reduce their emissions and significant funding to spur the market for low-emissions construction materials.

Other notable manufacturing and industrial investments include:

  • $500 million for the use of the Defense Production Act to accelerate domestic clean energy manufacturing for energy technologies like solar and critical electric grid components.
  • $2 billion for domestic manufacturing conversion 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 – including $3 billion for the Advanced Technology Vehicle Manufacturing program.
  • $4 billion for the General Services Administration and Federal Highway Administration to acquire and install low-carbon construction materials.
  • $250 million to enable carbon-intensity reporting for construction materials and products through the development of environmental product declarations.

Environmental justice

The bill will invest $60 billion in environmental justice, an important step toward addressing legacies of disinvestment and pollution burden in mostly Black, Latino, Indigenous and low-income communities — and ensuring these communities benefit from a clean energy future. This includes $3 billion in block grants and additional funding to address air pollution with better health data, using innovative technology to identify pollution hotspots and blind spots. Continued leadership from environmental justice communities on how and where these investments will be deployed is imperative.

Nearly 150 million Americans, or roughly half of the population, live in areas with unhealthy levels of air pollution. The health harms fall most heavily on Black, Latino, Indigenous and low-income communities because coal-fired power plants, oil refineries, petrochemical plants, ports, highways and other sources of air pollution are more likely to be located near them. Many of the clean transportation investments mentioned above, like the grants for ports and clean heavy-duty trucks and buses, will reduce health-harming air pollution.

While the bill ushers unprecedented resources toward environmental justice, much more will be needed. In addition to an ongoing need for direct investment in overburdened areas, we must prioritize addressing environmental justice concerns as emerging technologies are developed and deployed; ensure strong community consultation processes are built into any new siting and permitting discussions; and define health thresholds that ensure no additional harms will be experienced by communities.

Other notable environmental justice investments include:

  • $3 billion for environmental justice block grants to reduce air pollution, mitigate climate and health risks, increase climate adaptation, and facilitate community engagement in public processes.
  • $3 billion in grants to reconnect communities disconnected by transportation developments through community-led projects that address neighborhood equity, safety and affordable transportation.
  • $1 billion grant program to make affordable housing more energy efficient.
  • Nearly $700 million for federal agencies and departments to conduct environmental reviews and community engagement on energy and infrastructure projects and other activities.
  • $388 million for air quality monitoring, data and enforcement, including $117 million for communities near industrial sources of pollution.
  • $1.5 billion in competitive grants for tree planting and other activities to reduce urban heat challenges in underserved areas.

Curbing methane pollution

The Inflation Reduction Act will create a program to tackle methane pollution — a short-lived, but highly potent greenhouse gas which is more than 80 times as potent than carbon dioxide for the first 20 years after it is emitted. Administered by EPA, the Methane Emission Reduction Program (MERP) will complement critical EPA regulations to drive down harmful methane emissions from oil and gas operations – the largest industrial emitter of methane pollution — which waste energy resources, harm our health and drive dangerous climate change.

More details on the Methane Emission Reduction Program:

  • MERP will assess a charge on wasteful methane emissions above threshold levels that are based on the oil and gas industry’s own targets, starting in 2024 at $900/ton of methane. (The fee would only be assessed on the largest oil and gas polluters that already report their emissions).
  • The program also allocates funding for EPA to provide support to operators as well as disadvantaged communities impacted by pollution from oil and gas operations and funding for EPA to monitor methane emissions and improve methane emission estimates.

Climate-smart agriculture and climate resilience

The bill contains vital investments that will build climate resilience and put rural communities at the forefront of climate solutions, including nearly $21 billion funding for climate-friendly agriculture. This funding will help U.S. farmers and rural communities cut emissions and prepare for climate impacts that cannot be avoided. Farmers and rural communities are on the frontlines of climate change, with higher temperatures and changing rainfall making it harder to grow food; and at the same time, crop and livestock production account for more than 10% of U.S. emissions. These programs also create jobs and help revitalize rural economies.

In addition, the bill will fund coastal resilience solutions – including $2.6 billion to NOAA – that can make coastal communities, ecosystems and infrastructure better protected in the face of growing climate threats

Other notable resilience investments include:

  • $5 billion in funding for forests, including significant funding for natural climate solutions like reforestation and building resilience to catastrophic wildfires.
  • $50 million to NOAA for climate research to better understand how climate change is disrupting weather, ocean, coastal and atmospheric processes, and how climate change is impacting marine species and coastal habitats.
  • $150 million to NOAA to accelerate advances in weather, ocean, coastal and climate research, observation systems, modeling and forecasting.

It’s important to note that this deal is not perfect. It does have trade-offs, including reinstating offshore oil and gas lease sales that could increase emissions and cause air and water pollution, but on the whole, the Inflation Reduction Act is a huge win for the economy and climate.

This deal – if passed – will deliver lower energy costs, healthier communities and historic progress in the fight against climate change. As President Biden put it, this is “the action the American people have been waiting for.” Congress, let’s get it done.

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