The Triumphs and Challenges of the Inflation Reduction Act
Updated: Nov 1
Written by: Zoe Zakrzewska
Edited by: Justin Weir
On August 16th, 2022, the Inflation Reduction Act (IRA) was signed into law by United States President Joe Biden. The act is most notable for its enormous investments into clean energy and technology, and is being heralded as the most significant action the United States government has ever taken on climate change. IRA provisions will have a significant impact on national emissions: the United States was expected to decrease its emissions from its 2005 peak by 27-35% by 2035, but that figure has improved to 43-48% since the passage of the Act (Bistline et al., 2023).
A Surge of Funding
According to McKinsey’s analysis of the IRA, the bill allocates an estimated $394 billion toward climate and energy funding. The scope of the IRA is broad: it includes investments into the energy, manufacturing, sustainability, agricultural, and transportation sectors. Around $216 billion will go toward tax credits designed to accelerate private investment in these sectors, especially energy. Another $43 billion is to be allocated to consumer tax credits in order to lower the cost of adoption of goods like electric vehicles, rooftop solar panels and energy efficient home appliances. $82 billion and $40 billion are spent on grant programs and loan programs, respectively. Finally, $13 billion will be spent on expanding federal operations (Badlam et al., 2022).
These numbers are subject to change, as the current totals are estimates. Tax credits are uncapped, meaning the final total will depend on how many firms and consumers take advantage of the incentives. McKinsey predicts a $394 billion total investment, while the Congressional Budget Office predicts $369 billion, and Goldman Sachs projects as much as $1.2 trillion (Klein, 2023, 6:20). Nonetheless, estimates seem to be generally increasing, indicating the initial reaction to the act has been promising.
The IRA’s logic revolves around leveraging the financial power of the private sector in order to reach the nation’s climate goals. Instead of attempting to restructure the energy industry or implement more stringent laws and regulations, the government is offering benefits to those that invest in climate-friendly projects. This approach is producing results: in the first 14 months since the law’s signing, the IRA has led to over $340 billion in clean energy investments, a total higher than all combined clean energy investments announced between 2015 and 2022 (Clean Energy Investing, 2023).
Assessing the IRA’s Impacts
The response to the IRA’s incentives has varied across different industries. The most immediate and prominent result thus far has been from the electric vehicle (EV) industry. Although EV technology has made rapid improvements and is becoming increasingly competitive with traditional gas-powered vehicles, the EV market has still been facing some obstacles. Limitations on the applicability of tax credits, supply chain delays, and a lack of EV manufacturing and battery production within the United States have all stalled the industry in recent years. The IRA addresses these limitations by enhancing existing tax credits and providing new ones, as well as encouraging supply chain development with new material sourcing standards (Baldwin, 2022). Corporations were quick to take advantage of these provisions: of the $110 billion in climate technology manufacturing investments announced in the year following the IRA’s passage, $70 billion of it was related to the EV industry (The White House, 2022). This includes investments into mineral processing and refineries, battery manufacturing facilities, electric vehicle assembly plants, and more.
However, not all industries responded as markedly to the IRA as the electric vehicle market. The wind industry, for example, has been slow to react to the legislation. Investment in offshore and onshore wind reportedly dropped over the past year, despite generous incentives for manufacturers (Tankersley, 2023). This, however, was expected: the wind industry has been struggling recently with high interest rates, supply chain issues, and high costs that have led to low profit margins. Experts expect for investment to begin ramping up again as the IRA lays out a policy-based pathway to revitalize the industry (Woods, 2023).
Another factor holding off investment is the continuing wait for guidance on the usage of tax credits. Although the signing of the IRA created the blueprint for the types of incentives to be offered, rules on how specific tax credits can be utilized are not finalized. These guidelines, once released by the US Department of Treasury, have important implications on the degree and direction of investments made (McCarthy, 2023). For example, there has been considerable debate over how regulation surrounding clean hydrogen tax credits should be structured. If the Department of Treasury issues guidance allowing hydrogen tax credits to apply to projects using electricity used from fossil fuels, the hydrogen produced would be very emissions-intensive, undermining the purpose of developing clean technology to reduce emissions. However, if the rules published allow tax credits to exclusively apply to hydrogen projects using new sources of emissions-free electricity, there are worries the industry’s growth may be stifled (St. John, 2023). The private sector has thus been holding off millions of dollars in hydrogen development investments as they wait to see which approach the government will decide to take.
The IRA has actually drawn criticism from the international community, who have accused the United States of protectionism. Many of the incentives offered apply strictly to domestic producers, putting international firms and their products at a disadvantage. In addition, the generous tax credits offered have gained the attention of some international firms, who are opting to construct their facilities in the United States (Chandrasekhar et al., 2023). For instance, Meyer Burger, a Swiss solar cell and module manufacturing company, announced it was abandoning its expansion plans in Germany to build a solar cell factory in Colorado in order to take advantage of the IRA’s tax credits (Chu et al., 2023). Major vehicle manufacturers, such as Volkswagen, Tesla, Mercedes-Benz, and BMW have also announced plans to shift some activities or invest in new plants in the US because of the IRA (Reuters, 2023).
In response, the European Union’s Green Deal Industrial Plan is the trading bloc’s own version of the IRA: it aims to develop climate-friendly technology within the European Union by simplifying the regulatory environment, providing further access to funding by relaxing state aid rules, and creating new supply chains through trade deals (Braverman et al., 2023). Likewise, Canada announced it was allotting $60 billion toward clean energy tax credits and $20 billion toward sustainable infrastructure investments (Ghantous, 2023). The IRA has spurred a clean technology arms race, where governments of key nations are working to create incentives that are able to compete with those offered by the IRA and other competing legislation packages.
Despite the IRA’s success in fueling climate technology and clean energy investments, the long-term success of the legislation is still in jeopardy. Clean technology industries suffer from a variety of supply chain issues, including labor shortages, delay-causing bottlenecks, and constraints on access to raw materials, which threaten project economics and impede their completion (Ashcroft, 2023). The power grid also desperately needs to be expanded: the current grid is not able to support the country’s transition to renewable energy, and experts worry that this massive and expensive capacity upgrade may not be able to be completed quickly enough (Institute for Energy Research, 2022). Permitting is another struggle: under the current system, it takes years for projects to receive all approvals and permits, and there have been major calls to reform the system (Nilsen, 2023). And, the legislation could be altered altogether if politicians opposing it come into office through the 2024 congressional and presidential elections.
Nonetheless, the IRA has thus far led to a huge surge of clean energy investments across many United States clean energy industries. If challenges are addressed and the increasing trend of investment of the last 14 months continues, the legislation will be responsible for bringing the country much closer to accomplishing its climate goals.
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