Aug 24, 2022

How the Inflation Reduction Act incentivizes clean energy & decarbonization

| by Wendy Erickson | 1 Minutes

On August 16th, President Biden signed the Inflation Reduction Act into law. The landmark act contains the largest expenditure in federal history towards fighting climate change. It invests $369 billion in “Energy Security and Climate Change”, and sets aside another 4 billion for “Western Drought Resiliency”. Energy security and inflation are key issues on the minds of many Americans due to global gas supply issues and disruption from the Russian invasion of Ukraine.

A notable element of the Inflation Reduction Act is that it focuses on providing spending and tax incentives, as opposed to regulation, for transitioning to green energy. It also seeks to renew American innovation in clean energy industries compared to international competitors. In summary, the Inflation Reduction Act has five main ways that it seeks to influence climate change:

  • Lowering energy costs
  • Increasing American energy security
  • Decarbonizing the Economy
  • Investing in disadvantaged communities
  • Supporting resilient rural communities

The act will put the U.S. back on track for reducing emissions by 40% by 2030. These goals will be met in spite of concessions on new oil and gas lease sales on federal lands and waters (added to the act to secure the support of Senator Manchin). However, despite significant investments, the act does not set the U.S. on a path to meet emissions reduction goals set by the Paris Agreement (half of 2005-level emissions by 2030). The act also promises to reduce the federal budget deficit by as much as $264 billion over a 10-year budget window. This is accomplished through new taxes on some types of businesses, increased IRS funding to improve tax compliance, and pricing reforms on prescription drugs.

Although the Inflation Reduction Act makes big commitments, its ultimate success relies on followthrough from government, private industry, and individuals. For full adoption at the consumer and industrial levels, many green technology solutions still require further innovations to be made in energy storage and battery capacity infrastructure. The inflation act does act to authorize further presidential authority for pursuing American access to critical clean energy materials such as rare earth metals, now mostly controlled by China.

The Biden Administration has previously pushed through several other influential pieces of climate legislation including the Bipartisan Infrastructure Law and the CHIPS and Science Act. In combination with the inflation Reduction Act, this legislation will leave a significant impact on our fight against climate change over the next several decades.