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The Inflation Reduction Act of 2022: Tipping the Scale Toward Clean Energy
by: Erica Lasdon | August 30, 2022
Boyertown, Pennsylvania (August 30, 2022) – Sweeping legislation signed into law this month by President Biden will allow for unprecedented investments to decarbonize the nation’s economy. The Inflation Reduction Act (IRA) earmarks the bulk of its $490 billion spending on clean energy and climate change mitigation initiatives.
Combined with other recent spending bills, the U.S. government is set to begin a period of transformative investments. The Rocky Mountain Institute, a clean energy think tank, notes that the combined bills will more than triple annual real federal spending compared with recent years, which was already elevated from levels of the 1990s and early 2000s.
While the IRA is far from perfect, advocates say it provides extraordinary opportunities for the conservation of our nation’s lands and waterways and includes significant resources for restoring wildlife habitats and forests.
The legislation is expected to reduce U.S. greenhouse gas (GHG) emissions to approximately 40%, compared to 2005-levels, by 2030. Without enactment of the IRA, the U.S. was on course to reduce its GHG emissions to only 26%, compared to 2005-levels, over this period, according to an analysis from the World Economic Forum.
For the U.S. to reach its emissions-reduction targets, it’s imperative that we begin to take action across the entire technology adoption curve. This means exploring:
- Existing technologies that are ready for market but not deployed.
- Solutions that require some further development to be market ready.
- Technologies that are only prototypes and need significant development.
Importantly, IRA resources will focus on the most hard-to-abate industrial sectors, such as electric power generation.
As widely reported, the IRA is projected to drive significant emissions reductions in the electric power sector. To a certain extent, this can lower production emissions in steel, cement, and other carbon-intensive industries. However, practical options to capture carbon from industrial processes and traditional energy production require substantial investment to help meet climate goals. The IRA addresses these challenges by creating incentives through a system of grants, loans, and tax credits, including making certain existing credits larger and more durable.
Here are a few key IRA provisions for companies and investors to be aware of:
- Changes to 45Q, the existing tax credit for carbon capture and storage (CCS), make it more profitable and easier to access. Companies will be able to earn $85 for every metric ton of CO2 sequestered, rather than $50/ton previously. (The amount earned is less if the CO2 is buried during oil extraction.) The timeline is more favorable too. Previously, a company had to start building capture equipment by 2026. Now it’s 2033. The IRA also significantly lowers the minimum capture requirement.
- Methane emissions are an urgent issue for many industries, as this type of emission is far more potent than carbon dioxide and hard to detect. For the oil and gas industry, investments in methane detection and a first-time federal fee on methane emissions will amplify existing initiatives within industry to tackle this problem. The IRA also funds grants, rebates, loans, and other assistance to facilities subject to the methane fee for a variety of measures, including adding or improving equipment and processes that reduce methane emissions.
- Other long-term tax credits include clean hydrogen fuel development, direct-air-capture deployment, and advanced nuclear projects for heavy industry.
By driving down the cost of clean energy and other climate solutions, this approach may make it easier for companies and local governments to increase their climate ambitions.
Regardless of your business’s sector, you will feel the impact of the IRA and related legislation. As the landscape shifts, companies and investors should factor an increasing rate of technological and systems change into their future plans.
Deep decarbonization is complex work that requires a diverse set of policy, legal, technology, and market solutions. Forthcoming investments by the U.S. government seek to put the country on a net-zero pathway. Importantly, investors and corporations have many tools available to assess their pathways to net-zero.
Since our founding, ClimeCo has been a leading transformation partner to companies, investors, and governments pursuing a low-carbon future. As a vertically integrated sustainability solutions provider, we have enabled our clients to go beyond business as usual. By developing frontier technology- and nature-based carbon-reduction projects, transacting voluntary and compulsory environmental credits, and advising on climate risk and disclosure, our team is dedicated to implementing decarbonization pathways tailored to our clients’ specific sectors, business models, and balance sheets.
Please get in touch with us if you want to learn more about our:
- Complete range of ESG Advisory solutions that help companies improve readiness and resilience in the ever-changing regulatory environment.
- Project Development capabilities around high-quality carbon projects that feature strong engagement with our project partners, local stakeholders, carbon registries, and credit buyers.
- Environmental Credit offerings from projects we develop and projects we invest in.
ClimeCo is a respected global advisor, transaction facilitator, trader, and developer of environmental commodity market products, projects, and related services. We specialize in voluntary carbon, regulated carbon, renewable energy credits, plastics credits, and regional criteria pollutant trading programs. Complementing these programs is a team of professionals skilled in providing sustainability program management services, and developing and financing of GHG abatement and mitigation systems.
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