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What the Inflation Reduction Act Means for Biden’s Climate Push

The US has reclaimed global climate eminence with the passage of this law.

Words: Amena H. Saiyid
Pictures: Mārtiņš Zemlickis
Date:

The United States reclaimed its climate leadership role from the Europeans this week following the enactment of the Inflation Reduction Act, which includes an unprecedented $369 billion in a smorgasbord of tax credits, incentives, and fees to boost clean energy programs and reduce greenhouse gases over the next decade.

With the signature Inflation Reduction Act under his belt, President Joe Biden will have delivered on his promise to move the United States closer toward a net-zero carbon economy — an economy where all sectors reduce their greenhouse gas emissions to near-zero levels while offsetting any residual emissions through planting trees or capture and utilization of carbon dioxide, a key greenhouse gas, released to the atmosphere. The key task before him now is the implementation of the act at home and persuading the rest of the world to follow a similar trajectory.

“This bill is the biggest step forward on climate ever — ever — and it’s going to allow — it’s going to allow us to boldly take additional steps toward meeting all of my climate goals — the ones we set out when we ran,” Biden declared on Aug. 16, just before signing the bill into law.

Flanked by House and Senate Democrat leaders who secured the bill’s passage through Congress over the united opposition of Republicans, Biden added that the Inflation Reduction Act will “take the most aggressive action ever — ever, ever, ever — in confronting the climate crisis and strengthening our economic — our energy security.”

Together with the 2021 Infrastructure and Investment Jobs Act, the Inflation Reduction Act pumps $500 billion provisionally in spending into clean energy and infrastructure programs, exceeding the roughly €225 billion ($254.30 billion) in climate investments contained in the Next Generation EU package, an €806.9 billion stimulus recovery package for the economic bloc, according to S&P Global Capital and Financial Markets Executive Director Peter Gardett who advises financial institutions on their climate and cleantech solutions. S&P Global is a leading provider of transparent and independent ratings, benchmarks, analytics, and data to the capital and commodity markets worldwide including the impacts of climate change. Following the invasion of Ukraine, the EU has doubled down on its efforts to invest in clean and green sources of energy to wean itself off Russian natural gas supplies through its REPower EU Plan.

Gardett noted in an interview that the Inflation Reduction Act spending also exceeds the direct Chinese government spending, which is estimated at $200 billion to date.

THE QUEST FOR NET-ZERO

Biden has restored US credibility, which was in question after the setbacks his initial efforts to fight the climate crisis received, said Zach Friedman, federal policy director of Ceres, a nonprofit sustainable investor network. Securing passage of the Inflation Reduction Act shows that the United States is clearly back in a major way in the fight against the climate crisis and in the race for the clean energy market for the future, he added.

The Inflation Reduction Act is unquestionably “a game changer for US decarbonization,” New York City-based think tank Rhodium Group wrote in an Aug.12 analysis. It said the legislation’s package of programs and incentives “as a whole drives US net GHG emissions down to 32-42% below 2005 levels in 2030, compared to 24-35% without it.”

Together with the 2021 Infrastructure and Investment Jobs Act, the Inflation Reduction Act pumps $500 billion provisionally in spending into clean energy and infrastructure programs.

In April, Biden set an economy-wide greenhouse gas reduction goal of 50-52% that included a net-zero goal for the power sector. By mid-century, Biden is aspiring for a net-zero economy. The Rhodium Group analysis shows carbon removal by an additional 439-660 million metric tons in 2030 beyond what is projected without the IRA. “On the high end, that’s equal to zeroing out all current emissions from California and Florida combined,” it added.

While both pieces of legislation get the United States on the pathway to net-zero, analysts agree that more needs to be done. S&P Global Commodity Insights Chief Energy Strategist Atul Arya said “the IRA is a down payment, and a good start for the US to start making emissions reductions by 2030.” Beyond that period, he added, the tasks will get harder.

THE SETBACKS

Since unveiling his climate policy upon taking office in January 2021, Biden’s resolve to place the United States on a net-zero path has been tested numerous times. Most notably, Biden suffered a setback when Senator Joe Manchin (D-W. Va.) single-handedly blocked his signature Build Back Better Act in the Senate. Then in June, the US Supreme Court ruled that the executive branch could not mandate fuel switching from dirty fossil fuels to cleaner burning renewables under the Clean Air Act, the nation’s air pollution law.

Despite the setback from the Supreme Court, the Rhodium Group said the power sector will see the most reductions owing to the clean energy credits in the bill. These will reinvigorate renewable installations, drive up retrofits of fossil fuel-fired plants with carbon capture, and accelerate retirements of existing fossil fuel plants with cleaner ones.

Naysayers proclaimed an end to Biden’s climate ambitions, but Biden didn’t give up despite these obstacles. Instead, Biden and the Democrats “persisted,” Senate Majority Leader Chuck Schumer, of New York, noted at the signing ceremony Tuesday.

WHAT THE BILL DOES

In an Aug. 1 tweet, Gardett said the IRA and the Jobs Act aim at a “carefully engineered collection of demand and supply-side aims in both bills leverages the power of the US Federal Reserve’s balance sheet to accelerate the speed and expand the scale of private investment, a distinction from the approach taken by the geopolitical rivals and allies alike.

According to law firm Holland & Knight, the Inflation Reduction Act relies heavily on the tax code to advance the deployment of clean energy technologies and combat climate change. The bill’s tax credits, once implemented, will restore, modify, and expand several investment and production tax credits for renewables and other incentives, while also creating new technology-neutral ones, such as those for clean fuels and clean technology that will replace the individual credits in place for renewables and individual clean fuels, such as sustainable aviation fuel, biofuels, and clean hydrogen.

The challenge for Biden at home is to get the Internal Revenue Service on board to make changes to the tax code so that clean energy manufacturers and investors can take advantage of them. The extension of the production tax credits for wind and solar will not require any changes, but the creation of new technology neutral, manufacturing, and clean fuel-neutral tax credits will require work for the agency. The IRS also will have to change its existing regulations to enable customers to receive direct payments for purchasing electric vehicles instead of waiting the full year for it to materialize in their tax refunds.

The bill is not just reliant on tax credits to push reductions. For instance, the clean energy and climate mandates in the IRA consist of a series of mandates for government agencies to do their part to reduce air and climate pollution, Friedman said.

Under this newly enacted law, the US Environmental Protection Agency has been charged with imposing a fee on methane leaks from methane fee, a provision that was part of the House-adopted Build Back Better Act in 2021that a year later morphed into the Inflation Reduction Act. Likewise, the US Department of Interior gets the authority to impose a royalty for methane extraction on public lands.

LOOKING TOWARD COP27

On a global level, Biden’s challenge at the upcoming United Nations 27th Conference of the Parties summit on climate change (COP27), hosted this November in Egypt, is to get other countries to take similarly bold steps to decarbonize their economies and wean themselves from fossil fuels.

That may be a tad difficult as the war in Ukraine has heightened anxieties about energy access and supplies, and as countries emerging from the pandemic attempt to shore up their economies. The shortage of natural gas supplies has driven up prices, and the continued shortage of natural gas supplies, has led high greenhouse gas-emitting countries like China and India to ramp up their coal generation to meet power needs.

“China and India together consume double the amount of coal as the rest of the world combined, with China alone accounting for more than half the world’s demand,” the International Energy Agency wrote in its July 2022 Coal Market Update. These two economies, the IEA noted, hold the key to coal demand, and thereby to net-zero goals.

“If you recall, there was very little discussion about energy security at COP26 in Glasgow, but all that changed after February following the invasion of Ukraine,” S&P Global’s Arya said.

G20 countries, which are not part of the Organisation of Economic Development, attending COP27 will be preoccupied with energy security concerns and affordability rather than energy transition. However, these same countries also are dealing with climate-fueled weather extremes, such as drought conditions that are exacerbating food shortages. Pakistan, Egypt, Indonesia, and Nigeria are among those nations that need to focus on shoring up their economies, but they also are on the frontlines of climate-fueled weather impacts, he said.

At COP27, both Arya and Friedman said they believe Biden will need to make a persuasive case for why developing nations should wean themselves off fossil fuels and invest in clean energy, as the US has with this new legislation, otherwise they will find themselves in a tenuous position similar to that of Europe.

Amena H. Saiyid is an award-winning environmental and energy journalist whose articles covering the US government policies relating to air, water, and climate pollution have been published in Bloomberg News and S&P Global.

Correction 8/18/22: This article has been updated to add a link to REPowerEU and adjust the definition of net-zero economy.

Amena H. Saiyid

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