|
|
| Fig. 1: Breakdown of >USD 400 billion climate and energy-related provisions - U.S. Congressional Budget Office estimates. [3,7] (Image credit: S. Sahel-Schackis) |
The Inflation Reduction Act of 2022 (IRA) is a pivotal piece of United States federal legislation aimed at mitigating inflation through measures such as reducing the federal government budget deficit, lowering drug prices, and fostering domestic energy production with a focus on clean energy. Enacted by the 117th United States Congress, President Joe Biden signed it into law on August 16, 2022. [1]
This comprehensive legislation targets various programs to promote clean energy and carbon management, stimulate electrification and efficiency initiatives, diminish methane emissions, support domestic supply chains, and address environmental justice concerns. [2]
As evaluated by the nonpartisan Congressional Budget Office (CBO) and Joint Committee on Taxation (JCT), the law is expected to generate USD 739 billion through tax reform and prescription drug reform to reduce prices. [3,4] It also authorizes a total spending of USD 433 billion, with USD 369 billion allocated for energy and climate change initiatives (Table 1). [5] Notably, this represents the largest investment in addressing climate change in the history of the United States. [6]
This paper will delve into the specific climate and energy investments outlined in the Inflation Reduction Act, exploring their anticipated outcomes and impact.
|
||||||||||||||||||||||
| Table 1: Inflation Reduction Act toppling estimates.
[3,4] * = Joint Committee on Taxation estimate ** = Congressional Budget Office estimate |
 |
| Fig. 2: Breakdown of USD 1.7 trillion climate and energy-related provisions - Credit Suisse estimates). [7] (Image credit: S. Sahel-Schackis) |
The IRA encompasses more than 60 provisions dedicated to climate and energy initiatives, amounting to an investment exceeding USD 400 billion over the next decade, as per the most recent figures from the Congressional Budget Office (CBO). The CBO offers a detailed sector-wise breakdown of these climate and energy-related provisions, visually represented in Fig. 1. [3]
According to Credit Suisse, the actual expenditure on climate initiatives could surpass the reported figures due to three key factors. Firstly, approximately two-thirds of the baseline spending is allocated to provisions without capped federal credit or incentives. Secondly, the infusion of public spending is anticipated to catalyze private sector investments. Lastly, the provision of subsidized lending through the Department of Energy's loan program and the Greenhouse Gas Reduction Fund is expected to amplify green financing. [7]
In fact, Credit Suisse's assessment places the total federal spending at double the headline figure, surpassing USD 800 billion. This projection results in the total public and private spending mobilized by the IRA reaching nearly USD 1.7 trillion over the next decade. Within this substantial investment, the power sector claims the largest share (approximately USD 580 billion), while manufacturing ascends to the second position (around USD 520 billion), as depicted in Fig. 2. [7]
The surge in clean energy manufacturing is well underway, particularly in the Southern United States. In this region, numerous automakers, battery manufacturers, and solar companies are actively establishing factories to capitalize on the tax breaks offered by the legislation. [8]
 |
| Fig. 3: Estimates of US greenhouse gas emissions under the IRA. (Image credit: S. Sahel-Schackis, following Bistline et al. [9]) |
To assess the impact on emissions and energy systems, various studies comparing IRA scenarios to counterfactual reference scenarios without IRA provisions have been examined. These scenarios focus on central estimates of climate and energy provisions, which, it's important to note, are not harmonized across models.
A Science study estimates that IRA-induced reductions in economy-wide emissions range from 33% to 40% below 2005 levels in 2030, with an average of 37% (see Fig. 3). [9] This marks a significant reduction compared to the reference scenario without IRA, which anticipates emissions 25% to 31% below 2005 levels, averaging 28%. By 2035, IRA-driven reductions reach 43% to 48%, compared to 27% to 35% in the reference. Notably, IRA plays a pivotal role in narrowing the implementation gap for achieving the US 2030 target, reducing the emissions gap from 1.0 to 1.6 Gt-CO2e/year without IRA to 0.5 to 1.1 Gt-CO2e/year with IRA.
An Energy Innovation study predicts a 25 percent reduction in US emissions compared to 2005 levels by 2030 under a business-as-usual scenario, representing the lower limit from the prior study. The inclusion of the IRA could bridge 49% to 71% of the emissions gap between the reference and the nationally determined commitments (NDCs) under the Paris Agreement in 2030, as detailed in Table 2. This implies that the impact of the IRA may be even more substantial. Notably, despite criticism directed at the legislation's oil and gas provisions, the study suggests that for every ton of emissions generated by oil and gas provisions, a minimum of 28 tons of emissions are offset by other provisions. [10]
|
|||||||||||||||
| Table 2: GHG emissions reductions estimates. [10] |
Emissions reductions exhibit variability among sectors, prompting a closer examination of the sectors that achieve the most substantial reductions. The Department of Energy (DOE) provides estimates of emissions reductions per sector in 2030 resulting from the IRA, as depicted in Fig. 4. Now, let's delve into what various studies reveal on this matter.
 |
| Fig. 4: DOE estimates of US GHG emissions reductions by sectors in 2030 from the IRA (Mt-CO2e/year). [11] (Courtesy of the DOE) |
The Energy Innovation study illustrates sectoral GHG emissions and reductions by scenario in 2030, as depicted in Fig. 5. As highlighted in the figure, emissions reductions are most concentrated in the power sector, characterized by a decline of 44-72%, with smaller contributions from other sectors. Reductions in the transportation and building sectors are limited due to the nature of incentives, funding programs, and the stock turnover dynamics within those sectors. Even with growth in the sales share of clean technology, significant emissions reductions take years to accrue. In all scenarios, the industry emerges as the largest emitting sector by 2030. [10]
The studies align with the DOE's prediction that the power sector will experience the most significant GHG emissions abatement. [9,10,12] According to the Science study, a projected decline in power emissions of 38% to 80% by 2030, with an average reduction of 64%, highlights the sector's pivotal role. The legislative measures aimed at power sector decarbonization set ambitious targets, striving for emissions in 2030 to be 47% to 83% below 2005 levels, though falling short of achieving entirely carbon pollution-free electricity by 2035. [9]
 |
| Fig. 5: Estimates of US GHG emissions reductions by sectors in 2030 from the IRA. (Image credit: S. Sahel-Schackis, following Mahajan et al. [10]) |
The National Renewable Energy Laboratory (NREL), a national laboratory of the US DOE, compares the reference scenario with the IRA-BIL scenario including key IRA and BIL provisions. The IRA-BIL scenarios show a substantial emissions reduction due to a rapid surge in clean energy generation. In the IRA-BIL Mid case, by 2030, power sector emissions drop to 390 Mt-CO2e/year, marking an 84% reduction from the 2005 level. [12]
The IRA and BIL provisions drive significant increases in wind and solar deployment from 2023 to 2030. In the IRA- BIL Mid case, cumulative deployment totals 220 GW for wind (150-320 GW) and over 360 GW of solar (150-430 GW), with average annual deployment rates of 45 GW for solar and 27 GW for wind (Fig. 6). Additionally, battery storage sees substantial deployment, ranging from 40 GW to 100 GW across sensitivities, and approximately 40 GW of existing fossil capacity is retrofitted with carbon capture storage (CCS) (5-55 GW). The deployment of fossil-CCS underscores the substantial value of incentives for CCS projects, with potential implications for significant CCS deployment. Furthermore, all IRA-BIL cases include 1.4 GW of nuclear demonstration projects. [7]
Under the IRA-BIL Constrained case, deployment barriers have a pronounced impact on capacity and generation evolution. New wind deployment decreases from 220 GW in the IRA-BIL Mid case to 150 GW in the Constrained case, reflecting a 32% reduction by 2030. Similarly, new fossil-CCS builds decline from around 40 GW in the Mid case to 5 GW in the Constrained case. These results highlight the significant impact of barriers or limitations on wind and CCS deployment, with reductions offset by increased generation from natural gas, coal, and solar technologies. Notably, solar deployment increases despite assumed reductions in available land for solar development. [7]
The rapid deployment of wind, solar, and fossil-CCS under the IRA-BIL scenarios brings about substantial shifts in the generation mix. In the Mid IRA-BIL scenario, wind and solar technologies collectively contribute 50% to total generation in 2030, while unabated fossil falls below 20%. The total share of clean generation climbs to over 81%, a significant increase from approximately 41% in 2022. [7]
 |
| Fig. 6: DOE estimates of average annual deployment (2023-2030) by technology category and scenario. [11] (Courtesy of the DOE) |
In the IRA-BIL sensitivities range, 2030 emissions vary from 230 Mt-CO2e/year (91% below 2005) to 660 Mt-CO2e/year (72% below 2005). These variations stem primarily from cost, performance assumptions, and deployment constraints. Lower costs and enhanced performance of clean technologies drive increased deployment and greater emissions reductions, while constraints lead to reduced wind and fossil-CCS deployment, resulting in higher emissions. Natural gas price fluctuations have a less pronounced impact, often offset by compensating changes in coal capacity. Bonus crediting and tax credit monetization variations also affect emissions, but their impact is comparatively small next to technology cost, performance, and deployment constraints. [12]
The power sector generation comparison in Fig. 6 highlights that IRA tax credits accelerate clean electricity deployment, yet significant additions of solar and wind persist in the counterfactual scenario without IRA. Rapid cost declines in solar power, wind power, and battery storage over the past decade, coupled with expected future cost reductions, suggest that a portion of power sector tax credits serves as inframarginal transfers to firms adopting these technologies even without IRA, akin to clean vehicle credits. [13]
Although the IRA accelerates decarbonization, including beyond 2030, existing models do not project the achievement of the 2030 United States climate target through this legislation alone. The analysis underscores that the IRA's most significant effects are likely to manifest in the power sector, where its incentives reinforce existing trends and contribute to lowering decarbonization costs.
It's crucial to acknowledge the complexity of modeling IRA impacts, given their dependence on factors such as clean energy adoption, producer choices, household purchases, and policy-makers' actions. Numerous uncertainties persist; for instance, the reduction in clean energy costs may fuel greater ambitions among federal agencies, state and local governments, and companies, with the realization of these goals influenced by intricate drivers. [9]
As explicitly noted by the DOE itself, to fully realize the benefits of the IRA, federal agencies must act decisively to implement these laws. DOE, like other federal agencies, state governments, local governments, tribes, civil society, and the private sector all have important roles to play in the collective effort to modernize the United States energy system. An all-of-society approach will help maximize the positive returns from these historic programs and investments. [11]
© Samuel Sahel-Schackis. The author warrants that the work is the author's own and that Stanford University provided no input other than typesetting and referencing guidelines. The author grants permission to copy, distribute and display this work in unaltered form, with attribution to the author, for noncommercial purposes only. All other rights, including commercial rights, are reserved to the author.
[1] "Building a Clean Energy Economy: A Guidbook to the Inflation Reduction Act's Investments in Clean Energy and Climate Action", The White House, January 2023.
[2] B. Dennis, "As Congress Funds High-Tech Climate Solutions, It Also Bets on a Low-Tech One: Nature", Washington Post, 14 August 22.
[3] "Estimated Budgetary Effects of Public Law 117-169, to Provide for Reconcliation Pursuant to Title II of S. Con. Res. 14", U.S. Congressional Budget Office, September 2022.
[4] W. McBride et al., "Inflation Reduction Act One Year After Enactment", Tax Foundation, August 2023.
[5] B. Everett and M. Levine, "Manchin's Latest Shocker: A $700B Deal", Politico, 27 July 22.
[6] E. Nilsen, "Clean Energy Package Would Be Biggest Legislative Climate Investment in US History", CNN, 28 Jul 22.
[7] B. Jiang et al., "US Inflation Reduction Act - A Tipping Point in Climate Action," Credit Suisse, 30 November 2022.
[8] J. Ewing, C. Krauss and L. Friedman, "The Clean Energy Future Is a Battle for Hearts and Minds", New York Times, 17 Aug 23.
[9] J. Bistline et al., "Emissions and Energy Impacts of the Inflation Reduction Act," Science 380, 1324 (2023).
[10] M. Mahajan et al., "Updated Inflation Reduction Act Modeling Using the Energy Policy Simulator," Energy Innovation, August 2022.
[11] "The Inflation Reduction Act Drives Significant Emissions Reductions and Positions America to Reach Our Climate Goals," U.S. Department of Energy, August 2022.
[12] D. C. Steinberg et al., "Evaluating Impacts of the Inflation Reduction Act and Bipartisan Infrastructure Law on the U.S. Power System," United States National Renewable Energy Laboratory, NREL/TP-6A20-85242, March 2023.
[13] J. Bistline, N. Mehrotra, and C. Wolfram, "Economic Implications of the Climate Provisions of the Inflation Reduction," National Bureau of Economic Research, Working Paper 31267, May 2023.