08/12/2022 - Federal Policy Analysis - Inflation Reduction Act

The Inflation Reduction Act’s Implications for Biden’s Climate and Environmental Justice Priorities

The Inflation Reduction Act (IRA), passed by Congress on August 12, 2022, creates important incentives for clean energy and equity-centered environmental investments. The bill is a step toward greater federal action on both climate change and addressing some of the administration’s commitments on environmental justice (EJ). The bill, which moved through the Senate as a reconciliation package containing tax and budget provisions, includes key clean energy and EJ-related investments.

To comply with the requirements of the reconciliation process[1] that there be budgetary effects, the bill is designed to spur investment in clean energy through tax incentives, grants, and other funding mechanisms. The bill also contains compromises to get to the 50 votes needed in the Senate, including language to enable oil and gas lease sale auctions. Its sponsors estimate that the bill will drive investment of nearly $369 billion in clean energy and climate priorities, which in turn is projected to reduce greenhouse gas (GHG) emissions by about 40 percent below 2005 levels by 2030 (relative to 30 percent under current policy). Several analysts provide excellent summaries of  how the bill will achieve these reductions and describe the opportunities for businesses, states, communities, and households to benefit from these programs, including the Bipartisan Policy Center, the Rhodium Group, and the REPEAT Project.

In this blog, we focus on the IRA’s impact on the Biden administration’s regulatory priorities for addressing climate change and how it will support the administration’s EJ goals. Assuming the IRA enables the US to reduce emissions 40 percent by 2030, the Biden administration’s Paris commitment to reduce emissions even further to 50 percent by 2030 is within reach.

As we discuss below, the bill’s investments will change the baseline for rulemakings across several agencies as it brings down the cost of clean technologies so agencies can design rules that are both ambitious and legally durable.

The IRA’s investments underscore the need for regulatory reform to facilitate transitions to clean energy across numerous industries. For example, the acceleration of wind and solar development in the bill underscores the importance of FERC’s ongoing efforts to reform transmission planning and generator interconnection processes. This year, FERC has proposed rules seeking to address each of these barriers to clean energy deployment. The IRA’s incentives will reinforce existing industry trends that favor clean energy and highlight the urgency of FERC’s reforms.

The IRA also directs several billion dollars to support states’ climate efforts, including for example, funds for building electrification, energy efficiency initiatives, port electrification, heavy-duty electric vehicles and charging infrastructure, and states’ climate plans and GHG reduction programs. These programs are essential to accelerate investments in clean energy across the country and help to establish the basis for more ambitious federal regulation.

Many of these programs also include explicit requirements to invest directly or indirectly in communities with EJ concerns, marking the first time that states and non-federal entities will be required to comply with the administration’s EJ priorities.

Agencies’ Role in Implementing the IRA’s Environmental Justice (EJ) Provisions

The IRA will direct billions of dollars to communities based on various EJ criteria, including income, energy burden, and demographics. These provisions represent the first time that aspects of the Biden administration’s EJ agenda are expressly included in a statute. Until now, agencies have relied on their existing authorities to implement this agenda. Now, under several provisions of the IRA, states and other recipients of IRA EJ funding must direct benefits to “disadvantaged and low-income” communities. There are few legal levers advocates can pull to hold states and local governments accountable. Rather, the bill shifts the burden onto funding recipients to justify spending that conflicts with the IRA’s EJ requirements.

Although the IRA provides some guidance on how EJ funds should be spent, federal agencies and states have a significant role in deciding how programs are designed, implemented, and monitored. There are several factors that will determine how benefits reach communities with EJ concerns, including:

  • How beneficiaries are identified and defined (e.g., “disadvantaged communities”)
  • Who is eligible to apply (e.g., state and local governments versus community-based nonprofit organizations)
  • If applicants must pay before accessing benefits (e.g., tax credits or post-point of sale rebate programs) or pay a non-zero cost share
  • If grants are distributed using competitive processes, and who defines the criteria for selecting successful applicants

For a comprehensive overview of the IRA’s EJ provisions and these criteria, see our table here. This table summarizes who can apply for those benefits, if and how key EJ terms are defined, and other important criteria. In a separate blog, we explain the concerns several organizations are raising about the IRA and discuss important considerations for federal agencies in implementing the bill’s EJ provisions.

The IRA’s Impact on Upcoming Federal Greenhouse Gas Regulations

Power Sector Greenhouse Gas Rules

The IRA may help bolster EPA’s future rules limiting GHG emissions from power plants under Clean Air Act Section 111. In these regulations, EPA must select the Best System of Emission Reduction (BSER) that is adequately demonstrated, taking into consideration cost as well as environmental health impacts and energy requirements. The recent Supreme Court decision in West Virginia v. EPA rejected EPA’s use of generation shifting in defining BSER.[2] However, EPA can consider other options to reduce emissions as part of determining the standard. These can include efficiency improvements as well as carbon capture and co-firing with lower carbon fuels, provided those technologies meet the statutory criteria.

The IRA shifts a key consideration for EPA as it develops these rules—the costs for power plants to comply with the standard based on those technologies. For example, the IRA extends and expands tax incentives for carbon capture and sequestration (CCS)[3] and use of hydrogen as a fuel[4], which will lower the costs for plants building those systems. While EPA will still need to evaluate the other statutory factors for both technologies, their reduced costs make it more feasible for EPA to define BSER reflecting those technology opportunities.

Additionally, the IRA is projected to drive more renewable developments and retain existing nuclear plants, both of which will help keep the power sector’s emissions on a downward trend. Any EPA regulation under Section 111 will reflect that transition as part of the baseline—the analysis of what will occur but for the regulation. The Court in West Virginia criticized the Clean Power Plan as “forc[ing] a nationwide transition away from the use of coal to generate electricity.” The electric sector, however, demonstrated that it was transforming independent of regulation by achieving the Clean Power Plan targets more than a decade in advance. Now, the IRA adds additional momentum. EPA rulemakings can reflect in the baseline new investments companies are making, and will make because of the IRA, and the regulations can complement those emissions reductions through pollution control measures.

Oil and Natural Gas Methane Rules

The IRA amplifies EPA’s regulations under Section 111 for reducing methane emissions from oil and gas facilities through several provisions. For example, the IRA establishes a backstop methane charge[5], which is the first federal carbon price on a GHG, unless and until stringent regulations are in effect. The charge would apply to operations that emit over 25,000 metric tons of CO2 equivalent per year and that exceed an industry-specific threshold intended to drive the use of effective technologies to limit emissions. The IRA also directs EPA to revise its emission reporting program under Subpart W of the Clean Air Act to ensure the emissions data collected, which EPA will use to assess the methane charge, are based on “empirical data.”

The IRA’s references to EPA’s regulatory requirements is likely to create several incentives:

  • oil and gas companies will comply with EPA’s regulations and want to ensure the final rule achieves emission reductions consistent with, or greater than, EPA’s November proposal;
  • because the charge starts in 2024, oil and gas companies will want their states to submit plans that EPA approves under section 111(d) as soon as possible; and
  • industry may oppose any future rollback of the final rule to avoid having the charge apply.

The express language in the IRA also gives EPA a particularly conclusive defense to any Major Questions Doctrine legal challenge as the bill includes a clear direction by Congress for EPA to finalize the rule reducing methane emissions from the sectors.

The IRA will also drive investment in advanced technologies that measure and reduce methane emissions. For example, the Act allocates $850 million towards methane mitigation and monitoring; $700 million toward reducing emissions from marginal wells; $20 million toward monitoring methane emissions; and $117.5 million in grants for fenceline monitoring. EPA’s initial proposal indicated EPA is working to design a rule that enables owners and operators to deploy advanced technologies that can lead to greater emission reductions. As EPA works to finalize its regulations, the rule can be designed to build upon the technology and data improvements that are likely to result from these investments.

Clean Car Rules

The IRA’s clean vehicles provisions provide additional support for the auto industry’s transition to electrification and complement the administration’s clean car rules. A growing number of automakers have committed to the transition to electric vehicles and supported the recent clean car rules, demonstrating that the transition to electric fleets is underway. While lawmakers intend for the bill to support domestic production and require more strategic mineral sourcing this, along with price caps, is causing some concern among automakers. However, by providing tax credits for new, previously owned, and qualified commercial clean vehicles[6], the bill has the potential to significantly lower cost and bolster demand for electric vehicles over time, which will become the new baseline as EPA evaluates its regulatory options for standards.

The clean car rules finalized by EPA[7] and the National Highway Traffic Safety Administration (NHTSA)[8] set GHG and fuel economy standards that support the auto industry’s transition to lower emitting and more fuel efficient vehicles. To the extent manufacturers can meet the domestic production requirements, the IRA will complement the agencies’ efforts by reinforcing industry dynamics and lowering compliance costs. And, as EPA works to propose more stringent greenhouse gas standards for MY 2027 and beyond, the IRA provisions can further reduce those costs.

[1] For more detail about the reconciliation process and the Byrd rule, which restricts “extraneous matter” unrelated to the deficit reduction goals of reconciliation, see Congressional Research Service, The Budget Reconciliation Process: The Senate’s “Byrd Rule” (May 2021), https://crsreports.congress.gov/product/pdf/RL/RL30862.

[2] You can learn more about this in our two-part podcast: in Part 1 we break down the decision and in Part 2 we discuss its implications for regulating the power sector, including BSER.

[3] The Act extends 45Q tax credit for CCS to include CCS facilities on power plants that begin construction before 2033, capture at least 18,750 metric tons of qualified carbon (reduced from 25,000 metric tons), and have a capture design capacity of at least 75% of the baseline carbon production. § 13104.

[4] The IRA introduces the 45V tax credit for clean hydrogen production based on kilograms of hydrogen produced, with varying rates based on the lifecycle GHG emissions of the hydrogen production process. § 13204. The ten-year 45V credit is available to facilities that begin construction before 2033 and cannot be used with the 45Q credit, to avoid double counting production of “blue” hydrogen.

[5] The charge starts at $900 per ton in 2024 and reaching $1,500 per ton in 2026 and each year thereafter.

[6] The IRA contains tax credits of up to $7,500 for new electric vehicles and up to $4,000 for pre-owned vehicles as well as credits for qualified commercial vehicles through December 31, 2032. The bill sets certain limitations for designed to spur domestic vehicle production and direct benefits away from high-income households.

[7] In late 2021 and 2022, EPA issued GHG emissions standards for Model Years (MY) 2023 through 2026 and restored California’s waiver.

[8] NHTSA released fuel economy standards for MYs 2024 and 2025.