The Inflation Reduction Act and Other Climate Measures

By Jeffrey Karp, Senior Counsel, and Edward Mahaffey, Legal Research and Writing Attorney

The Biden administration has been announcing a new series of actions to address climate change, relying on executive power due to insufficient support in Congress. On July 27, 2022, however, Senators Charles Schumer (D-NY) and Joe Manchin (D-WV) unexpectedly agreed on a bill, the Inflation Reduction Act (“Act”), which would include many provisions intended to reduce greenhouse gas emissions, alongside other policies such as deficit reduction and prescription drug price negotiation. The Senate passed the bill on August 7, 2022, followed by the House on August 12.

Proposed Legislation

According to a one-page summary by Senate Democrats, the Act includes “$369 billion in Energy Security and Climate Change programs over the next ten years,” which will “reduce carbon emissions by roughly 40 percent by 2030.”[1]

The bill includes tax credits for electric vehicles ($7,500 for a buyer of a new electric vehicle and $4,000 for a low-to-middle-income buyer of a used one) and for manufacturing activity important to renewable energy development.[2] It would also create a Methane Emissions Reduction Program, penalizing oil and gas companies that fail to reduce methane emissions but rewarding those that do,[3] and a Greenhouse Gas Reduction Fund that would provide $20 billion to green banks to invest in clean energy infrastructure and technologies.[4]

The bill would provide billions in tax credits over the next ten years for new sources of all forms of zero-carbon-producing energy, whether wind, solar, geothermal, or nuclear, and for battery storage. It would also expand credits for carbon capture and sequestration and tax breaks for existing nuclear plants.[5] Tax credits and rebates for consumers, totaling $9 billion, also will be available to promote greater energy efficiency in homes.[6]

At the same time, other provisions of the bill have been criticized as creating obstacles to the clean energy transition. Most controversially, the bill would prevent the Department of the Interior from issuing rights of way for wind and solar development on federal land until it first recommences the oil and gas lease program. This legislative trade-off is intended to hasten the end of the effective pause on oil and gas leasing on federal land since January 2021.[7]

On the other hand, the bill would reinstate the long-expired Hazardous Substance Superfund Financing Rate on crude oil and imported petroleum products, at the rate of 16.4 cents per barrel.[8] It would also increase gas and oil royalty rates to be received by the federal government.[9]

Implications

The final impact of all of these provisions on greenhouse gas emissions is difficult to predict with certainty, as even Senate Democrats’ projected emissions reductions of 40 percent from 2005 levels by 2030 fall short of the 50 percent reductions sought by President Biden.[10] Independent estimates nevertheless support the view that the Inflation Reduction Act will lead to substantial reductions in emissions. The Rhodium Group projected that the Act’s “policies, including the new leasing provisions, reduce net GHG emissions by 31% to 44% below 2005 levels in 2030—with a central estimate of 40% below 2005 levels—compared to 24% to 35% under current policy.”[11] Princeton University’s REPEAT project estimates a 42% reduction under the Inflation Reduction Act compared to 26% under current policy.[12]

In general, climate activists see the bill as an important first step, with the Natural Resources Defense Council calling it “the most significant action the U.S. has ever taken to combat climate change.”[13] There are, however, some environmental groups that are more critical of the bill, seeing its concessions to fossil fuel interests as a source of environmental injustice.[14]

On the individual household level, the incentives it provides to install solar and other clean-energy and energy-efficiency upgrades, such as heat pumps and electric cooling, is a major consequence of the bill.[15] On the corporate level, renewable energy companies are major beneficiaries of the bill, which they generally view positively for its tax credits and other funding, despite concerns with the federal land trade-off; the Solar Energy Industries Association, for example, proclaimed that “solar and storage companies are one step closer to having the business certainty they need to make the long-term investments that decarbonize the electric grid and create millions of new career opportunities in cities and towns across the country.”[16]

Actions Announced

Prior to the deal between Senators Schumer and Manchin, the Biden administration had begun several climate-related actions of its own. These included funding infrastructure resilient to extreme weather via the Federal Emergency Management Agency (FEMA), expanding offshore wind development to the Gulf of Mexico via the Department of the Interior, and changing the Low Income Home Energy Assistance Program to allow funding for cooling equipment.[17] As the effects of these actions were relatively small compared to the Administration's ambitious climate goals viewed as necessary to curb climate change, many activists sought more actions from the Executive Branch, including a formal declaration of a “climate emergency.”[18] The passage of the Inflation Reduction Act may reduce pressure to make such a declaration, but further climate actions, such as promulgation of the SEC’s climate risk disclosure rule, are expected shortly.

[1] https://www.democrats.senate.gov/imo/media/doc/inflation_reduction_act_one_page_summary.pdf.

[2] Inflation Reduction Act of 2022 (July 27, 2022 draft), available at https://www.democrats.senate.gov/imo/media/doc/inflation_reduction_act_of_2022.pdf, §§ 13101, 13401-04, and 13502.

[3] § 60113.

[4] § 60103; https://www.washingtonpost.com/politics/2022/07/28/what-what-out-manchin-surprise-climate-deal/.

[5] §§ 13501-02 and 13701-05; https://www.nytimes.com/2022/07/28/climate/climate-change-deal-manchin.html.

[6] §§ 13302-04.

[7] § 50264; https://www.bloomberglaw.com/bloomberglawnews/exp/eyJjdHh0IjoiTkVWRSIsImlkIjoiMDAwMDAxODItNDRkZS1kNmRmLWE3Y2UtZjRmZjZiMDQwMDAxIiwic2lnIjoiWEVFNm5NR2tNbGxoNWVmL25WYStEQnIrL1N3PSIsInRpbWUiOiIxNjU5MDMxNTU2IiwidXVpZCI6IkpkdHU2TmxFYkUwTjUwdlJSbWpKbVE9PW5VT2J4ekxVQnZHSHhxRXlvOW9jU0E9PSIsInYiOiIxIn0.

[8] § 13601.

[9] § 50261-63.

[10] https://newrepublic.com/article/167254/inflation-reduction-act-climate-emissions.

[11] https://rhg.com/research/inflation-reduction-act/.

[12] https://repeatproject.org/docs/REPEAT_IRA_Prelminary_Report_2022-08-04.pdf.