President Joe Biden signed the Inflation Reduction Act (IRA), the country’s first major climate law and largest-ever investment in climate action, into law this week. The IRA aims to spur a massive transition in the American economy from reliance on fossil fuels to renewable energy through $369 billion in tax incentives and other spending over the next decade.

The incentives, which prioritize American workers and products, could cut U.S. emissions by 40% by 2030, putting the country’s emissions reduction goals within reach. Packaged alongside tax and healthcare reform, the climate policies in the IRA will impact countless businesses, industries, and individuals in the coming years.

Here are four key things to know:

The IRA includes many tax incentives, but no carbon tax. 

Rather than taxing carbon emissions, an idea that has historically failed to gain political traction in Congress, the IRA incentivizes industries and consumers with a variety of tax credits. These incentives include $60 billion devoted to renewable energy infrastructure such as the production of solar panels, wind turbines, and batteries. Individuals will be eligible for a $7,500 credit for purchasing a new electric vehicle, $4,000 for purchasing a used EV, and other incentives for making their homes more energy efficient.

Many experts, including from the Intergovernmental Panel on Climate Change, consider a carbon tax to be a “crucial tool in any cost-effective climate change mitigation strategy.” While the IRA does not include a carbon tax, it does include a small, short-term fee for excess methane emissions – marking the country’s first-ever direct charge on greenhouse gas emissions! The fee on methane, a potent greenhouse gas that the United Nation estimates is responsible for about 30% of global warming, starts at $900 per metric ton and increases to $1,500 after two years.

(Sources: The New York Times, Investopedia, Congressional Research Service)

The incentives are long-term, stackable, and support the American economy.

Many of the tax credits included in the IRA will last 10 years, offering a degree of predictability to clean energy markets over the next decade. Further magnifying their impact, the credits are also able to be stacked in certain situations, including:

• when American-made materials are used
• in census tracts with retired coal infrastructure
• in census tracts with high employment in the coal, oil, or natural gas industries
• for wind and solar projects in low-income communities 

The law also puts large incentives for training and paying fair wages to American workers. Both the Investment Tax Credit (ITC) and Production Tax Credit (PTC) significantly incentivize both the use of apprenticeship programs and prevailing wages for construction and operations jobs. 

Another uniquely impactful feature of the tax credits is their eligibility for direct cash subsidies, also called “direct pay.” Studies by the Bipartisan Policy Center show direct pay incentivizes up to twice as much clean energy development compared to a traditional tax credit, in which some federal dollars are diverted to financial markets.

(Sources: UtilityDive, Bipartisan Policy Center)

The IRA is a major opportunity to reduce greenhouse gas emissions, including in disadvantaged communities.

Experts estimate the IRA could cut U.S. greenhouse gas emissions by roughly 40% (from 2005 levels) by 2030 — significant progress toward Biden’s pledge to cut emissions in half by 2030. A recent report by Rhodium Group, an independent research firm that tracks climate targets, reads: “If Congress passes this package, additional action from executive agencies and subnational actors can put the US’s target of cutting emissions in half by 2030 within reach.”

Up to $60 billion will boost environmental justice initiatives in disadvantaged communities that are disproportionately hurt by climate change. These, in part, include:

• $27 billion for the creation of a Greenhouse Gas Reduction Fund providing technology-neutral funding for clean energy projects, $8 billion of which is specifically earmarked for low-income and disadvantaged communities
• $5 billion to help states, tribes, and municipalities develop and implement emissions reduction plans
• $1 billion to help public and private sectors transition to zero-emission buses, garbage trucks, and other other heavy-duty vehicles

(Sources: Princeton University’s REPEAT Project, NBC News, Rhodium Group)

The IRA is a historic first step, but much more is needed to protect our planet.

Scientists agree that all major economies must sharply cut carbon dioxide emissions in order to limit global warming to 1.5 degrees Celsius, the threshold to significantly more dire conditions on our planet. 

William Nordhaus, the economist who first devised the carbon tax in the 1970s, told the New York Times that the IRA is only the starting point for climate policy, not the finish line. “A journey does begin with a single step,” Nordhaus told the Times. “But if this is the last step, then we are in for a fiery future.”

(Source: The New York Times)

(Photo by Jorge Alcala on Unsplash)