If you follow climate or energy news, you’ve likely been inundated with headlines about the Inflation Reduction Act (IRA), the 700-plus page federal bill that dedicates $369 billion to decarbonize the United States.
This bill has something for everyone in the climate tech world, and much (digital) ink has been spilled parsing out this bill and what it means for different industries and sectors. It is rich in wonkery that will transform the clean energy landscape and trajectory of the U.S.’s emissions curve, while monumentally opening opportunities for corporate energy procurements.
Here are three takeaways to make sense of the signal through the noise.
Clean energy would get cheaper
If passed, the bill would provide incentives for clean energy technologies that, in turn, would catalyze new creative financial engineering and contract models to serve more offtakers.
The primary mechanism IRA uses is generous tax incentives. Namely, it would mean a long-term extension — and renewal back to the full value — of the Investment Tax Credit (ITC) and Production Tax Credit (PTC), two credits that have spurred forward the deployments of solar and wind power that have been set to sunset.
These credits would add long-term certainty to clean energy markets and would expand which technologies could benefit. Starting in 2025, the credits would become technology neutral and apply to all carbon-free electricity generation technologies (today the ITC applies to solar and the PTC applies to wind), Jesse Jenkins of Princeton’s Zero Lab explained on The Catalyst podcast.
This shift would be particularly important for firm, clean energy resources, such as geothermal, nuclear and hydrogen, that need to move down the cost curve in order to be deployed at scale and decarbonize the power sector — the second largest source of emissions in the U.S., after transportation.
There is historical precedent for this, as the tax credits have a documented history of proliferating solar and wind. The ITC has driven 52 percent average annual growth in the solar industry, according to the Solar Energy Industries Association. According to the National Renewable Energy Lab, the on-again, off-again historical policy environment has created uncertainty — and affected deployments. Past PTC expirations have resulted in reduction of year-on-year installations between 73 percent and 93 percent. The IRA’s long-term extension will hopefully address that volatility.
The IRA also aims to address some of the human impacts of the energy transition, an increasingly common guiding principle for corporate energy buyers. For example, the IRA tax credits are tied to prevailing wage standards (to ensure clean energy jobs are good paying jobs) and have preferential treatment for areas most affected by fossil fuel extractions (to incentivize a just transition).
The falling cost of electricity will also spur forward the electrification of industry, buildings and transportation, as cheap electricity will make all of these options more attractive. If you want to see a more detailed breakdown of incentives, Climate Tech VC has an easy-to-read tracker.
This really is a big deal
All of the headlines aren’t for nothing. The IRA is the first federal legislation to get through the U.S. Senate that truly pushes for decarbonization — 34 years after the first senate hearing on climate change.
Robinson Meyer puts this bill in context in The Atlantic, recalling the June day in 1988 when NASA scientist James Hansen first told a Senate committee that global warming wasn’t a hypothesis — it was already underway.
"It is time to stop waffling so much and say that the evidence is pretty strong that the greenhouse effect is here," Hansen said.
Yet in the past three decades, the Senate has failed to do anything comprehensive. The result has been other political bodies acting within their own limited authority. Climate-concerned presidents used executive action; a Supreme Court (one more rooted in reality) ruled the Environmental Protection Agency had the right to regulate carbon emissions; the U.N. designed a global climate accord (known as the Paris Agreement) to account for the Senate’s inability to ratify a binding agreement.
There are still several steps between now and law — but in this exact moment, it seems anything may be possible.
The bill is not perfect
While there is much to be excited about in this bill, it is ultimately borne out of politics — a.k.a. the art of the possible, a.k.a. compromises were made. It is imperfect, with concessions that are concerning to climate activists. Among them:
- The bill only takes us to two-thirds of the way to the U.S.'s stated climate goal for 2030, according to modeling from Princeton’s Zero Lab. The hope is the policy will drive down costs, spurring forward climate solutions beyond the legislation in the U.S. and the rest of the nation;
- The bill offers concessions for fossil fuel projects, requiring the Interior Department to make 2 million acres of our public lands and 60 million acres of offshore waters available for oil and gas leasing each year for a decade, and speeding up approval of pipeline projects. "The concessions in this bill are just another example of the long-running campaign by the fossil fuel industry and investor-owned utilities to continue pumping out fossil fuels," the Green Workers Alliance organization wrote in a release;
- Clean power mandates for utilities aren’t included in the bill, a concession to get Sen. Joe Manchin (D-W.Va.) on board.
These are important and valuable critiques. We certainly should continue to push for more, faster. And don’t be confused — the bill is monumental in its scope and positive impact.
In the words of Rewiring America, a think tank focuses on decarbonization and electrification, "The IRA is not perfect by any measure. But progress is never all at once, or neat. It is messy even in its biggest moments. This bill is imperfectly perfect because it is advancing progress so significantly, bringing disparate stakeholders together to find compromise, even as we work to a planetary deadline that is uncompromising."