What’s next for the Inflation Reduction Act and federal leadership on climate?
Congress just passed the Inflation Reduction Act, containing a massive investment in clean energy and climate that has the potential to cut U.S. greenhouse gas (GHG) pollution by 40 percent by 2030 (from 2005 peak levels). President Biden signed it into law last week. Those congressional investments are a huge deal and will transform America’s energy policy.
The Office of Management and Budget (OMB) estimates that the climate-related benefits from the new law could total up to $1.9 trillion from 2023 to 2050, representing savings from avoided illness and death, reduced property damage from climate-related disasters and sea level rise, and reduced costs related to increasing temperatures.
Still, further steps will be needed to fully meet President Biden’s pledge to reduce U.S. climate pollution by 50 to 52 percent below 2005 levels by 2030. So what’s next for federal leadership on climate?
The Biden administration has two big tasks to deliver on this potential. First, by working through federal agencies and together with states and cities, the administration needs to fully implement the Inflation Reduction Act to realize that 40 percent reduction. Second, the administration needs to take additional federal actions to achieve the president’s target to reduce U.S. greenhouse gas emissions by 50 to 52 percent below 2005 levels by 2030. Over the next two years, that will require the administration to issue a comprehensive set of standards under existing laws to cut GHG pollution in key sectors of the economy. There is much work to be done, but the U.S. climate goals are achievable if concrete action happens rapidly.
The investments that Congress has made in the Inflation Reduction Act will buy down the cost of many different clean energy technologies, including wind and solar, as well as electric cars, heat pumps, and other energy-efficient products. Lowering the cost of these technologies will speed their adoption by individuals, businesses, utilities, and governments.
Congress delivers massive climate investment
The Inflation Reduction Act includes many elements, such as major incentives supporting deployment of key clean energy technologies and funding for other pollution reduction programs, in addition to emissions fees for the oil and gas industry. The new funding is divided into two major categories: 1) tax incentives and 2) appropriations of federal money to new and existing programs at various agencies. Most of the money is anticipated to flow through clean technology tax incentives via the Internal Revenue Service (IRS), as shown in the table below. The tax incentive amounts are official Joint Committee on Taxation (JCT) estimates based on how much they expect people to take advantage of the policies, as Congress isn’t specifically setting aside a certain amount of money and generally hasn’t set caps on the total amount of benefit.
Note that this table only includes government outlays and not revenue raisers related to climate and energy, and it is slightly more inclusive of programs getting to a higher number than the summaries of the bill put out by policymakers.
NRDC has analyzed the climate pollution reductions expected from the major provisions of the Inflation Reduction Act, based on preliminary power sector modeling and analyses of other non-power sector elements. In line with other similar analyses, we estimate that the new law can deliver an emissions reduction as high as 41 percent below 2005 levels, as shown below.
The following table summarizes our analysis of the emissions reductions by sector and the major program categories. The Inflation Reduction Act could deliver additional cuts through more rapid uptake of new technology, from other programs, or through spurring rapid market evolution, which is hard to predict.
As clean energy technologies are deployed and GHG emissions decline, other forms of air pollution from fossil fuel combustion will also decline, along with water and waste pollution. Our initial analysis of just the clean electricity tax credits indicates that nitrogen oxide and sulfur dioxide emissions will decline by 400,000 to 600,000 tons, respectively, or around 1.4 million tons total, between now and 2035. By 2030, these reductions will save hundreds of lives, avoid thousands of emergency room visits and hospital admissions, and prevent tens of thousands of lost work and school days annually. These annual health benefits are equal to between $8.5 billion and $9.2 billion. Reduced combustion of fossil fuels in other sectors will also significantly reduce pollution overall, and more analysis from NRDC and other analysts will help quantify this in the coming months.
The Inflation Reduction Act also includes new programs and targeted investments to reduce emissions in communities that have historically borne unfairly high pollution levels. These new programs include a $27 billion Greenhouse Gas Reduction Fund, with at least $15 billion set aside for disadvantaged communities, and $3 billion in Environmental and Climate Justice Block Grants. The law also channels additional investments into existing programs, including $117.5 million for air pollution monitoring, $50 million for multi-pollutant monitoring stations, and $3 million for air quality sensors in low-income and disadvantaged communities. However, there are also policy decisions and technologies supported in the law that have the potential to harm communities. Actions will need to be taken to help protect impacted communities, such as oil and leasing reforms that minimize impacts on sensitive communities and habitats, additional rules and safeguards, and rigorous National Environmental Policy Act implementation.
The positive investments are long overdue and will help improve health and economic opportunity in communities most affected by racial injustice and fossil fuel pollution. More must be done, but it's a critical start that we can now build upon.
All eyes on Biden administration actions
The Biden administration has two immediate administrative and regulatory tasks ahead of it: one is to quickly and aggressively implement the Inflation Reduction Act; the other is to issue strong standards under the Clean Air Act (CAA) and other existing laws that fully leverage the clean energy incentives and other directives that the law provides.
Inflation Reduction Act implementation
The Biden administration must rapidly implement the law in order to achieve the significant GHG reductions that are projected. This is a very significant new set of responsibilities for federal agencies that are currently understaffed. Hiring and contracting will be essential to get the new programs up and running, and across the board, agencies will need thoughtful resource allocations to implement the programs swiftly and effectively.
There are three massive new areas of investment that need immediate focus by the administration:
- Treasury and IRS tax incentives: Most of the investment flows through the clean technology tax credits; the new and updated rules are necessary for people and companies to take advantage of these credits quickly. As examples, the new rules for electric vehicles and zero-emission electricity production need to be acted on fast, including clear guidance for new labor, manufacturing, and low-income elements.
- Environmental Protection Agency (EPA) programs: The Inflation Reduction Act creates or expands many programs at the EPA with tremendous potential to deliver benefits, especially in overburdened communities. Program design will need to be done in consultation with the communities eligible for support and also with other agencies that have related experience and can help with some of the program design (e.g., the Department of Energy (DOE) and its loan office).
- DOE programs: The combined investment in DOE programs through the infrastructure bill and the Inflation Reduction Act requires massive expansion of DOE programs. DOE is at heart a funding agency and has experience with rapid deployment of new funding, but the agency will be stretched and need to prioritize. We suggest focusing on programs and technology that can be deployed rapidly.
Greenhouse gas and energy regulations under existing laws
The Inflation Reduction Act supplements EPA’s existing authority under the Clean Air Act in important ways. It includes Clean Air Act amendments and appropriations that direct EPA to establish new standards for power plants and certain other sources, and it provides the agency with funding to establish those regulations and help states and industry to implement them. Likewise, the law provides new resources for the DOE to implement energy efficiency and other standards.
NRDC has examined the regulatory priorities set forth in the president’s 2021 executive orders, as well as subsequent EPA and DOE announcements, and assessed the potential GHG benefits associated with each rule, considering the incentives provided in the Inflation Reduction Act. The top five categories are shown below. (Several categories include more than one rule. For example, power plant standards include rules for both new and existing plants, and vehicle standards include rules for both light and heavy-duty vehicles.) For each, we have developed a low and high estimate of the achievable GHG reductions, depending on how ambitious the rules are. These estimates by sector include the impacts of the law’s incentives on such rules.
The administration has already made significant progress on HFCs and methane. The most impactful additional action needs to come in the form of strong power plant and vehicle standards.
As the graph below shows, the combined effect of implementing the Inflation Reduction Act and strong actions under existing laws can move the United States much closer to the president’s 2030 climate goals—on the order of 47 percent below 2005 levels.
To hit or exceed the 50 to 52 percent GHG reduction goal, the federal government and states will need to expand their planned efforts to cover more sectors and sources of emissions, such as other industrial sources, or pursue opportunities to strengthen and achieve greater reductions from their planned efforts. Further gains are possible with increased investments in natural carbon sinks or agricultural practices, which should be considered in the next Farm Bill. States can continue to go beyond what the federal government has planned, and the Inflation Reduction Act’s support to states, industry, and consumers should help enable state leadership. Funding for innovation programs and incentives to bolster domestic clean energy manufacturing could also help the markets reach a tipping point where these incentives and standards create a faster transformation that delivers even greater reductions than currently anticipated. All told, an ambitious and comprehensive effort can allow the United States to hit its goals.
The Biden administration now has an opportunity to lead again by showing ambition at home and helping to spur the global action necessary to put us on track for a 1.5-degree Celsius (2.7-degree Fahrenheit) trajectory. To mobilize this action, the Biden administration will need to do at least two things. First, it will need to ensure that it delivers the domestic emissions cuts to put the United States on track for at least a 50 to 52 percent emissions reduction by 2030. Mobilizing others to act is built on a foundation of getting your own domestic house in order. Second, it will need to put real money toward helping other countries mobilize greater emissions reductions and addressing the climate impacts they are suffering from due to decades of inaction.
The final funding allocation to provide direct U.S. support for international programs addressing the climate crisis for the current fiscal year (FY22) falls significantly short of what is needed. The Biden administration will need to find additional resources this year and ensure that next year’s budget meets the moment.
The bottom line
The United States is back in the climate fight, and the Biden administration is poised with the tools and money to deliver. All of us need to help the administration design and implement strong programs and maximize ambition so that we can hit the goals and do our long-overdue part in helping to address the global climate crisis.