The Inflation Reduction Act aims to lower costs for families, combat the ongoing climate crisis, reduce the deficit, and tax the wealthiest corporations and earners. The Act raises nearly $800 billion from multiple revenue sources with $369 billion earmarked for clean energy and climate change mitigation initiatives. This is the largest federal clean energy investment to date and expects to reduce the United States’ greenhouse gas emissions to around 40 percent of 2005 levels by 2030.
Energy prices continue to surge as the global supply chain remains tight and global demand is expected to increase as winter approaches. In August, Russia announced unscheduled maintenance to the Nord Stream 1 pipeline which supplies natural gas to the European Union. This drove natural gas futures prices to spike once again, topping $10/MMBtu for the first time since July 2008.
The European energy crisis is driving global inflation of products, goods, and services. It is driving higher energy prices that are passed onto consumers by companies across the global supply chain. The Inflation Reduction Act addresses this crisis by incentivizing consumers and companies to invest in renewable energy in the United States.
The Inflation Reduction Act is a sweeping financial and political statement supporting the adoption of renewable energy. The Act focuses on lowering energy costs, building a clean energy economy, and increasing carbon capture. Each of these pillars incentivizes the acceleration of renewable energy adoption.
Lowering Energy Costs
American households continue to feel the cost of elevated electricity and gasoline prices. In March, Yardeni Research estimated that the gasoline price increases would cost households an additional $2,000 per year. Researchers using the Penn-Wharton Budget Model estimated the average American household spent $1,200 more on energy costs alone in 2021.
The Inflation Reduction Act introduces new tax credits and rebates to incentivize consumers to spend on clean energy vehicles, energy-efficient home appliances, and solar systems. These initiatives enable consumers to offset many of the upfront costs of renewable solutions and reduce their long-term energy consumption. If a household utilizes all these incentives, it could save them up to $2,600 per year in energy and gasoline costs.
The Inflation Reduction Act will save every family an average of $500 per year in energy costs. These incentives accelerate consumer adoption of electric vehicles, energy-efficient home appliances, and solar systems. As more consumers switch to renewables, energy demands reduce leading to more affordable prices for all households.
Clean Energy Infrastructure
Low-income households benefit the most from renewable energy cost savings, but many cannot afford the investment. The average low-income household spends almost nine percent of its budget on energy, three times as high as non-low-income households. In some locations, the energy burden can be as high as 30 percent.
The Inflation Reduction Act plans to deploy more solar, wind, and battery storage plants to power homes, businesses, and communities. The Act also introduces advanced cost-saving clean energy projects for rural electric cooperatives. These programs reduce the energy burden for low-income households without requiring them to invest themselves.
Renewable energy is cheaper than fossil fuels and continues to decline in cost year of year. The deployment of more solar panels, wind farms, and battery storage increases renewable energy generation and drives down electricity costs. In combination with other programs like cost-savings for rural electric cooperatives, the Inflation Reduction Act accelerates renewable adoption across the communities that need it the most.
Increasing Carbon Capture
The Inflation Reduction Act increases the trajectory of emission reductions from 25 percent to almost 40 percent below 2005 levels by 2030. This moves the United States closer to its pledge to reduce emissions by 50-52 percent below 2005 levels by 2030. In order to accomplish this, the Inflation Reduction Act creates more incentives for carbon capture programs.
Carbon capture programs offset emissions from harder-to-decarbonize parts of the economy like oil, coal, and industrial sites. The Act provides funding for farmers to undertake “climate-smart” agriculture by planting cover crops. It also funds wildfire prevention and protection of old-growth forests which are carbon-rich.
These initiatives focus on natural ways to capture carbon through forests and soils. Princeton’s REPEAT modeling of energy policies estimates that carbon capture programs may account for a fifth of the bill’s total impact on emissions. The REPEAT model also shows that the forest and agriculture policies may offset emissions equal to 19 million cars.
The Inflation Reduction Act accelerates the adoption of renewables by consumers, businesses, and utilities through tax credits and rebates. While these new policies drive demand, the United States must meet that increase caused by the Act. In order to accomplish this, the Act includes incentives for domestic manufacturing and expansion to reduce reliance on other nations like Russia and China and bolster the domestic economy.
The United States relies on exports to maintain low prices for renewable products like lithium-ion batteries and solar cells. The supply chain is heavily reliant on China for rare earth element production, refinement, and processing. China produces over 60% of rare earth elements along with being responsible for the majority of refinement and processing of these materials necessary for clean energy products.
One core focus of the Inflation Reduction Act is to bolster domestic manufacturing while controlling costs. The Act includes production tax credits that accelerate solar panels, wind turbines, batteries, and the processing of key materials like rare earth elements. It also invokes the Defense Production Act to speed up domestic manufacturing of heat pumps and the processing of critical minerals.
These policies address a key vulnerability in the renewable energy supply chain for the United States. The production tax credits and use of the Defense Production Act support domestic manufacturers enabling them to produce clean energy products that are competitive with international suppliers. While the short-term supply chain will remain relatively unchanged, there will be long-term benefits to this insourcing.
Bolstering domestic manufacturing requires domestic expansion of facilities to meet demand and reach the goal of reduction in greenhouse gas emissions by 2030. Many domestic companies struggled to compete with subsidized international suppliers. This dynamic led to the stagnation of the domestic renewable manufacturing industry.
Domestic expansion is emphasized in the Inflation Reduction Act by providing investment tax credits to manufacturing facilities and developers. This expansive policy incentivizes companies like auto manufacturers to build more electric and hybrid vehicles. It also entices new manufacturing ventures around wind turbines and solar panels.
The expansion of domestic manufacturing further accelerates renewable adoption and securing the renewable supply chain. As the United States builds a stronger domestic supply chain, it will be less affected by geopolitical events. This will drive down energy costs, reduce unexpected price spikes, and slow greenhouse gas emissions.
Transitioning to renewables is a heavy undertaking for many companies, especially those that may not qualify for tax or investment credits. This is true for emission-intensive industries and vulnerable communities that rely on cheap energy sources and existing infrastructure. While renewables are cheaper than fossil fuels, the transition requires a large upfront cost for companies and communities.
Green finance ties funding to explicit environmental, social, and governmental outcomes. The Inflation Reduction Act creates a sizeable fund for making green loans and grants to ease the transition from fossil fuels to renewables for companies and communities. These allow companies like automakers to transition facilities to clean vehicle production or co-ops to switch from fossil fuel power generation to renewables.
Green financing enables emission-intensive industries and vulnerable communities to begin transitioning to renewables. These are areas that lagged in adoption due to the high switching and opportunity costs. By including these policies, the Inflation Reduction Act drives renewable adoption in the places that need it the most.
The Inflation Reduction Act is a Climate Change Bill
Renewable energy addresses one of the most pressing matters contributing to inflation–energy.
As the energy crisis persists and experiences high volatility, the repercussions are felt globally.
Companies along global supply chains pass off these increased energy costs to consumers, leaving them to bear the brunt of inflation.
While the Inflation Reduction Act addresses many causes of inflation, it heavily focuses on renewable energy adoption. The transition to renewables will drive down energy costs and reduce exposure to future global energy crises. It also forges a path to a stronger domestic manufacturing industry that contributes to lowering emissions and energy independence.
The Act distributes $369 billion across consumers, communities, corporations, and utilities to catalyze more renewable adoption. From tax credits to green financing, the Act addresses some of the most important areas for renewable adoption. These policies especially benefit the communities and industries that need the most support to transition to clean energy.
The Inflation Reduction Act is the largest bill to address climate change to date and reiterates the United States’ commitment to reaching its 2030 emissions reduction goal. The comprehensive policies address key areas like domestic manufacturing, consumer adoption, and transitioning emission-heavy companies to renewables. The Inflation Reduction Act is a long-term climate change bill that addresses the short-term problem of inflation.