Energy Security and Climate Change Initiatives in the Inflation Reduction Act

By: The Practical Guidance Finance Team

This article discusses the energy security and climate change initiatives included in the Inflation Reduction Act of 2022¹ (IRA) and brings together a collection of related resources that include additional guidance. 

PRESIDENT JOSEPH R. BIDEN SIGNED THE IRA INTO LAW ON August 16, 2022, to address climate change, taxes, healthcare, and inflation. Among other things, the statute aims to increase American energy security through policies to support energy reliability and cleaner production along with investments in clean energy manufacturing. This article includes links to related content in Practical Guidance.

Overview of the Energy Security and Climate Change Initiatives Included in the IRA

The IRA includes $369 billion in energy security and climate change spending over the next 10 years. The energy security and climate change initiatives in the statute are discussed below.

Energy Security

The IRA invests in several energy security initiatives, including through the extension and expansion of many existing renewable energy credits and the creation of new tax credits for investments in clean energy technologies or energy production. The statute expands the existing production tax credits and investment tax credits for businesses to support investments in energy storage technologies, renewable energy sources such as solar and wind power, clean vehicles and charging stations, and fuels such as clean hydrogen.

Of particular interest in the statute is a new direct pay feature that will make it easier for owners of renewable energy projects to monetize the value of the tax credits by receiving cash payments instead of tax credits (in some cases eliminating the need to set up complicated tax equity structures). However, only certain tax-exempt entities can use the new direct-pay feature (with limited exceptions for certain types of renewable energy projects).

Specific funding amounts in the statute for energy security include:

• $30 billion in production tax credits to accelerate U.S. manufacturing of solar panels, wind turbines, batteries, and critical minerals processing
• $10 billion investment tax credit to build clean-technology manufacturing facilities
• $500 million in the Defense Production Act for heat pumps and critical minerals processing
• $2 billion in grants to retool existing auto manufacturing facilities to manufacture clean vehicles
• Up to $20 billion in loans to build new clean vehicle manufacturing facilities across the country
• $2 billion for National Labs to accelerate energy research

Climate Change

The IRA contains substantial funding aimed to reduce emissions from electricity production, transportation, industrial manufacturing, buildings, and agriculture. The statute also includes several incentives for consumers such as direct consumer incentives to buy energy efficient and electric appliances, clean vehicles, and rooftop solar generation. Examples in the bill include:

• $9 billion in consumer home energy rebate programs
• 10 years of consumer tax credits to make homes energy efficient
• $4,000 consumer tax credit to buy used clean vehicles and up to $7,500 tax credit to buy new clean vehicles
• $1 billion grant program to make affordable housing more energy efficient
• Tax credits for clean sources of electricity and energy storage and roughly $30 billion in targeted grant and loan programs for states and electric utilities to accelerate the transition to clean electricity
• Tax credits and grants for clean fuels and clean commercial vehicles to reduce emissions from all parts of the transportation sector
• Grants and tax credits to reduce emissions from industrial manufacturing processes, including almost $6 billion for a new Advanced Industrial Facilities Deployment Program to reduce emissions from industrial emitters
• Over $9 billion for federal procurement of American-made clean technologies, including $3 billion for the U.S. Postal Service to purchase zero-emissions vehicles
• $27 billion in clean energy technology to support deployment of technologies to reduce emissions

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Related Content

1. Pub. L. No. 117-169, 136 Stat. 1818 (Aug. 16, 2022).