Introduction

Two weeks after Sen. Joe Manchin tanked the downsized Build Back Better package, Senate Democrats on July 27, 2022 released the proposed Inflation Reduction Act of 2022 (the “Act” or IRA). While not focused entirely on climate, the IRA dedicates $369 billion to energy security and climate-related initiatives and promises to advance the United States’ clean energy objectives.

The Act establishes incentives for businesses and consumers to invest in low- to zero-emission technologies and is predicted to help America reduce its current emissions by 40% by 2030. It seeks to reduce the cost of clean energy production and consumption to the benefit of manufacturers, investors, and consumers by offering:

  • $9 billion in consumer home energy rebate programs and 10 years of consumer tax credits to make homes energy efficient;
  • $60 billion to on-shore clean energy manufacturing in the U.S. across the full clean energy supply chain, including billions dedicating to clean technology and clean vehicle manufacturing facilities;
  • Over $60 billion in tax credits and grants to invest in programs and technologies to reduce emissions in every sector of the economy, including from electricity production, transportation, industrial manufacturing, buildings, and agriculture;
  • Over $60 billion in environmental justice priorities to promote investments in disadvantaged communities; and
  • Over $25 billion in investments in clean energy development in rural communities, climate-smart agriculture, forest restoration, and land conservation.

If successful, the IRA would propel the U.S. ahead of European Union and other similarly situated jurisdictions in achieving ambitious climate goals.

Climate Deal Proposals

The climate deal contains significant credits and rebates that incentivize the transition to and investments in clean energy. The Act takes a holistic approach in an effort to garner stakeholder buy-in and drive investments at each point in the energy production and consumption chain. It offers incentives that cut across sectors, including for clean energy technologies, manufacturing, recycling, consumer appliances and home upgrades, workforce, and the location of projects, among others. Notable climate-related incentives set forth in IRA Subtitle D – Energy Security are summarized below:

Part 1 – Clean Electricity and Reducing Carbon Emissions

1. Extension and Modification of Credit for Electricity Produced from Certain Renewable Resources (Section 13101)

Extends the Production Tax Credit (PTC) for wind, biomass, geothermal, solar, landfill gas, trash, qualified hydropower, and marine and hydrokinetic resources through 2024. The base credit amount for the PTC would be set at .3 cents per kWh, and facilities that pay prevailing wages during construction and the first 10 years of operation would be eligible for five times the base amount.

2. Extension and Modification of Energy Credit (Section 13102)

Extends and modifies the current investment tax credit (ITC) for investments in certain energy property through the end of 2024, including raising the base rate for solar, fuel cells, waste energy recovery, combined heat and power, and small wind property from 6% to 30%, and the base rate for microturbine property from 2% to 10% if projects pay prevailing wages during the construction phase and the first five years of operation. The list of qualifying property would be expanded to include energy storage, qualified biogas property, electrochromic glass, and microgrid controllers.

3. Increase in Energy Credit for Solar and Wind Facilities Placed in Service in Connection with Low-Income Communities (Section 13103)

Allocates 1.8 gigawatts for “environmental justice solar and wind capacity.” Capacity allocation recipients under this provision may be entitled to tax credits in addition to the ITC. To be eligible, the project must be located in a low-income community or on Indian land for an additional 10%. Low-income residential building projects or qualified low-income economic benefit projects would be eligible for a 20% bonus investment credit. The list of qualifying solar and wind properties include properties with a nameplate capacity of 5 megawatts, including energy storage and interconnection facilities.

4. Carbon Oxide Sequestration and Zero Emission Nuclear Power Production Credit (Section 13103)

Extends the Section 45Q carbon oxide sequestration credit for industrial or direct capture facilities whose construction begin before January 1, 2033. The Act reduces the annual captured carbon oxide amount for each direct air capture (DAC), electricity-generating facility and for other facilities. The credit amount for DAC captured and geologically sequestered carbon will increase to a base rate of $36 per metric ton and $180 per metric ton for projects that meet the prevailing wage and apprenticeship requirements.

5. Zero-Emission Nuclear Power Production Credit (Section 13105)

Creates a base credit of .3 cents per kWh and a bonus credit rate of 1.5 cents per kWh (adjustable for inflation) for electricity for zero-emission nuclear power production sold after December 31, 2023 by qualified nuclear power facilities. Qualified facilities must use nuclear power to generate electricity, should have received the Section 45J PTC, and must be in existence before enactment.

Part 2 – Clean Fuels

6. Extension of Incentives for Biodiesel, Renewable Diesel, and Alternative Fuels (Section 13201)

Extends tax credits for alternative fuel and alternative fuel mixtures, and biodiesel to December 31, 2024. The Act extends payments for biodiesel and renewable diesel credits, alternative fuel credits, and alternative fuel mixture credits, as well as payments for alternative fuels that expired in 2021, throughout 2022. Taxpayers would have 180 days to submit a claim, which would be paid within 60 days of receipt.

7. Extension of Second-Generation Biofuel Credit (Section 13202)

Extends the $1.01 per gallon income tax credit for second-generation biofuel from 2021 to December 31, 2024.

8. Sustainable Aviation Fuel Credits (Section 13203)

Creates a new tax credit for the sale or mixture of sustainable aviation fuel starting in 2023 and expiring December 31, 2024. The base credit amount will be $1.25 per gallon, with a supplemental credit of $0.01 per gallon for each GHG reduction percentage point that exceeds 50%. The maximum potential per gallon credit is $1.75.

9. Clean Hydrogen

Creates a new credit for qualified clean hydrogen production at a qualified facility during the first 10 years of operation. The base credit amount is $0.60 per kg multiplied by the applicable percentage (determined by the lifecycle GHG emissions reduction rate in production) as defined in the Act. Qualifying facilities meeting the prevailing wage and apprenticeship requirements will receive five times the base amount.

Part 3 – Clean Energy and Efficiency Incentives for Individuals

10. Extension, Increase, and Modifications of Nonbusiness Energy Property Credit

Increases credit rates for qualified energy-efficiency improvements and expenditures for nonbusiness property to 30%, with an annual limit of $1,200 per taxpayer. Geothermal and air source heat pumps and biomass stoves receive an additional $2,000 credit limit.

11. Residential Clean Energy Credit (Section 13302)

Extends the existing clean energy credits available to individuals through December 31, 2034. It provides a 30% rate through 2032 and reduces the credit rates to 26% and 22% in 2033 and 2034, respectively. Clean energy includes solar, fuel cells, wind, and biomass fuel properties. This credit extends to qualified battery storage properties.

12. Energy-Efficient Commercial Buildings Deduction (Section 13303)

Updates the energy-efficiency requirements for qualifying buildings. It provides that qualifying buildings must update efficiency relative to a reference building by 25%. The Act sets the deduction at $0.50 per square foot and increases by $0.02 (capped at $1.00 per square foot) as the certified energy improvements reduce energy and power costs. Projects meeting the prevailing wage and apprenticeship requirements get higher costs, with a base rate of $2.50 per square foot that increases by $0.10 (capped at $5.00 per square foot) as the certified energy improvements reduce energy and power costs. The credit extends to qualified retrofit plans on a building that is at least five years old.

13. Extension, Increase, and Modification of New Energy-Efficient Home Credit (Section 13304)

Increases the credit amounts for single and multi-family housing. Units with 50% less annual consumption than comparable units receive a credit of $2,500, while units eligible for the Energy Star Multifamily New Construction Program receive $500. New homes that are zero-energy-ready receive a $5,000 credit and zero-energy-ready Energy Star Multifamily New Construction Program homes receive $1,000. If the homeowner ensures that laborers and contractors are paid prevailing wages, the credits go up to $2,500 and $5,000, respectively.

Part 4 – Clean Vehicles

14. Clean Vehicle Credits (13401)

Extends the tax credit for plug-in vehicles to clean vehicles and removes the per manufacturer limit. The Act modifies the clean vehicle credit to $3,750, with a maximum of $7,500 for vehicles meeting the critical minerals and battery components requirements. The Act clarifies clean vehicles as vehicles with a battery capacity of at least 7 kWh and fuel cell vehicles. To qualify, vehicles must be have final assembly in North America and the qualified manufacturers must have written agreements with the Department of Treasury and provide periodic reports to the Department.

15. Credit for Previously Owned Vehicles (Section 13402)

Creates a new tax credit of up to $4,000, limited to 30% for buyers of previously owned clean vehicles. Credits apply to vehicles with a sale price of $25,000 or less, with a model year that is at least two years earlier than the calendar year in which the vehicle is sold.

16. Qualified Commercial Clean Vehicles (Section 13403)

Creates a new tax credit for commercial clean vehicles. The tax credit is the lesser of (i) 15% of the vehicle’s cost (30% for vehicles not powered by gasoline or diesel internal combustion engines) or (ii) the incremental cost of the vehicle relative to a comparable vehicle. Applicable credit amounts cannot exceed $7,500 for vehicles weighing less than 14,000 pounds or $40,000 for heavier vehicles. Vehicles must have a battery capacity of no less than 7 kWh and 15 kWh, and may be charged by an external source of electricity. To qualify, manufacturers must have written agreements with the Department of Treasury and provide periodic reports to the Department.

17. Alternative Fuel Refueling Property Credit (Section 13404)

Extends the tax credits for qualified alternative fuel vehicle refueling properties through December 31, 2032. For business properties, the credit rate is 6% of the cost of installing the qualified alternative fuel recharging property, up to the sum of $100,000. The percentage increases to 30% if the properties meet the prevailing wage and apprenticeship requirements. The Act extends the definition of qualifying equipment to include bidirectional charging equipment. The credit applies also to electric charging stations for two- and three-wheeled vehicles for use on public roads.

From 2023, only charging and refueling properties located in low-income or rural census tracts will be eligible.

Part 5 – Investment in Clean Energy Manufacturing and Energy Security

18. Extension of the Advanced Energy Project Credit (13501)

Provides additional allocations of the advanced energy manufacturing credit. The Act provides an additional $10 billion in allocations, with at least $4 billion to be allocated to energy communities. The base rate for the credit would be 6%, with a 30% base rate for projects meeting the prevailing wage and apprenticeship requirements.

19. Advanced Manufacturing Production Credit (Section 13502)

Creates a new PTC for domestic production and sale of qualifying solar and wind components. The allocated credits vary by components and the credit would phase out for components sold after December 31, 2029. Components sold in 2030 would be eligible for 75% of the full credit amount, while components sold in 2031 and 2032 would be eligible for 50% and 25%, respectively.

Part 6 – Superfund Financing

20. Reinstatement of the Hazardous Substance Superfund (Section 13601)

Permanently reinstates the Hazardous Substance Superfund financing rate on domestic crude oil and imported petroleum excise taxes at the rate of $16.4 cents per barrel, beginning January 1, 2023.

Part 7 – Incentives for Clean Electricity and Clean Transportation

21. Clean Electricity Production Credit (Section 13701)

Creates a new 10-year clean electricity PTC for the sale of domestically produced electricity with zero GHG emissions. The production must be by a qualified facility placed in service after December 31, 2024. The base credit amount is .3 cents per kWh, increasable up to 1.5 cents per kWh for facilities meeting the prevailing wage and apprenticeship requirements. The maximum output must be less than 1 megawatt and the credit amounts would be adjusted for inflation annually.

22. Clean Electricity Investment Credit (Section 13702)

Creates a new ITC for investments in qualifying zero-emission electricity-generation facilities or energy storage facilities. The Act creates a base credit percentage of 6% (30% for facilities that meet the prevailing wage and apprenticeship requirements) for facilities with a maximum output of less than 1 megawatt. The credit rate increases up to 10% for facilities in energy communities, while facilities in low-income communities will receive a base credit of 16% and a bonus credit of 50%. The Act allows a 1.8 gigawatt allocation for environmental justice solar and wind credits and projects located in low-income communities or on Indian lands will receive an additional 10% rate. Low-income residential building projects or qualified low-income economic benefit projects will receive 20% bonus ITC. Qualifying projects must have nameplate capacities of 5 megawatts or less and facilities must be placed in service within four years.

23. Cost Recovery for Qualified Facilities, Qualified Property, and Energy Storage Technology (Section 13703)

Facilities qualifying for the clean electricity PTC and facilities qualifying for the energy storage technology ITC and placed in service after December 31, 2024 will be treated as five-year properties under S.168 of the Tax Code (Modified Accelerated Costs System).

24. Clean Fuel Production Credit (Section 13704)

Creates a PTC for domestic clean fuel production starting in 2025. The base credit rate is $0.20 for aviation fuel and $0.35 for non-aviation fuel. The credit rates increase for facilities meeting the prevailing wage requirements to $1.00 for non-aviation fuel and $1.75 for aviation fuel. The amounts are adjustable for inflation and apply to zero-emission fuels.

Part 8 – Credit Monetization and Appropriations

25. Elective Payment for Energy Property and Electricity Produced from Certain Renewable Resources, etc. (Section 13801)

Allows tax-exempt entities to treat certain tax credit amounts as tax payments. Payments exceeding tax liability may be received as direct payments; the direct payment is allowed for certain credits such as the clean hydrogen production credits, carbon oxide sequestration credits, zero-emissions nuclear power production credits, credits for alternative refueling property, renewable electricity production credits, and other credits listed under this section in the Act.

Other provisions

26. Permanent Extension of Tax Rate to Fund Black Lung Disability Trust Funds

27. Offshore and Onshore Leases and Royalty

Leases

Perhaps the most criticized climate provision of the Act mandates that the Interior Department offer at least 2 million acres of public lands and 60 million acres of offshore waters for oil and gas leasing for a 10-year period as a prerequisite to installing new solar or wind energy. This provision has been condemned for giving with one hand and taking with the other; critics say it furthers the fossil fuel crisis and hold no promises for communities most affected by fossil fuels. The provision reflects a compromise between the old players and the “favored” players, that is, the traditional energy producers versus the renewable energy producers. While they slow U.S. progress toward achieving climate goals, compromise provisions like this also permit incremental progress that otherwise may not be legislatively possible.

Royalty Rates

Increases the offshore and offshore oil and gas royalty rate from 12.5% to 16–18%. It increases the oil and gas minimum bid from $2 per acre for a period of two years to $10 per acre for a 10-year period. The Act further increases fossil fuel rental rates from $1.50 per acre to $3 per acre per year. After the end of the two-year period, the rates increase to $5 per acre per year for the following 6 years, and to not less than $15 per year thereafter.

Offshore Lease Sale

During the 10-year period beginning on the date of enactment, the Act prohibits right-of-way for wind and solar energy development on Federal Land, unless an onshore lease sale has been held during the 120-day period ending on the date of the issuance of the right-of-way for wind or solar energy development.

28. Agriculture and Forestry

Agricultural Conservation Investments

Appropriates funds to carry out the environmental quality incentives under the Food Security Act and make funds available for more agricultural conservation practices.

Rural Development and Agricultural Credit

Provides additional $1 billion in loans for funding electric loans for renewable energy under the Rural Electrification Act. The Act makes additional allocations to programs such as the Rural Energy for America, USDA assistance for rural electric co-operatives, and USDA assistance to support underserved ranchers, farmers, and foresters, etc.

Forestry

Makes appropriations to the national forest system restoration and fuel reduction projects, including hazardous fuels reduction projects, vegetation management projects, and protection of old-growth projects, and appropriations to provide environmental reviews. It provides grants for non-federal landowners and state and private forestry programs.

29. Greenhouse Gas Corporate Reporting

Provides $5 billion to enhance standardization and transparency in corporate climate action commitments and plans to reduce GHG emissions.

30. Energy Infrastructure Reinvestment Financing

Provides grants and guarantee loans for energy infrastructure that has ceased operations or for operating energy infrastructure to avoid, reduce, utilize, or sequester air pollutants or anthropogenic emissions of greenhouse gases.

31. Grants and Appropriations

Provides other miscellaneous grants and appropriations, including grants for:

  • Investing in coastal communities and climate resilience. The appropriations are to be available to coastal states, tribal governments, nonprofit organizations, and institutions of higher education, among others.
  • Computing capacity and research for weather, oceans, and climate.
  • Establishing the Alternative Fuel and Low-Emission Aviation Technology Program.
  • Guaranteeing tribal energy loans.
  • Methane emissions and waste reduction incentive programs for petroleum and natural gas systems.
  • Climate pollution reduction.
  • Fish and wildlife service to address weather events.
  • The Council on Environmental Equality to improve environmental and climate data collection.
  • Entities working to reduce transportation- and infrastructure-related emissions and improve access to related technologies. The federal government shares the cost of an activity in this regard up to 80% but may be up to 100% in a disadvantaged or undeserved community.
  • Federal buildings to be converted to high-performance green buildings, to use low-carbon materials and administer emerging and sustainable technologies, as well as low-carbon transportation materials and products that have substantially reduced GHG emissions.
  • Tribal electrification programs, emergency drought relief, and tribal climate resilience for Native American tribes and Native Hawaiian communities.

Conclusion

The Climate Deal will no doubt be a historic leap forward in achieving energy efficiency and climate resilience in the United States. The Bill passed at the Senate level last weekend with Vice President Kamala Harris’ tie-breaking vote and we are monitoring the legislative process as the IRA progresses for House approval. The holistic, results-oriented approach proposed by this law is a blueprint for achieving carbon reduction goals.

Crafted to incentivize a broad range of stakeholders, the IRA will inevitably shape investment, development, and growth planning across sectors going forward. MoFo’s team of energy and climate security specialists can assist in your firm’s efforts to integrate opportunities afforded by the IRA and transition to an energy-secure economy.