After nearly a year of negotiations, on August 12, 2022, Congress passed a budget reconciliation bill, the Inflation Reduction Act (IRA). President Joe Biden is signing the IRA into law on August 16, 2022. The IRA includes transformative energy and climate provisions, including hundreds of billions of dollars in federal funding, expected to bring the U.S. closer to achieving President Biden’s greenhouse gas (GHG) emissions reduction targets. This alert provides a list of the 10 takeaways from the energy and environment titles of the IRA; a comprehensive summary of these titles is available here.  A discussion of the IRA’s energy and climate tax provisions, including impacts on the sustainable fuels industry, hydrogen production, carbon capture, utilization, and sequestration (CCUS), electric vehicles, and wind and solar tax credits, will be in a separate alert later this week. Clients interested in accessing federal funds provided for in the IRA or seeking assistance on navigating new requirements and programs established in the IRA should monitor forthcoming Sidley alerts on IRA implementation.

1. Methane Emissions Will Be Subject to a New Fee Beginning in 2024

Among the revenue-generating provisions of the IRA, Congress established a new fee on methane emissions from the oil and natural gas sector. Beginning in 2025 and each year thereafter, facilities within nine segments defined by subpart W of 40 CFR 98 that emit more than 25,000 metric tons of CO2-equivalent of GHGs annually will be subject to an annual fee on methane emissions exceeding prescribed thresholds — regardless of a facility’s reporting threshold under subpart W — that the Environmental Protection Agency (EPA) will administer. Fees are applied based on each metric ton of methane emitted in the preceding year that exceeds prescribed thresholds, beginning with $900 per ton in 2025, $1,200 per ton in 2026, and $1,500 per ton in 2027 and beyond. For onshore and offshore petroleum and natural gas production facilities, the fee is based on emissions that exceed 1) 0.20% of natural gas sent to sale from the facility or 2) 10 metric tons of methane per million barrels of oil sent to sale if no natural gas was sent to sale from the facility. For onshore natural gas processing, liquefied natural gas (LNG) storage, LNG import and export equipment, or onshore petroleum and natural gas gathering and boosting facilities, the fee is based on emissions that exceed 0.05% of the natural gas sent to sale “from or through” the facility. For onshore natural gas transmission compression, underground natural gas storage, or onshore natural gas transmission pipeline facilities, the fee is based on emissions that exceed 0.11% of the natural gas sent to sale “from or through” the facility.

The IRA includes several flexibilities and opportunities for exemptions that were not part of the House-passed Build Back Better Act. Notably, facilities under common ownership or controls can account for facility emissions below applicable thresholds within and across all identified segments to net emissions when calculating the total emissions charge. There is an exemption from the fee if the EPA Administrator determines that the emissions were caused by an “unreasonable delay” in environmental permitting needed to transport the gas. EPA may also approve an exemption for emissions from wells plugged during the prior year. Last, the IRA provides a future option that may exempt facilities complying with final EPA methane regulations if the final regulations meet or exceed the estimated emissions reductions of EPA’s November 2021 proposed rule and all state (and federal) plans are in effect. Up to $1.55 billion in funding is provided to EPA to administer the fee and related activities such as providing grants, rebates, contracts, and loans for activities, including assistance with reporting and monitoring requirements and efforts to reduce methane and GHG emissions (Sec. 60113).

2. Carbon Capture Projects Are Eligible for More Federal Funding

Separate from the enhanced tax credits for CCUS under Section 45Q of the Internal Revenue Code, the IRA provides significant streams of funding for the development of CCUS projects and related infrastructure. This includes $3.6 billion for the Department of Energy (DOE) Loan Guarantee Program under Section 1703 of the Energy Policy Act of 2005 for CCUS projects, among other eligible projects, with the flexibility for DOE to commit to guarantee loans at an aggregate principal amount of up to $40 billion (Sec. 50141). The bill also authorizes $5 billion for DOE to provide financing for energy infrastructure to avoid, reduce, utilize, or sequester carbon and other emissions (Sec. 50144). DOE’s new Office of Clean Energy Demonstration, established under the Infrastructure Investment and Jobs Act (IIJA), will receive $5.8 billion to assist entities involved in installing, retrofitting, and upgrading certain energy-intensive industrial facilities with advanced technologies, among other activities, to support decarbonization (Sec. 50161).

3. Federal Funds Are Available to Advance Electric Transmission Siting

The legislation builds upon provisions in the IIJA intended to facilitate electric transmission investment and electric grid development. The IRA contains provisions to support the siting of interstate electric transmission lines, including $2 billion to provide loans to nonfederal borrowers for the construction or modification of electric transmission facilities designated by the Secretary of Energy (Secretary) to be necessary in the national interest under Section 216(a) of the Federal Power Act (Sec. 50151). As currently written, Section 216(a) considers electric transmission facilities to be in the “national interest” if they can resolve future or current electric transmission capacity constraints or congestion that adversely affects consumers.

In addition, the IRA provides for $760 million in grants to state, local, or tribal siting authorities to facilitate the siting of interstate and offshore electric transmission lines. The grants would be available for the following activities: (i) studies and analyses of the covered transmission project, (ii) examination of up to three alternate siting corridors within which the covered transmission project feasibly could be sited, (iii) participation by the siting authority in regulatory proceedings or negotiations in another jurisdiction or under the auspices of a transmission organization, (iv) participation by the siting authority in regulatory proceedings at the Federal Energy Regulatory Commission (FERC) or a state regulatory commission for determining applicable rates and cost allocation for the covered transmission project, or (e) other measures and actions that may improve the chances of, and shorten the time required for, approval by the siting authority of the application relating to the siting or permitting of the covered transmission projects (Sec. 50152). This follows a rulemaking FERC proposed earlier this year to facilitate state participation in regional transmission planning and cost allocation.

4. Funding and Statutory Amendments Will Facilitate Offshore Wind Development 

The IRA contains several provisions to facilitate offshore wind development. In addition to facilitating the development of offshore transmission lines to transmit wind energy as provided for in Section 50152, described above, it provides $100 million for use by the Secretary to convene relevant stakeholders to address the development of interregional electricity transmission and transmission of electricity that is generated by offshore wind (Sec. 50153). It also authorizes the Secretary to conduct planning, modeling, and analysis regarding interregional electricity transmission and transmission of electricity that is generated by offshore wind (Sec. 50153). It amends the Outer Continental Shelf Lands Act (OCSLA) to restore the ability of the Secretary of the Interior to grant leases, easements, and rights-of-way on Outer Continental Shelf Lands for offshore wind development that were previously withdrawn by presidential memorandums issues on September 8, 2020 (Memorandum on the Withdrawal of Certain Areas of the United States Outer Continental Shelf from Leasing Disposition) and September 25, 2020 (Presidential Determination on the Withdrawal of Certain Areas of the United States Outer Continental Shelf from Leasing Disposition) (Sec. 50251). In addition, the IRA amends the OCSLA to broaden the definition of “outer continental shelf” (OCS) to include land within the exclusive economic zone of the U.S. and adjacent to U.S. territory and provides for the Secretary of the Interior to issue calls for information and nominations for proposed wind lease sales for areas of the OCS and conduct wind lease sales in each area within the exclusive economic zone of the U.S. adjected to Puerto Rico, Guam, American Samoa, the U.S. Virgin Islands, or the Mariana Islands (Sec. 50251). 

However, under the heading of ensuring energy security, the IRA sets limits on Department of the Interior (DOI) authority to issue offshore and onshore renewable energy leases. Prior to permitting leases for offshore wind development on the OCS, DOI’s Bureau of Ocean Energy Management must first make at least 60 million acres on the OCS available for oil and gas leasing (Sec. 50265). A similar limitation applies to onshore leases as well (Sec. 50265). 

5. Changes to Natural Resources Laws Will Make Fossil Energy Extraction More Expensive

The IRA amends the OCSLA and Mineral Leasing Act (MLA) to make offshore and onshore oil and gas extraction more expensive. The royalty rate for offshore oil and gas extraction under the OSCLA increases from a minimum of 12.5% to a minimum of 16.67% but not more than 18.75% during the 10-year period after the bill’s enactment (after which the rate will be a minimum of 16.67%) (Sec. 50261). Similarly, the onshore oil and gas royalty rates under the MLA increase from 12.5% to 16.67%, with the minimum royalty rate for future rentals under lease reinstatement increasing from 16.67% to 20% and the oil and gas minimum bid increasing from $2 per acre to $10 per acre (Sec. 50262). Annual rental rates for oil and gas leases and reinstated leases also increase significantly (Sec. 50262). The MLA is also amended to allow for additional rounds of competitive bidding for land made available for leasing (Sec. 50262).

In an effort to discourage flaring of natural gas, the IRA also requires that royalties paid for gas produced from federal land and on the OCS be assessed on all gas produced, including all gas consumed or lost by venting, flaring, or negligent releases through any equipment during upstream operations. This does not apply to gas vented or flared for not longer than 48 hours in an emergency situation that poses a danger to human health, safety, or the environment; (2) gas used or consumed within the area of the lease, unit, or communitized area for the benefit of the lease, unit, or communitized area; or (3) gas that is unavoidably lost (Sec. 50263).

However, as noted above, the IRA creates preferences for onshore and offshore oil and gas leases before the DOI may issue rights-of-way for wind or solar development on federal lands or issue lease sales for offshore wind development on the OCS (Sec. 50265).

6. More Funding Is Available to Boost Low- and Zero-Emissions Vehicles

Aside from tax credits for electric vehicles, the IRA provides significant funding to support low- and zero-emissions vehicles. The IRA provides DOE $3 billion for loans that support reequipping, expanding, or establishing a manufacturing facility in the U.S. to produce advanced-technology vehicles that emit low- or zero-exhaust emissions of GHGs and removes the loan cap of $25 billion (Sec. 50142). DOE is also authorized $2 billion to fund domestic production of efficient hybrid, plug-in electric hybrid, plug-in electric drive, and hydrogen fuel cell electric vehicles (Sec. 50143). At EPA, up to $1 billion will be available for grants and rebates to replace heavy-duty vehicles with zero-emissions vehicles and infrastructure, including grants designated for eligible vehicles (e.g., school buses, garbage trucks, and tow trucks) serving communities in areas designated in nonattainment with the National Ambient Quality Standards (Sec. 60101). EPA will receive up to $2.25 billion to fund eligible recipients (port authorities, state, tribal, or municipal agencies and private entities) to purchase zero-emission port technology and to spend funds on associated planning and permitting costs for the installation of such technologies (Sec. 60102). 

Additionally, the Act provides up to $5 million in funding for the EPA to carry out testing and to develop protocols regarding the environmental and public health effects of fuel additives, including lifecycle GHG emissions and the effects on low-income and disadvantaged communities and up to $10 million in grant funding to industry to support investment in advanced biofuels (Sec. 60108).

7. Environmental Reviews Should Be Improved With Funds for Staff and Resources 

While a separate permitting bill led by Sen. Joe Manchin, D-W.Va., remains under negotiations, the IRA does provide funding to support permitting activities including the time- and resource-intensive environmental reviews under the National Environmental Policy Act. Staff shortages and resource constraints at federal agencies have long been cited as reasons for delay in the environmental review process. The IRA provides significant funding to address those concerns at agencies key to facilitating the environmental reviews of major federal actions, including those for clean energy projects. Specifically, the IRA provides $40 million to EPA, $30 million to the White House Council on Environmental Quality, $115 million to the DOE, $110 million to FERC, and $150 million to the DOI for the hiring and training of personnel and technical support to facilitate “timely and efficient” environmental reviews and authorizations, among other activities. (Sec. 60115, 60402, 50301, 50302, 50303).

8. Corporate Climate Goals and Product Declarations Will Receive EPA Oversight 

At a time when corporate sustainability and GHG goals have become a major focal point, the IRA provides funding for EPA standards and oversight. The IRA appropriates $5 million in funding for the EPA to support enhanced standardization and transparency of corporate climate targets and progress toward meeting those targets (Sec. 60111). The IRA also provides up to $250 million for EPA to develop and implement a program to standardize and increase transparency regarding environmental product declarations for construction materials that include assessments of GHG usage (Sec. 60112).

9. Increased Allocation of Funds Will Promote More Energy-Efficient Buildings

The IRA allocates a combined $9 billion for rebate programs available for homeowners and aggregators for house energy-saving retrofits and high-efficiency electric home rebate programs and grants for training and educating contractors in the installation of home energy efficiency and electrification improvements (Secs. 50121, 50122, and 50123). It also makes $1 billion available for grants to adopt building codes for residential buildings that meet or exceed the 2021 International Energy Conservation Code and commercial buildings that meet or exceed the ANSI/ASHRAE/IES standards (Sec. 50131). In addition, the IRA provides $250 million to the Federal Buildings Fund to convert to high-performance green buildings (Sec. 60502) as well as $2.15 billion to the Federal Buildings Fund to acquire and install materials and products with substantially lower GHG emissions (Sec. 60503). Additionally, it provides $975 million to the Federal Buildings Fund for emerging and sustainable technologies and related sustainability and environmental programs (Sec. 60504).

10. There Are New Investments in Nuclear Energy 

The IRA provides $100 million to license and regulate special nuclear material fuel fabrication and enrichment facilities and certify transportation packages; assist commercial entities in designing and licensing transportation packages for high-assay low-enriched uranium; and support commercial entity submissions of such transportation package designs (Sec. 50173). An additional $500 million is provided to acquire or provide high-assay low-enriched uranium from a DOE stockpile or to use enrichment technology to make available to an established consortium for commercial use or demonstration projects; conduct a stakeholder survey to estimate the quantity of high-assay low-enriched uranium necessary for commercial use; and support the aforementioned consortium and its needs related to high-assay low-enriched uranium (Sec. 50173). Monies are also allocated to the DOE Office of Science for activities related to nuclear energy projects undertaken by the National Laboratories (50172).

Other Noteworthy Takeaways

The IRA’s extensive funding for environmental justice (EJ) is another important takeaway. Following an increased focus on EJ by the Biden administration, Congress has shown its support for EJ by providing unprecedented levels of funding for EJ-related activities at EPA. The most significant provisions include the carveout for low-income and disadvantaged communities to receive 40% of the $27 billion GHG Reduction Fund (Sec. 60103) and the $2.8 billion appropriated for environmental and climate justice block grants (Sec. 60201). Other EPA funding for EJ activities include, but are not limited to, up to $60 million in grants to identify and reduce diesel emissions from the transport of goods in low-income and disadvantaged communities (Sec. 60104), up to $37.5 million in grants to monitor and reduce air pollutants at schools in low-income and disadvantaged communities as well as an additional $12.5 million in funding for related technical assistance (Sec. 60106), and $17 million for education about emissions reductions and electricity use in low-income and disadvantaged communities (Sec. 60107).

Indeed, there are major tax incentives and liabilities under the energy and environmental umbrella, including the reinstated Superfund tax on crude oil and imported petroleum products and enhanced tax credits for CCUS and electric vehicles. As stated above, insights on those relevant tax provisions will be included in a separate alert. Clients interested in accessing federal funds provided for in the IRA or seeking assistance on navigating new requirements and programs established in the IRA should monitor forthcoming Sidley alerts on IRA implementation.