Inflation Reduction Act Summary
After months of intra-party talks, Congress has approved a major budget reconciliation bill – the Inflation Reduction Act of 2022 – that includes various climate change, renewable energy, tax, and health care-related provisions. The final package, which was negotiated by Senate Majority Leader Chuck Schumer (D-NY) and Senator Joe Manchin (D-WV), was carefully crafted to be able to win support from all 50 members of the Senate Democratic caucus. On August 7, the upper chamber voted along party lines to advance the bill, with Vice President Kamala Harris casting the tie-breaking vote. The House briefly returned from its summer recess last Friday to provide the final vote. The legislation now heads to President Biden’s desk, where it will be signed into law.
At its core, the Inflation Reduction Act aims to reduce carbon emissions by roughly 40 percent (from 2005 levels) by 2030. It will accomplish this feat by, among other things, providing nearly $370 billion for a range of tax credits to help stimulate adoption of clean energy technologies. The measure also includes a fee on oil and gas companies’ methane emissions and will dedicate up to $60 billion to low-income areas and minority communities that suffer disproportionately from environmental pollution.
Aside from the environmental provisions, the Inflation Reduction Act will allow Medicare to negotiate certain prescription drug prices and limit the program’s out-of-pocket co-pays to $2,000 annually. It also will extend for another three years the increased premium subsidies for Affordable Care Act coverage for approximately 13 million low- to moderate-income individuals who purchase coverage through a health exchange.
In addition, and prior to final passage in the Senate, a coalition of Western Democrats won inclusion of $4 billion in drought resiliency funding. The funding, which will be administered by the U.S. Bureau of Reclamation, is available to help compensate farmers, water districts, and others for voluntary water reductions. Pursuant to the legislation, it could also be used for voluntary system conservation projects that achieve verifiable reductions in the use of or demand for water supplies or projects that provide environmental benefits in the Colorado River basin. Finally, federal dollars will be available for ecosystem and habitat restoration projects to address issues directly caused by drought.
On the revenue side of the ledger, the legislation will be fully offset through a combination of corporate tax changes, increased IRS enforcement, and Medicare prescription drug pricing reforms. At the request of Senator Kyrsten Sinema (D-AZ), a provision that would have changed the way private equity income is taxed was cut from the final package. In its place, Democrats added a 1 percent excise tax on stock buybacks. While a final cost analysis is not yet available, it’s anticipated that the measure will contribute $300 billion toward deficit reduction efforts.
To follow are some additional highlights of the Inflation Reduction Act:
Clean Energy Tax Credits
The agreement includes 10-year extensions of existing credits for wind and solar, as well as provisions for heat pumps, rooftop solar and standalone energy storage, such as batteries. The credits are tied to prevailing wage and domestic content requirements.
Domestic Clean Energy Manufacturing
The bill includes a five-year, $60 billion production tax credit that will send payments directly to companies involved in clean energy manufacturing. About half of the credits will flow to efforts to spur manufacturing for solar panels, wind turbines, batteries and critical minerals processing. Approximately $10 billion will be dedicated to build clean technology manufacturing facilities.
Electric Vehicles
The Inflation Reduction Act includes a $7,500 rebate for new electric vehicles (EVs) and a $4,000 tax credit for used vehicles. To qualify for the credit, the final assembly of a vehicle must occur in North America. The measure will also require EVs to have batteries made with at least 40 percent minerals extracted or processed by a nation that is party to a U.S. free trade agreement. The critical minerals content requirement for batteries will increase to 80 percent by 2027. The income limit to receive an EV tax credit will be set at $300,000 for a couple and $150,000 for individual filers. In addition, vehicles eligible for a tax credit will need to be below a certain price. The highest retail price eligible for a tax credit will be $80,000 for vans, SUVs and pickup trucks, and $55,000 for cars.
In addition, the package will set aside financing and credits to promote EV manufacturing. It also calls for $2 billion in grants to help convert existing auto manufacturing factories into EV production facilities and $20 billion in loans for new clean vehicle manufacturing sites.
Methane Fee
Under the bill, oil and gas companies that emit more than 25,000 metric tons of carbon dioxide annually will be fined if their methane leakage rate exceeds a certain threshold. The fee will escalate over time from $900 per metric ton of emissions to $1,500 beginning in 2027. The package also provides over $1.5 billion to help companies reduce their methane emissions, such as providing technical assistance to improve greenhouse gas reporting, shut-in wells, and deploying methane-reduction equipment and processes. In addition, the Inflation Reduction Act will let companies that comply with any future federal methane rules avoid paying the fee, so long as those regulations achieve the same amount of emissions reductions.
Air Pollution
The Inflation Reduction Act will provide $1 billion for a new grant program to replace heavy-duty vehicles (like buses and garbage trucks) with zero-emission vehicles. It also includes $3 billion in grants for improving air quality near ports and $5 billion for a new grant program to implement greenhouse gas air pollution reduction plans.
Residential Efficiency and Electrification Rebates
The package includes $4.3 billion to develop and implement a competitive grant program that will provide rebates to homeowners for whole-house energy saving retrofits and $4.5 billion for a high-efficiency electric home rebate program.
Conservation
The legislation will provide additional funding for four existing farm bill conservation programs, including the Environmental Quality Incentives Program ($8.45 billion), the Conservation Stewardship Program ($3.25 billion), USDA conservation easements ($1.4 billion), and the Regional Conservation Partnership Program ($4.95 billion). In addition, $1 billion will go to the Natural Resources Conservation Service for technical assistance and $300 million for a carbon sequestration and greenhouse gas emissions quantification program.
Forestry
The forestry subtitle of the bill will allocate $1.8 billion for hazardous fuels reduction projects on National Forest System (NFS) land within the wildland-urban interface, $200 million for vegetation management projects on NFS land, $100 million for environmental reviews, and $50 million for the protection of old-growth forests. It also includes $550 million for grant programs targeted to non-federal forest landowners and $2.2 billion for state and private forestry conservation programs.
Public Lands
The package will provide $250 million for conservation and preservation projects on lands and resources administered by the National Park Service (NPS) and Bureau of Land Management (BLM); $250 million for conservation, ecosystem, and habitat restoration projects on NPS and BLM lands; $500 million to hire NPS employees; and, $200 million for NPS deferred maintenance projects.
Endangered Species Act
The bill includes funding for the U.S. Fish and Wildlife Services to develop and update Endangered Species Act Recovery Plans, address the threat of invasive species, and increase the resiliency and capacity of habitats and infrastructure to withstand climate-induced weather events.
Drinking Water
The legislation will provide $550 million in grants and other financial support for disadvantaged communities to help them access potable drinking water supplies. The funding will cover up to 100 percent of the cost of planning, design, or construction of eligible water projects.
Neighborhood Access and Equity Grant Program
The legislation will provide nearly $1.9 billion for grants to improve walkability, safety, and affordable transportation access in neighborhoods, with an additional $1.26 billion set-aside for economically disadvantaged communities and $50 million available for technical assistance.
Offshore Wind
The package includes new measures that will make it easier for the Interior Department to lease federal offshore acres for wind power development. It will also tie offshore wind leasing to previous auctions for oil and gas. The bill will put in place a 10-year window in which a lease for offshore wind development could not be issued unless an oil and gas lease sale has been held in the year prior and is not less than 60 million acres. It also will withdraw the Trump administration’s moratorium on offshore wind leasing in the southeastern U.S. and eastern Gulf of Mexico.
Building Efficiency and Resilience
The legislation will provide $1 billion for the Energy Department to provide loans and grants to improve energy efficiency, water efficiency, and climate resilience in affordable housing. It will also provide $1 billion for competitive grants to support adoption of certain building energy codes.
Defense Production Act
The legislation includes $500 million in funding to support President Biden’s use of the Defense Production Act to produce heat pumps and spur critical minerals processing projects.
Green Bank
The agreement includes $27 billion for a clean energy technology accelerator to support deployment of emission-reduction technologies, especially in disadvantaged communities. The program resembles the national green bank that had emerged in earlier iterations of the bill.
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