As a significant piece of climate legislation, the recently approved Inflation Reduction Act (IRA) has garnered a lot of attention, and for good reason.
Building incentives
On a considerably greater scale than previous climate policies, the IRA is a historic investment in the United States decarbonization and climate resilience efforts. According to the White House, by 2030, U.S. greenhouse gas emissions will have decreased by nearly 40% or one gigaton.
Beyond its obvious advantages for the environment, the legislation represents a significant investment in the competitiveness and innovation of the United States. The IRA is created to build incentives that will foster technological advancements and promote domestic manufacturing, paving the way for a new era of renewable energy. With this legislation, Congress hopes to reduce emissions while also advancing the development of the US as a global leader in sustainable energy.
Geopolitical factors
The development of sustainable energy has lagged behind in the United States in recent decades. Consider solar as an example. In the last ten years, China has largely taken control of the solar supply chain, while the United States part in the industry has decreased by 80%. Other renewable energies have started to follow this pattern. China now leads in the production of minerals required for the majority of clean energy production, is the largest investor in renewable energy, and is the leading generator of wind energy. Although the production of clean energy outside of the United States is not inherently bad, the country loses the chance to diversify its clean energy supply chains, encourage more competition, create jobs for domestic manufacturers, and lessen the risks brought on by geopolitical factors—most recently highlighted by Russia’s invasion of Ukraine.
Budget reconciliation
Exactly this problem is what the IRA aims to solve. Every element of the budget reconciliation law translates to money being spent or collected in the form of loans, spending, tax credits, or revenue from taxes. Its $369 billion budget for clean energy and decarbonization initiatives is primarily focused on deployment, which means it offers incentives for the development and use of renewable energy technology in the United States. Many of the bill’s provisions are demand-pull measures that guarantee a market for clean energy components and products. It provides tax credits to producers of clean energy, thereby funding those businesses. Additionally, it contains discounts and incentives that lower the cost of clean energy for consumers. Supply-push policies, low-interest government loans, and tax rebates for new manufacturing and sustainable energy projects are further components. Together, these investments create an environment where businesses are encouraged to produce clean energy and consumers are encouraged to purchase it.
Goal of the bill
Because the goal of the bill is not only to have clean energy technology deployed in the United States but also to establish entire clean energy supply chains, the legislation includes a host of incentives for clean energy manufacturing.
It creates demand by implementing “bonus” credits that offer additional tax incentives for firms that use components or manufactured products produced in the United States.
And, it generates demand for the solar components and panels created, providing tax credits that pay per kilowatt hour of energy produced.
For American competitiveness, the implications are clear.
By creating demand and lessening the cost of operation for clean energy industries, the legislation creates incentives that allow American firms to compete with producers abroad.
If successful, this legislation will strengthen U.S. leadership in clean energy industries for years.
As for innovation?
The IRA does not invest in what some people traditionally think of as innovation, such as the early stages of research and development (R&D) or prototyping.
But it does create markets for innovative industries.
This helps bring developing technologies from the lab to the market.
The more the federal government invests in financing and building clean energy, the better it will get at it.
Ultimately, though, the IRA’s effect on clean energy innovation will be how it complements two other recent major pieces of legislation—the Infrastructure Investment and Jobs Act and the CHIPS and Science Act.
These three bills create generous incentives for new clean energy technology at each stage of the innovation pipeline—investing billions in early R&D, funding demonstration projects to help new technologies showcase their viability, providing the infrastructure needed to scale these technologies, and enabling deployment by driving investment growth.
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Source: CFR
