Article
Mattias Goldmann
84 w
The US's record-breaking climate pact in 12 points
The US is set to implement its largest ever climate investment through the Inflation Reduction Act (IRA), passed by both the US Senate and Congress.
But what does it mean concretely for the USA, for the rest of the world, for the climate in general, and for business life? With all eyes on Climate Week NYC, this is as good a time as any to discuss the 12 pillars that make up this initiative.
Sustainability expert Mattias Goldmann summarizes the Inflation Reduction Act.
1. It’s The Biggest Ever
First, the volume itself: The investment package is stated to be valued at 369 billion USD, of which approximately two-thirds are directly climate-related.
I’d like to chime in with the words "up to" regarding this amount, since much of this is about stimulus packages that may not be fully utilized. On the other hand, the total investment will be many times larger, as many of the investments are partial financings of around 20% of the total amount.
Never before (depending on how you count China's five-year plans) has such a large climate package ever been launched by a sole country.
2. In line with the goals
The US has pledged to reduce its emissions by 50-52% by 2030, compared to 2005. The Rhodium Group's analysis (here and here) shows that the package could reduce emissions by 31-44%, with 40% as the most likely outcome, compared to 24 -35% without the package. In addition, President Biden has promised that the US will run on 100% green electricity by 2035, compared to about 40% by 2021.
With IRA, up to 81% can be reached by 2030, by not shutting down existing nuclear power plants and more than doubling the share of new renewable electricity. This will also cut household energy costs and improve the US's security policy situation.
3. Anti-inflation?
Well, actually yes. The fact that the world's largest climate package has been titled the Inflation Reduction Act may be confusing, but it actually lives up to its name. Inflation in the United States is driven to a large extent by increasing prices for electricity and energy for heating and transportation. With increased energy efficiency, more renewables and electric cars, the price increase can be kept in check, although many believe that this effect will only become apparent later on.
4. The big no-no: Emissions trading and carbon tax
Let's start with what's not included in the package: a federal tax on carbon emissions, and a national emissions trading scheme. Why? Simply because this is unthinkable, not only for Republicans (who all voted against the package even without it), but also for many Democrats in swing states. States such as California, on the other hand, continue with their systems, without restrictions.
5. Social profile at the expense of free trade
In short, all federal support in the package has a counting factor, up to a fivefold increase, if the production takes place in North America, with reasonable working conditions, in particularly deprived areas or where the fossil industry has previously dominated. This applies, for example, to electric cars and their components, solar cells and wind turbines.
In total, USD 60 billion in the package has this profile, which, for example, benefits Tesla. The European Commission, however, threatens to take the US to court on the basis that it would violate WTO rules.
The Inflation Reduction Act is estimated to increase EV sales by a third. Photo: Andrew Roberts on Unsplash
6. EV rebate
The current $7,500 tax credit for electric cars is extended and the cap on how many cars individual manufacturers receive the credit for is removed. This will increase EV sales by a good third compared to before the IRA, but the increase is limited by the requirements for increasing the American share of manufacturing, and also by caps on how expensive the car can be (USD 55,000 for cars, 80,000 for pickups and SUVs) and how much a person may earn (USD 150,000/year) in order to get the deduction.
A new deduction of USD 4,000 is introduced for used electric cars, but only for those earning a maximum of USD 75,000/year and only for cars with a price tag of less than USD 25,000.
The USD 7,500 premium applies to electric cars, hydrogen cars and plug-in hybrids with a battery of at least 7 kWh, provided that they are finally assembled in North America, and that a certain percentage of critical minerals and metals are sourced within the nation’s borders, with the goal of 100% by 2028.
Electric transport vehicles receive a premium of 30% of the cost or the actual additional cost compared to the equivalent fossil car, but not more than USD 40,000. These premiums apply until 2032.
7. Renewables
The production of renewable energy is being encouraged thanks to a series of production subsidies, as well as a 1.5 US cents rebate per kWh.
Overall, this is estimated to triple renewables by 2030, with 550 GW of new electricity from wind, solar, geothermal energy, biomass, some hydropower and other clean sources, equivalent to the needs of 110 million homes.
Those who invest in solar, fuel cells, small-scale wind, energy storage, biogas and microgrids can get up to 30% tax deduction until 2024. Green hydrogen is benefited by 0.60 USD/kilo in the first ten years, calculated with inflation, with progressively lower compensation if the climate impact is higher than 0.45 kg CO2/kg gas.
Renewable fuels receive a $0.50/gallon tax credit through 2024, $1 for biodiesel with an additional surcharge for agriculture and second-generation biofuels.
Green jet fuel will be stimulated from next year by up to USD 1.75/gallon. At today's prices, this makes biofuels competitive with fossil fuels.
In addition, the expansion of biofuel infrastructure is stimulated with 500 million USD, which includes, for example, the storage and blending of these infrastructures.
Renewables are estimated to be tripled by 2030. Photo: Nicholas Doherty on Unsplash
8. Carbon dioxide separation
"Multi-megaton" carbon dioxide must be stored in rock chambers, in soil and in forests. Direct air capture (DAC) receives a twelve-year tax reduction and up to 180 USD per ton, for facilities that capture at least 75% of the carbon dioxide and are of a certain minimum size. CCS and DAC are estimated to increase by 35-40% to roughly 100 million tons of CO2 in 2030 and double the volume thereafter.
9. Nuclear power and natural gas
Taxpayer-paid nuclear power plants get a new tax credit of up to 1.5 US cents per kWh, which is reduced if the electricity price increases to above 2.5 US cents per kWh. This could provide 30 billion USD to the nuclear industry by 2032, and is thought to lead to a number of existing reactors not being decommissioned, but not to any new nuclear power.
Annual minimum levels for land sales for gas and oil are set; just under a million hectares onshore and 25 million offshore. However, it is not a given that there are any buyers, let alone that the areas are actually used for this. At the same time, methane emissions are subject to a fee of up to USD 1,500 per ton, and crude oil and imported petroleum products must pay a "Superfund tax" of 16.4 US cents per barrel, which will finance the cleanup of contaminated industrial areas. Coal already has a special tax of USD 1.1 per ton (half in open pit mines), which is now being made permanent.
Investments in energy efficiency will be subsidized 30% of the cost up to 2,000 USD per year and taxpayers. Photo: Erik Mclean on Unsplash
10. Energy efficiency improvement
Energy efficiency will be subsidized 30% of the cost up to 2,000 USD per year and taxpayers, for example, will be subsidized for additional insulation of windows and doors. For buildings whose energy use is reduced by at least 25%, property taxes are reduced by $0.50 per square foot, up to double with higher efficiency.
11. Tax rules will decide
Much of the US system is based on tax deductions, which becomes problematic if the tax base from which deductions are made is too small.
Therefore, the possibilities to move the deductions in the business are now being expanded; a technical finesse that can be of great importance, not least in the electricity market. For private individuals, it’s beneficial that you can now choose to receive a premium when purchasing instead of a tax deduction, which is more difficult to assess.
12. What else?
Several investments in the Build Back Better package agreed by both parties are not included in the IRA, such as support for electricity grids, CO2 pipelines and energy efficiency in buildings.
Much of this is expected to come in new building regulations, while climate adaptation (which in the IRA gets a paltry 4 billion USD specifically for the southwestern United States) is handled in upcoming safety programs and next year's Farm Bill handles agriculture's emissions and storage of carbon dioxide.
By MATTIAS GOLDMANN, Goldmann Green
SOURCES
Here are Rhodium Group's analyses:
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83 w
Thank you everyone! I am excited about the Biden Administration's climate push - let's use it as a way to help convince others to do more; countries, regions, cities, companies, individuals... You, I, everyone!
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83 w
@mattias_goldmann Yes. Hopefully, we can have Sweden's new government look at what's happening in the US.
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83 w
Thanks for summarizing the important points of this key decision!
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83 w
Thanks for sharing!
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84 w
Great article Mattias!