What Is the Inflation Reduction Act?

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TheInflation Reduction Act (IRA) is the first climate legislation in U.S. history. President Joe Biden signed it into law on August 16, 2022, after it passed the House and Senate. 

The law aims to reduce U.S. greenhouse gas emissions contributing to climate change to40% by 2030. The IRA willallocate $369 billion to invest in clean energy technologies to reduce consumer energy costs, decarbonize the American economy, improve American energy security, boost domestic manufacturing jobs, and support disadvantaged communities.

What kind of incentives does the Inflation Reduction Act provide for clean energy investments?

Over the next decade, the IRA will fund massive clean energy investments across multiple sectors of the U.S. economy to help transition the country to a more sustainable and clean energy future. Let’s explore incentives by sector.

Incentives for consumers

The IRA offers numerous incentives, such as tax credits and rebates, to consumers for purchasing solar panels, energy-efficient appliances, and electric vehicles (EVs). It also provides funding for low-income households to electrify their homes. The incentives are aimed at cutting the high energy costs of American consumers. Some incentives or tax credits will need to be claimed on your federal income taxes, others may be available at the time of purchase. 

Home energy generation and battery incentives

The new Residential Clean Energy Credit, formerly known as the Investment Tax Credit, allows homeowners to deduct 30% of the cost of installing solar, wind, geothermal, biomass, or fuel cell power from their federal income taxes. Homeowners who buy solar batteries will also be eligible for the tax credit. Valid for ten years, the 30% tax credits will decrease to 26% in 2033 and 22% in 2034 and expire in 2035.

Clean vehicles

The new Federal Electric Car Tax Credit provides up to $7,500 for low- and middle-income persons to purchase new EVs and $4,000 to purchase used EVs. The old electric vehicle incentive law excluded used cars. Each credit has individual requirements associated with consumer income levels and vehicle specifications, as detailed below.

Tax credit details

Income eligibility for EV tax credits

The IRA specifies income restrictions on who qualifies for the EV tax credits. Eligible recipients of the credit are:

• Single filers with a modified adjusted gross income of $150,000 or less
• Joint filers with a $300,000 adjusted gross income
• Heads of household with a modified adjusted gross income of $225,000 or less

Price limits

The tax credit parameters also include specifications on the EV purchase price SUVs, trucks and vans have a limit of $80,000. All other EVs have a price cap of  $55,000. 

Limits on EVs and batteries

Price aside, not all EVs will be eligible for the tax credit, particularly after January 1, 2023. After the new year, all EVs must be made in North America to be eligible for the full tax credit. The percentage of U.S. or free-trade components will start at 50% and increase by 10% every year until it reaches 100% in 2029. The Internal Revenue Service (IRS) will use the vehicle identification number (VIN) to determine where a car is manufactured. Effective in 2023, half of the EV tax credit (around $3,750) claimed on your federal taxes will be determined by the origin of raw materials and components used in the car’s battery. 

Energy-efficient appliances

The Inflation Reduction Act incentivizes Americans to cut their homes’ carbon footprint by making them more energy efficient with electric appliances and heat pumps. Rebates include: 

• HOMES rebate program. This program includes rebates for homeowners who invest in home energy-efficiency upgrades and retrofits like weatherization and HVAC installations. The rebate amounts will depend on the energy savings of the upgrades. For example, homeowners who reduce their energy consumption by at least 35% through a home improvement will qualify for $4,000 in rebates. Low and middle-income families would be eligible for $8,000 rebates for similar investments.
• High-Efficiency Electric Home Rebate Act (HEEHRA). Low- and middle-income households can qualify for home electrification benefits. HEEHRA provides up to $14,000 in rebates for specific appliances, including up to $8,000 for the purchase and installation of heat pumps, which serve as heating and air conditioning. Because heat pumps are costly, ranging between $3,500 to nearly $8,000 for each unit, the HEEHRA rebate can make these products more affordable. This program also provides $1,750 for heat pump water heaters and $840 for electric stoves. In addition, homeowners who upgrade their electrical panels, electrical wiring, and home insulation will qualify for a rebate through this program.
• Energy Efficient Home Improvement Credit. This program will cover up to 30% of the cost of energy upgrades, with an annual limit of $1,200 valid through  2032. Homeowners can use the credit for, efficiency upgrades such as:
  • Home insulation
  • Windows
  • Exterior doors
  • Heat pumps
  • Water heaters
  • Furnaces
  • Biomass stoves and boilers

Homeowners can incorporate labor costs in the total cost of residential energy upgrades when applying for the tax credit. It’s important to note that a household can’t apply for two rebates for the same appliance upgrade. For example, if a family received a HOMES Rebate for purchasing a heat pump, they would not qualify for a HEEHRA rebate for the same heat pump. HEEHRA rebates will be provided at the point of sale.

Community and climate justice investments

The IRA will provide nearly $60 billion to environmental justice problems across the U.S. $15 billion will go to financing and providing technical assistance to low-income and marginalized environmental justice communities. The funding will broadly address:

• Pollution reduction
• Affordable and accessible clean energy to underserved communities
• Improvement of quality of life and job creation

Below are the IRA’s main funding areas to help disadvantaged communities.

• Air Pollution Monitoring. This $236-million program will fund air quality monitoring, especially in underserved communities exposed to continued air pollution.
• Assistance for Rural Electric Cooperatives. The IRA will allocate $9.7 billion to the U.S. Department of Agriculture (USDA) to improve the rural electric system’s reliability, strength, and affordability. The funding will be available until 2031.
• Clean Heavy-Duty Vehicles. Administered by the Environmental Protection Agency (EPA), the Clean Heavy-Duty Vehicles program will receive $1 billion to fund up to 100% of the costs of zero-emission school buses, garbage trucks, and transit buses serving disadvantaged communities.
• Community Solar. Low-income and underserved communities will receive $7 billion for rooftop and community solar projects.
• Environmental and Climate Justice Block Grants. The federal government will allocate $3 billion to states, municipalities, tribes, and non-profit groups as environmental and climate justice block grants. The funding will go toward reducing pollution in marginalized and poor communities.
• Neighborhood Access and Equity Grants. The federal government will provide $3 billion to improve transportation access and safety in disadvantaged communities. State, local, territory, and tribal governments will qualify for grants under this program. The projects will include improving air pollution, managing stormwater run-offs, and providing tree canopies, among other plans.
• Rural Energy for America Program (REAP). The USDA’s REAP program will provide funding for adopting clean energy and transportation technologies in rural communities. $2 billion will go to ranchers, farmers, and rural small companies needing renewable energy technologies and efficiency upgrades.

Incentives for manufacturers

The IRA will allocate $60 billion to domestic manufacturing of clean energy and transportation technologies. The funding will support manufacturing across the entire supply chain of clean energy technologies. The following incentive programs will spur American industries:

• The Advanced Manufacturing Production Tax Credits will provide $30 billion to American-made solar panels, wind turbines, and batteries, as well as the production of critical minerals. The tax credit amounts will be on a sliding scale depending on a specific technology.
• Clean Energy Manufacturing Facilities Investment Tax Credits will get a $10 billion boost and increase the categories of eligible technologies, including electric and fuel cell vehicles, renewable energy, storage equipment and parts, carbon capture, and grid modernization equipment. The U.S. Department of Energy will base its decision to award tax credits to qualifying manufacturers on the number of created jobs, the level of greenhouse gas emission reductions, the shortest completion time, and commercial feasibility, among other factors.
• Direct grants will support industrial technologies that reduce greenhouse gas emissions in various industrial facilities, including clean vehicle manufacturers. The DOE will provide $6 billion as grants on a 50/50 cost share basis.
• Hydrogen and Carbon Capture Tax Credits will increase the value for clean hydrogen production and carbon capture in industrial processes.
• New loans and loan guarantees will support various American manufacturing companies under the oversight of the DOE. These new loan programs aim to provide attractive interest rates for start-up companies with innovative emission-reduction technologies.

Data and information sourced from:

https://www.democrats.senate.gov/imo/media/doc/inflation_reduction_act_of_2022.pdf

https://www.democrats.senate.gov/imo/media/doc/environmental_justice_in_the_inflation_reduction_act.pdf