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The Inflation Reduction Act Seeks to Reduce GHG Emissions: Can its Provisions Effect Long-Term Systemic Change?

Among the many provisions of the 2022 Inflation Reduction Act (IRA) are investments in environmentally related areas like alternative fuels, hydrogen production for heat and transportation, and carbon sequestration, largely in the form of tax incentives and credits.

Given that the act’s multiple goals include driving down consumer energy costs, increasing energy security, and reducing greenhouse gas (GHG) emissions, it’s worth looking at these investments and assessing their potential for producing the type of long-term systemic change that’s essential for at-scale effectiveness.

Broadly speaking, reducing GHG emissions will require a shift away from burning of fossil fuels for energy production, transportation, home heating, and other uses, all of which produce substantial amounts of CO2. Alternative fuels are one possible path, as are power plants driven by zero-emission alternatives like wind, solar, nuclear fission, or emerging technologies like fusion, all of which are funded under the act.

Green hydrogen is a new, important IRA focus, with an eye towards encouraging cleaner production of hydrogen as a strong contender for heat production in existing industrial processes (such as ammonia production and steelmaking), and for possible use for nascent applications like fuel-cell-based transportation, and energy storage. Incentives include a production tax credit (PTC) of $0.60/kg that can be increased by up to 500% if wage/apprenticeship and other requirements are satisfied, and can also be claimed as an investment tax credit (ITC). Emissions must be at or below 4 kg per CO2e/kg well to gate, a substantial decrease from existing natural gas reforming with steam, which generates on the order of 10-12 kg per CO2e/kg but well within the range of other current technologies.

While that’s good as far as it goes, the IRA’s 10-year time frame is a concern for the many applications that are still at relatively early stages of development and will require substantial efficiency improvements to compete with simple electrification of transport and heating. It seems likely that the act’s provisions will expire well before any of these become mainstream.

IRA incentives for battery development are perhaps more promising. Incentives for standalone facilities and US manufacturing will spur domestic production of advanced batteries and likely drive innovation and cost reduction. The transportation sector will benefit from spillover of the technology and economic improvements.

Another important IRA feature is modifications to the section 45Q tax credits for carbon capture. We’ve discussed in the past how these credits fundamentally change the economics of carbon emission capture and sequestration or utilization, for the energy sector and other industries. The modifications increase the per-ton credit values, especially when wage and apprenticeship standards are met, extend the time frame for starting construction of facilities, make investor-favorable changes to payment and transferability of credits, and broaden the definition of qualified facilities.

However, the structure of the act is such that CO2 capture from low-emitting processes, such as ethanol production and other fermentation processes is incentivized, while CO2 capture from high-emitting processes, such as fossil-powered power plants is not. This was done to drive down carbon emissions by these emitters, but it may actually result in less CO2 being captured. More to follow on this in an upcoming blog post.

Ultimately, the net environmental effectiveness of these aspects of the IRA, and the act’s ability to truly drive systemic change, will depend on the answers to a number of questions. How will allocation of feedstocks, and allocation of products, be handled? Will fuel cells emerge as a better technology than batteries? Which companies will grab the market?

And more broadly, are the GHG requirements stringent enough and the long-term incentives strong enough? And will the measures produce unintended impacts that were not considered? For example, the incentivization of American manufacturing could result in products being transported 3,000 miles by truck rather than going by sea.

In Otto von Bismarck’s enduring words, “Politics is the art of the possible…” and the IRA’s wide-ranging pursuit of everything from reduced insulin prices to drought resilience to tax reform in addition to environmental impact reduction represents what was possible in the American political environment of 2022. Whether that is adequate to the task facing us in global warming remains to be seen, and many of us will be watching with interest.

This article was adapted from a presentation to the December 2022 CRC Sustainable Mobility Workshop.