The US Inflation Reduction Act: A Two-Year Retrospective on Decarbonization and Energy Transition

Two years ago, the United States took a historic step toward a low-carbon future by enacting the Inflation Reduction Act (IRA), a cornerstone of the Biden administration's climate policy. As the second-largest carbon emitter globally, the US has committed to reducing its emissions by 50-52% below 2005 levels by 2030 and achieving net zero by 2050.

The IRA, alongside the Infrastructure Investment and Jobs Act and the CHIPS and Science Act, forms a trio of legislative actions designed to accelerate the nation’s decarbonization and energy transition efforts. This article reviews the IRA’s decarbonization and energy transition components, examines the early results, and explores the challenges that remain.

Understanding the IRA: A Focus on Clean Energy

The Inflation Reduction Act, passed in August 2022, represents the largest federal climate investment in US history. With a budget of approximately $500 billion, it primarily uses clean energy tax credits and incentives to drive private investment in clean technologies.

Key areas of focus include hydrogen, batteries, solar panels, and low-carbon power generation, all aimed at reducing the nation's greenhouse gas (GHG) emissions and enhancing energy security.

Key Components of the IRA:

• Clean Energy Tax Credits: The IRA provides extensive tax credits to spur the adoption of clean technologies. For instance, hydrogen production credits range from $0.60 to $3 per kilogram, and homeowners installing solar systems are eligible for a 30% tax credit through 2032.
• Incentives for Fair Labor Practices: Bonus credits are offered for projects that meet fair wage and labor standards, ensuring that the benefits of the clean energy transition are broadly shared.
• Support for Low-Income and Fossil Fuel Communities: Special provisions in the IRA ensure that disadvantaged communities benefit from the clean energy boom, addressing both environmental and social equity.

The First Visible Results: Job Creation and Project Development

Two years into its implementation, the IRA has already begun to reshape the US energy landscape. The law's impact is evident in several areas:

Job Creation and Economic Impact

• Manufacturing Boom: Manufacturing construction spending in the US has doubled since the end of 2021, driven by investments in electrification and decarbonization. The IRA alone is expected to generate significant economic growth, with sectors like electric vehicles (EVs), batteries, and solar energy leading the way. For example, over $84 billion has been invested in battery manufacturing, supporting the US's transition to a cleaner energy economy.
• Job Creation: The clean energy sector has seen a surge in job creation, with thousands of new jobs emerging in industries like solar panel manufacturing, EV production, and green hydrogen development. These jobs are often located in regions that have historically relied on fossil fuels, providing new economic opportunities for those communities.

Key Projects and Investments

• Green Hydrogen: The IRA’s support for green hydrogen is helping to kickstart projects across the country. For instance, Clean Hydrogen Production Credits have made low-carbon hydrogen production more viable, with several large-scale projects already underway.
• Solar Power Expansion: Since the IRA's passage, the US has seen a significant increase in solar energy capacity. Over 155 gigawatts (GW) of new production capacity has been announced, supported by a range of rebates and tax credits aimed at increasing solar installations for various applications.
• Industrial Decarbonization: The industrial sector, responsible for around 30% of US energy-related emissions, is also benefiting from IRA funding. Projects like Electra’s green steel pilot in Colorado and Limelight’s carbon-free laser method in steel production exemplify how the IRA is driving innovation in hard-to-abate sectors.

Challenges and Opportunities Ahead

Despite these early successes, several challenges remain in fully realizing the IRA’s potential:

Supply Chain Dependencies:

While the IRA seeks to reduce the US's dependency on global energy supply chains by reshoring production, there is still a significant reliance on imported materials, particularly in the battery and solar sectors. Addressing these dependencies will be crucial to sustaining long-term growth in clean energy manufacturing.

Technological and Infrastructure Gaps

The transition to a low-carbon economy requires not only new technologies but also significant upgrades to existing infrastructure. The US grid, for example, needs substantial investment to accommodate the increasing penetration of renewable energy sources. Additionally, emerging technologies like green hydrogen and carbon capture and storage still require further development and commercialization to achieve their full potential.

Regulatory and Policy Uncertainties:

The implementation of the IRA's provisions depends on a complex web of federal, state, and local regulations. Navigating these regulatory environments can be challenging for businesses, particularly those new to the clean energy sector. Ensuring consistent and supportive policy frameworks across all levels of government will be essential to maintaining the momentum generated by the IRA.

Harnessing the IRA for Sustainable Businesses in the US

As the Inflation Reduction Act continues to unfold, it presents unprecedented opportunities for businesses looking to contribute to and benefit from the transition to a low-carbon economy. However, navigating the complexities of the IRA and maximizing its benefits requires strategic planning and expertise.

At Asuene, we are committed to helping businesses adapt to this rapidly changing landscape. Our team of experts is here to guide you through the intricacies of the IRA and other climate regulations, ensuring that your company can thrive in a low-carbon future. Whether you're looking to decarbonize your operations, invest in clean technologies, or explore new market opportunities, we’re here to help you make the most of these historic investments.

Contact our US team today to learn more about how we can support your journey toward a sustainable and profitable future: Seiichiro (Ichiro) Tanigaki , Colin Connors , Chan Lee .

Article by Stéfan Le Dû and Wan Li , Asuene Compass team. Asuene Compass, the global sustainability intelligence team at Asuene, acts as the guidepost through the evolving landscape of corporate sustainability. The Asuene Compass team identifies emerging trends and regulations in decarbonization, climate policy, and broader ESG matters. This knowledge is translated into actionable insights through white papers, articles, webinars, and regular updates on our website and social media.