Progress and Challenges: Assessing the Impact and Limitations of America's Inflation Reduction Act on Climate Targets

US will be closer to climate targets but still falls short

Eventually, when a robust low-carbon energy supply chain is established, when emerging technologies become largely competitive with carbon-intensive options, and when infrastructure hubs scale up the adoption of clean technologies, the US will be making significant progress toward decarbonisation. A recent research paper published by Science suggests that the US will likely slash emissions by 43-48% by 2035 under the effects of the IRA.

However, this forecast means the US will be well behind its commitment under the Paris Agreement to cut emissions by 50-52% by 2030 – and a delay in meeting this interim target could mean that the US risks missing its goal to become net zero by 2050. 

 

Impact of the IRA on US emissions

Net million tonnes of CO2e

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What is the IRA not addressing?

The IRA is not a one-stop shop for a faster clean energy transition in the US – in any jurisdiction, one single policy hardly does it all. What are some of the issues the IRA is not touching upon?

The first is infrastructure. Take the power sector as an example, there were over 2 Terawatts (TW) of renewable and storage capacity waiting to be connected to the grid by the end of 2022, a 40% increase from 2021. The renewable capacity from projects waiting in line exceeded the total existing renewable capacity of 1.25 TW in 2022. This grid congestion issue is caused partly by the design of interconnection evaluation processes and has resulted in delays in renewable project development. Seeing the problem, the Federal Energy Regulatory Commission has approved reforms to speed up the permitting process, and the Infrastructure Investment and Jobs Act assists to build more transmission lines. These efforts will help with the situation, but their effect is looking to only be modest in the medium term.

The second issue that has fallen out of the IRA’s scope is offtaker demand management for certain clean energies. In the hydrogen industry, for instance, being able to secure long-term offtake agreements is crucial for projects to come to a final investment decision (FID). Although North America is leading in bringing projects to FID, as of January 2023, only 8% and 26% of the renewable (green) hydrogen and low-carbon (blue) hydrogen projects announced by 2030 had reached FID or were under construction, commissioned, or operational. To facilitate hydrogen demand growth, offtakers need assurance that there will be continuously available and reasonably priced hydrogen. Government agencies can help with the situation by providing financial support for offtakers, and/or creating a platform for more transparent pricing.

Lastly, as we have repeatedly pointed out, the IRA is more heavily focused on carrots than sticks, as is the US energy and climate policy in general. There are recent efforts made on the regulatory front, such as proposed stricter regulation standards on automotive pollution to disincentivise high-emissions economic activities. But some of the more complex policy designs, like a nationwide carbon pricing and trading scheme, will be without the country’s reach for now.

That said, the US will be needing a much more comprehensive – and possibly more aggressive – collection of incentives, regulations, standards, enforcement, and labour capacity-building programmes to realise its climate goals on time. These can help consistently bring down the costs of clean technologies such as hydrogen and EVs so that they become competitive with high-carbon alternatives when the IRA’s financial support expires in a decade.

 

Clean energy tax credits are likely to survive long-term turbulence

Corporates and investors are watching whether the IRA will survive in the long term. If Republicans take control of Congress, and a Republican president is elected in 2024, the IRA could be at risk of being repealed, as signalled by some current criticism of the law. But even then, bipartisan support for certain cleaner technologies, especially carbon capture and storage (CCS) and blue hydrogen, is unlikely to go away. Since the IRA entered into force, more than 80% of the pledged investment in clean energy and semiconductor manufacturing announced is specifically toward Republican congressional districts. With significant potential for revenue generation and job creation, this should give IRA clean energy tax credits enough stability through the elections.

The IRA, with its lucrative incentives to attract project developers and investors worldwide, has drawn concerns and action from other economies. As a response, the EU has proposed the Net-Zero Industry Act and the European Critical Raw Materials Act, but since it is unclear how much funding there will be and where it will come from, these policies might not be able to provide incentives as high as those of the IRA. On a positive note, countering policies can level the playing field for faster clean energy adoption worldwide, but the risk is that domestic requirements under these policies could lead to a certain extent of clean energy supply chain deglobalisation.