The Inflation Reduction Act (IRA) Creates Powerful Tailwinds for Net Zero Companies

Authors

• David Wei

  Former Managing Director, Climate and Nature, BSR

The Inflation Reduction Act (IRA) is historic legislation, projected to reduce US climate pollution by roughly 40 percent by 2030 compared with 2005, and it will enable investment and innovation en route to the current US Paris Agreement target.

Unleashing US$369 billion in climate and clean energy incentives, the legislation provides powerful tailwinds for companies already on a science-based trajectory toward net zero, and it removes excuses for those waiting for policy certainty before setting up their own net-zero goals. Through provisions on methane, environmental justice, and new technologies, the IRA also signals the future of corporate climate action.

All companies validate their net-zero and science-based climate goals without full certainty on how they will implement them. The IRA gives businesses more of the policy certainty that they need to make good on these goals. This ambitious legislation establishes:

• New tailwinds to reduce scope 1 emissions (in company operations), including a US$10 billion investment tax credit to build clean technology manufacturing facilities and US$6 billion for a new Advanced Industrial Facilities Deployment Program to tackle the hardest-to-abate industries like chemical, steel and cement plants. A tax credit will incentivize carbon capture in these industries beyond 2030.
• New tailwinds to reduce scope 2 emissions (e.g., procured electricity and heat), including long-term, full-value tax credits for the production of renewable electricity (e.g., solar, geothermal, wind, combined heat and power, waste energy recovery) through to 2025, converting to technology-neutral tax credits for electricity generation facilities placed in service in 2025 or later. Another 10-year tax credit applies to energy storage technologies. Grants will facilitate siting of interstate electricity and transmission lines. As a result, clean electricity is projected to be roughly three-quarters of US generation by 2030.
• New tailwinds to reduce scope 3 emissions, including tax credits for electric vehicle (EV) charging and the purchase of new and used light-duty EVs, and for commercial clean vehicles. US$1 billion goes to grants or rebates for zero-emission heavy-duty vehicles, and credits support the production of biodiesel, renewable diesel, sustainable aviation fuels, and other clean fuels. These will substantially reduce companies’ emissions in transportation and distribution (categories 4 and 9).
  • For food, beverage, and agriculture companies with substantial upstream footprints, US$20 billion goes to reducing methane from livestock, improving soil carbon and climate-smart agriculture, which will reduce scope 3 emissions from purchased goods and services (category 1).
  • To help resolve a pain point for most corporate practitioners, US$5 million enables the EPA to support standardization and transparency of corporate climate action commitments and plans.

The IRA also bolsters US efforts at climate diplomacy by undergirding its new Paris Agreement target of 50-52 percent reductions by 2030. Additional federal regulatory and state-level action over the coming years can bring this target within reach. Companies concerned about their upstream scope 3 emissions outside of the US, e.g., in manufacturing centers in Asia, should cheer the possibility that a credible US target will result in an upward spiral of national ambition.

Finally, the IRA signals the future of corporate climate action by establishing incentives around emerging issues and technologies.

• A methane emissions reduction program provides grants for methane monitoring and fees for methane emitters in the oil and gas industry starting at US$900/tonne in 2024. Immediate methane reductions are key to limiting warming in the short term and clearing a path for a longer-term energy transition needed to meet the Paris Agreement’s goals.
• Environmental justice provisions will target clean energy and emissions reductions toward low-income and disadvantaged communities. We at BSR are working to bring climate justice, long established in academia and in the development community, into the mainstream of corporate sustainability.
• Tax credits will reduce the green premium on new technologies like hydrogen and direct air capture, laying the groundwork for continued emissions reductions in later decades toward net zero and for the removals that will be necessary in net-zero target years.

The IRA is projected to reduce household energy bills and generate millions of jobs at a time of energy-driven inflation and potential economic recession. That said, we should not overlook the powerful tailwinds it gives sustainability professionals working to build net-zero value chains and how it leaves no excuses for companies yet to take science-based action.