In a series of prior blog posts, we previously highlighted the historic implications of the Inflation Reduction (IRA) for the U.S.’s international climate commitments, as well as for private companies navigating the energy transition. Shortly after our series published, the Senate passed the IRA on Sunday August 7th with only minor modifications to the bill’s $369 billion in climate and clean energy spending. Today, the House passed the IRA without any further changes, and soon hereafter President Biden is expected to sign it into law.
However, this is only the beginning of the road; the IRA will have sweeping implications beyond the four corners of its pages. In the coming months and years, we expect to see intense jockeying over agency rulemakings that will shape the IRA’s implementation, as well as determine its ultimate success as an energy policy.
I. Congressional Permitting Reform
As an initial matter, it seems Congress has not finished its work revamping the nation’s climate and energy laws. As part of his agreement to support the IRA, Senator Joe Manchin (D-WV) announced that “President Biden, Leader Schumer and Speaker Pelosi have committed to advancing a suite of commonsense permitting reforms this fall that will ensure all energy infrastructure, from transmission to pipelines and export facilities, can be efficiently and responsibly built to deliver energy safely around the country and to our allies.” While the exact contours of this legislation are not currently known, Senator Manchin’s office recently released a legislative framework, which includes proposals to, among other things:
- tighten environmental reviews under the National Environmental Policy Act (NEPA);
- clarify the permitting and regulatory authorities of the Department of Energy and the Federal Energy Regulatory Commission;
- reform Clean Water Act provisions that allow state and local governments to impose additional requirements on federal permits; and
- create a list of strategically important energy projects, that the President can designate and periodically update, for streamlined permitting reviews.
According to Senator Manchin’s office, permitting reform will receive a vote before the end of the fiscal year on September 30, 2022. Unlike the Inflation Reduction Act, which passed through arcane rules of reconciliation—and thus required only a simple majority—permitting reform will be subject to the Senate filibuster and require the support of at least 60 senators (and bipartisan agreement) to become law. At the moment, it is unclear whether broad bipartisan support exists for this measure; some Republicans have publicly signaled skepticism, and environmental activists have long opposed expedited fossil fuel permitting. However, in the past, Republican Senators have expressed an interest in speeding the nation’s permitting system. During this Congress, a bipartisan group of Senators introduced a law to speed infrastructure permitting, and all Republicans and Senator Manchin supported a law to overturn the Biden administration’s revisions to NEPA. Together, these actions suggest there may be some interest within the Republican caucus in implementing meaningful changes to current law, partisan divisions notwithstanding.
II. Guidance for Key Tax Provisions in the Inflation Reduction Act
Additionally, there are several portions of the IRA itself that will be clarified and implemented through administrative guidance and in rulemaking processes over the coming months. For the purposes of this post, we’ve keyed in on three issues to watch: the interpretation of electric vehicle supply chain requirements; compliance measures for wage, apprenticeship, and domestic content requirements; and the method of greenhouse gas emissions accounting for new tax credits.
As highlighted in an earlier Inside Energy & Environment post, beginning in 2023, the IRA only provides tax credits for electric vehicles sold to consumers that meet strict critical mineral and battery sourcing requirements; these requirements do not apply to credits for commercial electric vehicles. Specifically, the law requires a certain “percentage of the value” of the electric battery components to be “manufactured or assembled in North America,” with applicable percentages varying by year. It also requires a certain “percentage of the value” of the critical minerals contained in the batteries to be “extracted or processed” in the United States or in any country with which the U.S. has a free trade agreement. IRA § 13401(e). Given the current state of the electric vehicle supply chain, many automobile manufacturers are expected to have difficulty meeting these sourcing requirements.
However, key features of these clean vehicle credits have yet to take shape. By the end of this year, the IRA requires the Treasury Department to issue regulatory guidance to help shape and administer the battery and mineral sourcing requirements. Id. Among the questions open for interpretation are acceptable methods for calculating the “percentage of the value” for critical mineral and battery components, as well as better defining the terms “manufacture or assembly” and “extraction or processing.” How Treasury addresses these points will have significant ramifications for the short- and medium- term value of the clean vehicle credits.
A much broader set of IRA tax credits seek to promote investment in, and use of, clean electricity, but their value depends on the interpretation of key labor and domestic content requirements. As currently structured, the IRA extends and modifies the Investment Tax Credit and Production Tax Credits that apply to certain renewable sources of power through the end of 2024. Id. §§ 13101, 13102. Beginning in 2025, similar projects will also be eligible for a new technology-neutral Clean Electricity Production Credit and a Clean Electricity Investment Credit, which apply to any domestically produced electricity source with a greenhouse gas emissions rate of zero. Id. §§ 13701, 13702. These credits, and others throughout the IRA, are keyed to the satisfaction of prevailing wage and apprenticeship requirements.
Specifically, if these wage and apprenticeship requirements are not satisfied, the credits are worth five times less than they otherwise would be. Additionally, the IRA creates a 10% “domestic content bonus” when facilities certify that certain percentages of steel, iron, and other manufactured products used in the facility are made in America, and further increases the value of the credit for projects located in “energy communities,” i.e. brownfield cites or economically distressed sites of former fossil fuel production. The interpretation and application of these provisions will dramatically affect the value of available government support. Future clean energy projects must take care to ensure proper documentation and compliance with these provisions.
Finally, many IRA tax credits are pegged to a demonstration of the life-cycle emissions of the underlying facility or fuel. For instance, the value of the clean hydrogen credit varies based on the project’s “lifecycle greenhouse gas emissions rate.” On the high end, a 100% credit value is awarded to projects with a lifecycle emissions rate of less than .45 kilograms (kgs) of carbon dioxide equivalent (CO2e), but on the low end, projects only receive 20% of the credit value if their emissions rate is between 4 and 2.5 kgs of CO2e. Id. § 13204. Additionally, the availability of the new credit for sustainable aviation fuels depends on a certification that the applicable fuels achieve at least a 50% life cycle greenhouse gas reduction percentage compared to petroleum-based jet fuel; that fuel’s project can then earn an additional credit for each additional percentage of lifecycle greenhouse gas emissions reductions. Id. § 13203. Properly measuring and verifying lifecycle emissions will determine a project’s eligibility for these credits, along with its ultimate value. This exponential increase in the economic significance of accounting for greenhouse gas emissions will bring much greater scrutiny to what are currently arcane and insufficiently standardized greenhouse gas accounting rules.
III. Closing Thoughts
The full implications of the IRA are yet to be fully understood. The law is likely to have significant implications for our energy future, leading to sharp growth in the nation’s clean energy production and a decline in national greenhouse gas emissions. Though we have laid out some initial consequences, there are undoubtedly many more interpretive questions that will arise in the coming weeks, months, and years. Additionally, by subsidizing and lowering the costs of clean electricity and other low-emissions technology, the IRA could improve the benefit-cost analysis for a variety of environmental regulations, leading to more stringent and durable rules. Further, by bolstering the domestic energy industry, the IRA could alter the political economy of climate policy, creating a broader base of support for future government investments in clean energy production or greenhouse gas curtailment. Regardless of how this future unfolds, it will surely be a dynamic time for energy and environmental law and policy.