The Inflation Reduction Act - Reducing Inflation or Increasing Climate Funding?
The Inflation Reduction Act (IRA) commits a huge amount of money to fight inflation and climate change, but it’s important to highlight how it is put into practice.
Climate tech companies are a vital component of the fight against climate change as they develop and bring to market innovative technologies that help reduce greenhouse gas emissions and mitigate the impacts of a changing climate.
These companies often face significant challenges, including the high cost of research and development, difficulty obtaining funding, and the need to compete with established players in the energy and technology sectors.
To fight these challenges and at the same time, fight rising inflation, the US government passed the Inflation Reduction Act in August of 2022.
The Inflation Reduction Act Establishes and Extends Tax Credits and Loans
The Inflation Reduction Act (IRA) is a piece of legislation that has had a significant impact on the climate tech industry. The IRA aims to reduce inflation and stabilize prices by encouraging businesses to invest in technology that can improve energy efficiency and develop new technologies that benefit the climate.
One of the key provisions of the IRA is the creation of a tax credit for businesses that invest in climate tech. This credit is designed to encourage businesses to adopt technologies that can reduce their carbon footprint and mitigate the impacts of climate change.
For example, a company that installs solar panels or invests in energy-efficient equipment may be eligible for a tax credit under the IRA.
In addition to the tax credit, the IRA also provides funding for research and development in the climate tech sector.
This funding is intended to help emerging startups develop and commercialize new technologies that can help reduce greenhouse gas emissions, decrease the use of fossil fuels, and much more.
These tax credits are beneficial to initiatives such as the Climate Pledge, of which 378 companies and counting have signed onto and promised to reduce their carbon footprints to zero by 2040. The monetary incentives now available are expected to boost the number of companies signing on to the Climate Pledge and other similar initiatives.
Electric Vehicle Startups Can Lower their Manufacturing Costs with the New IRA Policy
The IRA allocates ~$108.5 billion in funding for EV companies and consumers buying EVs out of the total $369 billion in the bill.
Under the Inflation Reduction Act, the US legislation extends a program that provides $7,500 in tax credits to consumers who buy EVs.
But for consumers to claim this benefit, manufacturers have to follow new guidelines:
Car batteries must be made using critical minerals that are recycled, mined, and processed in the US (or any country with which the US has a free trade agreement)
Most of the final assembly of the battery packs has to take place in North America
To qualify, a company has to follow both of these requirements in under three years starting in 2024.
However, the legislation also has a provision that partly incentivizes consumers who buy EVs from companies that meet the requirements halfway. This means customers can claim a tax credit of $3,750 if they follow just one of the two requirements.
These tax credits for buying EVs are helpful but don’t yet tip the balance with gas vehicles. The average cost of an EV is 37% more ($67,291) than the overall new car market average.
People are already quite reluctant to buy EVs because of the associated costs. With the new requirements under IRA, if a company wants their electric vehicles to qualify, they need to use more expensive US-made parts when compared to importing parts from China.
In order to survive in the market, these electric vehicle companies won’t have a choice but to increase the price of the vehicles. Even with the tax credit of $7,500, it will be a challenge to lower manufacturing costs and make EVs more affordable.
Current Status of EVs
According to the Alliance for Automotive Innovation, there are 72 EV models available for purchase in the United States and three major types: battery, plug-in hybrid, and fuel cell electric vehicles.
70% of these vehicles currently do not meet either of the new requirements, and not even a single EV model currently meets both requirements.
Existing electric vehicle companies like Rivian are not happy with the tax credit concept under the IRA. In an interview with Reuters, they acknowledged two major issues:
The first is the manufacturing of EVs in North America or a partner country under a free trade agreement with the U.S.
The second issue is the price limit on electric pick-up trucks or SUVs set at $80,000. This means for consumers to claim the full $7,500 tax credit on electric pick-up trucks, the price of the truck must be less than $80,000, plus the consumer must make less than $150,000 as individual income-earners or less than $300,000 for those filing jointly.
Rivian is not happy because they recently increased their SUV price from $72,500 to $84,500, making it invalid for buyers to claim the tax credits under the new IRA rules.
The two major challenges for existing players in EV manufacturing are:
To create EV batteries as per IRA requirements
Finding a lower-cost way of manufacturing EV batteries in the US
Adjusting prices so that they’re in line with the $80k limit
Tax Credits Extended For Solar, Wind, and Geothermal Through 2024
The IRA extends the Investment Tax Credit (ITC) and Production Tax Credit (PTC) for solar, wind, geothermal, biogas, combined heat and power (CHP) facilities, as well as microgrid projects that begin construction before December 31, 2025.
To claim the enhanced 30% ITC and 2.6 cents per kilowatt PTC, businesses must follow the labor and apprenticeship requirements.
Stand-alone energy storage companies will benefit from IRA as they can now claim ITC without connecting the energy storage devices to solar projects.
Another benefit of tax credit extension in the energy sector is for solar projects that use domestically produced materials. If the total materials for the project you’re building are 40% US-made, your project will qualify for a 10% increase in the ITC.
There’s also a 10-20% increase in the ITC if your project is related to the energy community - a type or project where the majority of the employees hired are from the oil, gas, and coal sectors or is located in an environmental justice area - a low-income community or tribal land.
New Loans for Clean Energy Companies
The Inflation Reduction Act launched a new loan program called Energy Infrastructure Reinvestment (EIR), which will help update, repurpose, and replace energy infrastructure to increase clean energy production.
The IRA has allocated $5 billion in funds to be distributed as loans under EIR until September 5, 2026. The total funds allocated to EIR have now reached an impressive $250 billion.
The three types of projects that can attain loans under EIR are:
Repurpose shuttered fossil fuel facilities for clean energy production
Retooling energy infrastructure
Updating operating energy infrastructure with emissions control technologies
More Loan Initiatives within the IRA
Advanced Technology Vehicles Manufacturing (ATVM) Direct Loan Program: $3 billion credit subsidy and a fund of ~$40 billion in loans to support manufacturing of medium- and heavy-duty vehicles, locomotives, aviation, and hyperloop.
Tribal Energy Loan Guarantee Program (TELGP): Increased the loan amount available from $2 billion to $20 billion so that Tribes all across the US can apply for loans to build energy-related projects.
Innovative Clean Energy (ICE): $40 billion in loans available to all eligible Title 17 Innovative Clean Energy technology categories.
Consumer Incentives by IRA will Make Products More Affordable
The IRA announced ~$43 billion in tax credits to help electrify homes by making products like solar panels, heat pumps, and home batteries more affordable. These consumer incentives will persuade people to buy environmentally friendly products. This will also help climate tech companies increase their sales and incentivize more startups to enter the consumer climate tech space.
Some of the consumer incentives that will be available from the start of 2023 are:
$7,500 tax credit for EVs that adhere to the criteria set by the IRA (the same one explained above)
Qualifying home improvements like Energy Star exterior windows and doors, central air conditioners, heat pumps, boilers, and other renewable energy equipment be eligible for a tax credit of up to 30% of the total cost (capped at $1,200 yearly)
The Inflation Reduction Act Will be a Game Changer In 2023 & Beyond
With hundreds of billions of dollars committed to fight climate change, the IRA is going to be a game changer for existing and upcoming companies dedicated to investing in climate technology.
At the same time, companies might have to rethink their manufacturing and production strategies in order to adhere to the rules and regulations implemented by the IRA that are aimed at reducing inflation as well.
What’s clear is that the IRA provides a massive boost to climate tech companies and incentivizes other companies to implement more climate-friendly technology. We hope the IRA is just the start, inspiring many more programs from governments around the world to provide substantial climate funding.
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