What’s in the new U.S. Climate Deal?

On August 12, 2022, the U.S. House of Representatives passed the Inflation Reduction Act of 2022 (the “Act”), which is substantially focused on transitioning the U.S. economy away from fossil fuels and towards clean energy, and represents the single biggest climate investment in U.S. history, allocating $369 billion in tax credits to green programs.

The Act, expected to be signed into law by the President in the coming days, puts the United States on a path to reduce emissions by up to 40% below 2005 levels by 2030 and represents a new phase in the development and deployment of clean technology.

Key Provisions of the Act

(1) Tax credits for zero-carbon energy. The Act includes billions of dollars in new tax credits for companies building new sources of emissions-free electricity, including clean hydrogen, solar panels, and advanced nuclear energy, and grants 10-year extensions of existing credits for zero-carbon technology, including wind and solar energy. The tax credits, which are tied to wage requirements to ensure that clean energy is built through a unionized, domestic supply chain, will be critical in bolstering a just transition to renewable energy and supporting the development of zero-carbon technology. In addition, the Act extends tax credits to companies using high-cost technology to capture and bury carbon dioxide from natural gas power plants and other facilities to prevent carbon from reaching the atmosphere and contributing to climate change.

Following the Act’s proposal in late July, investments in solar companies, wind turbine manufacturing companies, and electric battery manufacturers soared. This growth in the green technology market could continue as the deployment of climate-related technology grows over time in line with the Act’s incentives.

(2) Oil & gas lease sales. The Act clears the way for further oil and gas lease sales on public lands and waters by providing that the U.S. Department of Interior (“the DOI”) will only be permitted to issue new onshore and offshore renewable rights on federal land if the agency held onshore and offshore oil and gas lease sales in certain timing and acreage minimums.  

In addition, the Act requires that the DOI execute previous lease sales in the Gulf of Mexico and Alaska’s Cook Inlet. The Act also reinstates a lease sale of 80 million acres in the Gulf of Mexico that the DOI made available for oil and gas drilling in November 2021, but which had been invalidated by a D.C. Circuit Court ruling that determined that the government had not sufficiently evaluated the sale’s environmental impact.

Experts indicate that, given the above provisions, while the Act may have the effect of increasing some emissions from ongoing fossil fuel usage, the overall amount of emissions would nevertheless be reduced given the step up in renewable energy use.

(3) Electric vehicle incentives. The Act also targets the transportation sector, providing several tax and funding incentives for purchasers and manufacturers of electric vehicles. Under the Act, buyers will receive up to a $7,500 rebate for new electric vehicles and up to $4,500 in tax credits for used electric vehicles, subject to income limits of buyers. The Act also provides $2 billion in grants to help domestic car manufacturers transition to clean vehicle manufacturing, including hydrogen-fueled vehicles.

(4) Fees on methane leaks. In addition, the Act establishes a “Methane Emissions Reduction Program” to prevent methane leaks from natural gas production and distribution. The program imposes penalties— $900 per metric ton of methane emissions that surpass the federal limit in 2024— on methane leaks from oil and gas wells, pipelines, and other leak-prone infrastructure. The penalty will increase at the end of 2026 to $1,500 per metric ton.

(5) Agriculture and forest conservation programs. The Act allocates $20 billion for programs, including for livestock and soil and rice production, to cut emissions from the agricultural sector. This sector generates approximately 11% of the United States’ greenhouse gas emissions. The Act also funds support for forest conservation and restoration of coastal environments.

(6) Environmental justice initiatives. The Act also allocates $3 billion in funds to the Environmental Protection Agency to award grants and provide technical assistance for environment-related activities that benefit disadvantaged communities. Of these funds, $2.8 billion is allocated for grants to support eligible activities, which include pollution monitoring, environmental remediation, workforce development that helps reduce greenhouse gas emissions and other air pollutants and facilitating engagement of disadvantaged communities in State and Federal public processes, including advisory groups, workshops, and rulemaking.

As the Act’s provisions come to fruition, companies and their stakeholders should continue to monitor related regulations and business developments to consider risks and opportunities, especially given the federal government’s historic investment to combat climate change.