The Inflation Reduction Act at one year: How is it going?

One year ago, on August 16, 2022, President Joe Biden signed the Inflation Reduction Act into law, enacting historic investments in clean energy, electric vehicles, energy efficiency, environmental justice, and other green initiatives. These measures aim to significantly reduce carbon emissions in the United States and bring the nation's climate goals closer to reality, but how is it all working out one year in?

Beyond its impact on the environment, the Inflation Reduction Act represents a pivotal shift in the American economy. It ushers in a manufacturing revival that could generate good-paying jobs in both blue and red states. With its focus on benefiting workers without college degrees and revitalizing moribund cities, The approach differs substantially from trickle-down economics.

It is still early in the timeline of the legislation. Still, a year after its passage, data indicates that the Inflation Reduction Act has already begun rebuilding the nation's manufacturing sector.

Revitalizing U.S. Manufacturing through the IRA

Over the past few decades, the United States has offshored millions of manufacturing jobs, resulting in the decline of once-thriving communities. Manufacturing firms and plants have decreased by around 25% since 1997, and the corresponding job losses have been substantial.

While politicians from both sides have promised to address this issue, the Inflation Reduction Act stands out as the first substantial legislation in over five decades that genuinely tackles the offshoring problem and reinvests in U.S. manufacturing on a large scale.

The law has initiated a renaissance, nearly doubling manufacturing construction within a single year. Battery component makers, wind and solar equipment manufacturers, and electric vehicle producers have announced huge investments since the law's enactment. New clean energy projects have been announced in 44 states, with Michigan, Georgia, South Carolina, California, and Texas leading the way.

State and local governments have historically used tax credits and other incentives to attract private and public investments, and local legislation intended to capitalize on the IRA is just coming into view. With uncapped IRA tax credits, the private sector may contribute even more capital to clean energy projects, creating more manufacturing jobs than initially projected.

Forecasts and Investments

In the summer of 2022, the Congressional Budget Office estimated that approximately $369 billion in federal clean energy tax credits could be claimed through the law. However, a more recent analysis by Goldman Sachs in April 2023 suggests that as much as $1.2 trillion in federal incentives could drive up to $3 trillion in private investment over the next decade, potentially leading to millions of new, high-paying jobs.

While new projects are emerging in almost every state, clean energy and battery-related investments influenced by the law have been mainly concentrated in the Midwest and Southeast regions. These areas, often impacted by economic decline due to shifts in energy trends or offshoring, are now experiencing a resurgence.

The Inflation Reduction Act presents an opportunity for communities traditionally relying on fossil fuels and carbon-intensive industries to reinvigorate their economies. For example, Michigan's historical dependence on the auto industry positions it to benefit from new investments in electric vehicles and battery manufacturing as the nation moves towards low-carbon transportation.

Bringing it All Back Home

The appeal of the investment-friendly environment created by this law extends beyond U.S. borders. Representatives from various states, including Georgia, Ohio, and Michigan, have traveled to Europe to attract foreign developers using the incentives provided by the Inflation Reduction Act. Additionally, states like Illinois, Michigan, and Georgia have showcased themselves as destinations for clean energy investments at events like the World Economic Forum. As of January 2023, half of the manufacturing investments spurred by the Inflation Reduction Act have come from foreign companies.

The IRA's extended timeline is also seen as a boon for businesses. Companies can invest more confidently in factories and other ventures, with incentives lasting up to a decade. Businesses are encouraged to leverage federal incentives to attract their own capital, driving innovation and growth.

One example of this is Boston Metal, which is constructing a plant in West Virginia to manufacture components for its green steel production platform, Molten Oxide Electrolysis (MOE). This plant will produce low-emissions refractory metal alloys and high-purity chromium alloys, addressing gaps in U.S. production capacity. The IRA's incentives help ensure access to clean electricity required for MOE technology and promote the adoption of decarbonization technologies.

Although progress has been promising, the Inflation Reduction Act continues to face both political and technical challenges. Ensuring efficient and safe energy transmission is crucial, particularly for renewable energy projects connecting to the grid. Addressing transmission challenges requires reforms in project siting and permitting at federal, state, and local levels. Overcoming these hurdles is essential to enable the clean energy revolution made possible by the Inflation Reduction Act.

Consumer Savings and Incentives

For consumers, the IRA offers rebates that cover a substantial portion of the cost of purchasing and installing energy-efficient appliances. Electric heat pumps, water heaters, clothes dryers, and ovens are among the eligible products. For instance, rebates of up to $2,000 can be obtained for replacing a furnace or air conditioner with an electric heat pump, contributing to more efficient heating and cooling.

Solar Investment Tax Credit (ITC) provisions in the IRA allow American taxpayers to claim a credit worth 30% of their solar system's cost. Additionally, a new ITC worth 30% of the cost of a home battery storage system makes solar-powered battery storage more accessible. Single-family and multifamily homes can benefit from the IRA's solar ITC, extending advantages to homeowners and renters alike.

Taking it on the Road

The IRA presents a compelling opportunity for substantial savings when purchasing or leasing electric vehicles (EVs). Qualified buyers can save up to $7,500 on select new EVs or $4,000 on a used one. Long-term benefits of EV ownership are evident, particularly when coupled with renewable energy sources like solar power. Charging EVs using clean energy sources at home further reduces carbon footprints and enhances cost savings.

An evolving landscape for electric vehicles is projected, with gas-engine vehicle dominance giving way to electric cars. By 2027, an estimated 46% of new model launches will be electric vehicles, accompanied by increased EV charging infrastructure spurred by federal funding.

While the Inflation Reduction Act's implementation faces challenges and calls for investigation from Republican lawmakers, its economic benefits are gaining traction nationwide. Even as some members of Congress consider repealing incentives, the law's positive impact on job growth and supply chains makes such efforts challenging. The law's popularity among voters, particularly in rural and suburban areas where manufacturing growth is taking place, contributes to its likely endurance.

The Inflation Reduction Act presents a unique opportunity to drive climate action while rejuvenating the country's manufacturing sector and uplifting millions of Americans. Those interested in exploring funding opportunities and tax incentives stemming from recent U.S. climate laws can access resources through WRI's U.S. Climate Policy Resource Hub.