Collaboration and Effective Investment Will Enable IRA Success

In August 2022, the US passed the Inflation Reduction Act (IRA), which marks a significant opportunity to accelerate the transition away from fossil fuels. Such benefits lie within the bill’s $369 billion in climate and clean energy expenditures, as well as the deployment of 950 million solar panels, 120,000 wind turbines, and 2,300 grid-scaled battery plants that will help reduce the social cost of carbon. However, state and local governments, corporations, and regulators must collaborate to promote effective investments in renewable technologies such as hydropower, biopower, batteries, and power-to-X. With these efforts, the IRA can be more successful in its efforts to transition the US away from fossil fuels.

What’s Going On Now, and Is It Enough?

The IRA implements a methane emissions tax that will force utilities and corporations to pay $900/ton starting in 2024 and $1,500/ton after 2025; it also includes an investment tax credit to reward entities that generate power using renewable energy. Beyond these two renewables-embracing policies, the IRA grants the U.S. Department of Energy (DOE) the authority to commit $40 billion in loan guarantees for sustainability projects, which is in addition to its current commitment authority of around $24 billion.

To determine where to allocate funds, DOE needs to identify innovators pursuing sustainable technologies that display signs of market disruption. To that end, companies should be more transparent in reporting business practices and emissions. For example, if corporations reported all three emissions scopes as well as in-depth business practice methodologies such as supply chain analyses and waste figures, DOE would find more value in distinguishing companies with sustainable practices. Additionally, consolidating company rating websites to standardize environmental, social, and governance ratings would help DOE aid companies that are—in the words of Michael Lenox and Aaron Chatterji, authors of Can Business Save the Earth?—“actually sustainable, not just the ones that have figured out how to game a given ratings system.”

Collaboration is also needed between the Federal Energy Regulatory Commission and state and local governments to approve transmission lines and licensing projects that align with the IRA’s sustainability goals. Expanding transmission lines, especially ones with advanced conductor technology, can increase renewable power, while growing the number of licensed renewable projects will help transition the US away from fossil fuels. Altogether, this will allow more investment from DOE in renewable technology.

Cooperation among Stakeholders Can Unlock Significant Savings

A recent empirical study forecasting energy technologies and costs outlines the monetary benefits that can be achieved with a “fast transition” away from fossil fuels—which the study defines as eliminating fossil fuel use by 2050. While ambitious, this goal would save the US an estimated $514 billion if met, mainly due to cheaper costs for renewable energy. In addition, once renewable technologies are fully developed, they can be integrated into smart energy grids, which in turn increase energy reliability and resiliency. Reaching such a target will require cooperation among US state and local governments, corporations, and regulators to embrace and act on the initiatives set in the IRA. Mutualistic outcomes are possible if the politics of climate change can be set aside and these stakeholders can collaborate to facilitate effective investment in renewable technologies.

To learn more about the IRA and its impact on energy costs and production, read Guidehouse Insights’ white paper titled The Inflation Reduction Act: A Boon for American Clean Energy – But When? In addition, those curious about renewable energy and storage technologies should check out Guidehouse Insights’ distributed energy resources database.