• Inflation Reduction Act to fund large range of energy-related activities and incentives

    Date posted:

    • Post Author

      Patrick Lavery

      Combustion Industry News Editor

The Inflation Reduction Act (IRA), which includes large amounts of spending on energy and climate initiatives, has become law in the United States, having been signed by President Joe Biden. After being flagged in the 1 August edition of the Combustion Industry News, much more detail is now available on the array of initiatives, which includes, in the words of the summary document produced by the Democrats party:

  • Production tax credits to accelerate U.S. manufacturing of solar panels, wind turbines, batteries, and critical minerals processing (an estimated US$30 billion).
  • US$2 billion for national labs to accelerate breakthrough energy research.
  • Tax credits for clean sources of electricity and energy storage and roughly US$30 billion in targeted grant and loan programs for states and electric utilities to accelerate the transition to clean electricity.
  • Tax credits and grants for clean fuels and clean commercial vehicles to reduce emissions from all parts of the transportation sector.
  • Grants and tax credits to reduce emissions from industrial manufacturing processes, including almost US$6 billion for a new Advanced Industrial Facilities Deployment Program to reduce emissions from the largest industrial emitters like chemical, steel and cement plants.
  • Over US$9 billion for Federal procurement of American-made clean technologies to create a stable market for clean products, including $3 billion for the U.S. Postal Service to purchase zero-emission vehicles.
  • US$27 billion clean energy technology accelerator to support deployment of technologies to reduce emissions.
  • A methane emissions reduction program to reduce the leaks from the production and distribution of natural gas.
  • Grants to reduce air pollution at ports, funded at US$3 billion, support the purchase and installation of zero-emission equipment and technology at ports.
  • US$1 billion for clean heavy-duty vehicles, like school and transit buses and garbage trucks.
  • More than US$20 billion to support climate-smart agriculture practices.
  • Tax credits and grants to support the domestic production of biofuels, and to build the infrastructure needed for sustainable aviation fuel and other biofuels.

Apart from the investment incentives in renewable energies and electric vehicles, the range of initiatives also supports carbon capture and hydrogen technologies, which will play a key role in decarbonisation of the economy. Perhaps the most impactful short-term initiative will be the money allocated to methane emissions reduction and introduction of the ‘methane charge’, given methane’s high greenhouse gas potency. The clean fuels initiatives are also interesting in that they seem likely to help spur development of green hydrogen, methanol, ammonia and synthetic methane, along with the further boost to biofuels. In all, the package appears to be welcome news for many of the innovations that the combustion industry is focussed on.

Renewables, storage and other ‘clean power’

A large part of the package is aimed at renewables, and preliminary analysis by American Clean Power estimates that it could result in an additional 525-550 GW of installed power generation capacity by 2030, noting that it is “hard to understate the transformative impact that the IRA will have on the country’s electric grid”. With an estimated 221 GW capacity currently installed, this would be more than a tripling, and renewables might then account for around 40% of US electricity production (in the estimate of American Clean Power), having stood at 20.1% in 2021. Such high levels could start to mean potential stability issues in some areas, meaning that storage and other balancing technologies, including flexible ‘baseload’ generation will become even more vital.

While until 2024, the current tax credits for wind and solar will remain in place, a transition will then be made to a technology-neutral tax credit which is to remain in place until 2032, or until emissions from the electricity sector fall to 75% of the 2022 level (whichever is later). Energy storage will also be eligible for these credits, which seems likely to spark additional private investment in such technology.

Carbon capture and storage

More detail on the carbon capture provisions of the Inflation Reduction Act has been provided by legal and advisory firm McDermott Will & Emery. The ‘45Q’ tax credits for each tonne of carbon dioxide captured and reused or stored at CO2-producing facilities are to increase to US$85/metric tonne, up from US$50/tonne. This tax credit was already helping to get carbon capture projects off the ground, and raising it should encourage more, especially as the size of an eligible project is being hugely decreased:

  • Where a power plant would qualify for the tax credit scheme before only if it emitted more than 500,000 tonnes of CO2per year, under the new act that will now be just 18,750 tonnes.
  • Industrial facilities have needed to emit more than 100,000 tonnes of CO2per year to qualify, and that will be reduced to 12,500 tonnes.
  • DAC facilities needed to capture 100,000 tonnes CO2/y to qualify, but under the new act that will be 1,000 tonnes. Direct air capture projects will also see the per-tonne incentive raised to US$180.

Lowering these thresholds should encourage more innovation, as smaller installations carry less absolute financial risk.

A final change to the 45Q arrangements will be that the credits will be able to be paid ‘directly’ – that is, it would allow “the applicable taxpayer to claim the value of the 45Q tax credit through a tax refund as if it were an overpayment of taxes” so that “project developers and sponsors will avoid the overly burdensome (and often costly) process of raising tax equity to utilise the traditional tax credits”. Together, these changes could significantly change the landscape for carbon capture in the US and thus the world.

Methane charge

Also of interest is the ‘methane charge’. For facilities that are not in compliance with forthcoming Environmental Protection Agency regulations on methane, and which emit more than 25,000 tonnes of CO2-equivalent emissions per year, there will be a fee of US$900 per metric tonne of methane released (after certain allowances). This will rise to US$1500 after two years, which, according to the congressional briefing note on the matter, would equate to a carbon-equivalent price of US$36/tonne CO2e and US$60/tonne CO2e respectively. The scope is confined to the oil and gas industry, and specifically to the following facilities:

  • offshore petroleum and natural gas production
  • onshore petroleum and natural gas production
  • onshore natural gas processing
  • onshore natural gas transmission compression
  • underground natural gas storage
  • liquefied natural gas storage
  • liquefied natural gas import and export equipment
  • onshore petroleum and natural gas gathering and boosting, and
  • onshore natural gas transmission pipelines.

In total, it is estimated that there are 2,172 such facilities that emit more than 25,000 tonnes/yr of CO2-equivalent emissions, in 2019 producing a total of 78.3 million metric tonnes of CO2-equivalent emissions.

The allowances for each type of facility are as follows:

  • For petroleum and natural gas production facilities, the charge would apply only to the number of reported tons of methane that exceed 0.2% of the natural gas sent to sale from such a facility.
  • For nonproduction facilities, such as gathering and boosting facilities, the charge would apply to methane emissions that exceed 0.05% of the natural gas sent for sale from the facility.
  • For natural gas transmission facilities, the charge would apply to methane emissions that exceed 0.11% of the natural gas sent for sale from the facility.

It is estimated that applying these thresholds would further reduce the ‘chargeable’ methane by something around one-third.

While many of the facilities will meet the incoming EPA guidelines, the charge is nevertheless a significant piece of the act, the first time that greenhouse gas emissions will be directly priced. The estimate is that the net income for the federal government will start at around US$850 million in the 2026 financial year, rise to a peak of US$1.4 billion by 2028, and then reduce to US$500 million by 2031, as methane emissions are reduced.


For hydrogen, the act will include between US$0.60/kg and US$3/kg through the Clean Hydrogen Production Tax Credit (H2PTC) for low carbon H2 for new facilities constructed within a certain time period that meet certain wage and labour requirements. Projects not meeting such requirements will be eligible for between US$0.12/kg and US$0.60/kg (five times less than the higher range projects). The lifetime greenhouse gas emissions of production will also be influential: production that results in 0.45 kg of CO2e emissions per kg of hydrogen (or less) will attract the highest credits, scaling down to the lowest credits for 4 kg of CO2e emissions per kg of hydrogen (or more), as SP Global reports. Such scaling will help to push green hydrogen production, and it also highlights how vital greenhouse gas accounting will be. The Fuel Cell and Hydrogen Energy Association called it “a historic piece of policy and a monumental milestone” in “providing $13 billion in value across the industry for the next 10 years”.

Other reaction and effect on GHG emissions

Other reaction from industry groups has also been positive. Clean Fuels Alliance America vice president of federal affairs said “we appreciate the further extension of the biodiesel and renewable diesel tax incentive” while “We applaud the new Biofuel Infrastructure and Agriculture Product Market Expansion” (which will provide infrastructure grants). The Renewable Fuels Association commented that it will stimulate growth and investment in the use of low-carbon renewable fuels.

Preliminary analysis by Rhodium Group has suggested that the package will help reduce US greenhouse gas emissions by 31-44% by 2030 (from the 2005 basis year), compared with the current policy scenario of a reduction of 24-35%. The Biden Administration’s target is a 50-52% reduction by that time, suggesting future additional measures will be required – in the event the Democrats stay in power.