States have a huge role to play in enacting the Inflation Reduction Act

Congress finally took action on climate change in 2022, but the federal government can’t implement IRA on its own. States will be vital actors in putting the act’s incentives to work.

A stately capitol building with red brick, white columns and a golden dome under a bright blue sky
The Massachusetts State House in Boston (Ajay Suresh/CC BY 2.0)
  • Link copied to clipboard

For a decade, most of the major U.S. clean-energy and climate policy has come from the state level. In 2022, the federal government finally stepped up. In 2023, state and federal progress will be more closely intertwined, and success on common climate goals will depend on both working in tandem. 

The past year saw Maryland, Massachusetts and Rhode Island join a growing roster of Democratic-controlled state governments committing to zero-carbon electricity and broader economywide decarbonization in the coming decades. November’s election put Democratic governors and legislatures in control in Maryland, Massachusetts, Michigan and Minnesota, priming the states for more aggressive climate action in the future. 

Subscribe to receive Canary's latest news

Meanwhile, the U.S. Congress’ passage of the Inflation Reduction Act in 2022 and the Infrastructure Investment and Jobs Act in 2021 unleashed hundreds of billions of dollars of federal tax credits, incentives, loans and grants to support renewable-energy deployment, clean-technology manufacturing and other investments in fighting climate change. 

Not all of that funding will flow through state agencies or be dependent on state policy choices, but a lot of it will. In particular, how great a volume of federal tax credits and loans flowing from the Inflation Reduction Act end up being put to use may well depend on how aggressively states direct utilities to take advantage of them. 

Most of the action in the United States is in those 50 state capitols,” Maryland state Senator Brian Feldman, a Democrat, noted in a December webinar hosted by trade group Advanced Energy Economy. Beyond setting executive policy, passing legislation and crafting budgets, state governors and legislatures have power to appoint the heads of state agencies and public utility commissions responsible for implementing key energy policies and regulating utilities, which is pretty significant from a national standpoint,” he said.

What states did on their own

The roster of state-level energy and climate legislation passed in 2022 wasn’t quite as long as that of 2021, when Colorado, Illinois, Massachusetts, North Carolina, Oregon, Rhode Island and Washington state all passed significant laws. But 2022 did see Maryland, Massachusetts and Rhode Island extend the scope of previous state clean-energy and decarbonization goals — and that was before Maryland and Massachusetts elected Democrats as governors, broadening the potential for greater ambitions in future years. 

A map showing the states where climate laws were passed in 2021 and 2022
States that passed climate laws in 2022 are in dark green; those that passed climate laws in 2021 are in lighter green.

Maryland went first, passing the Climate Solutions Now Act of 2022 in April over the objection of Governor Larry Hogan, a Republican. The law strengthens Maryland’s target for reducing greenhouse gas emissions to 60 percent below 2006 levels by 2031, up from a previous target of 40 percent by 2030. It also sets a 2045 deadline for achieving net-zero greenhouse gas emissions across the state’s economy — the earliest one yet for economywide net-zero targets among the handful of states that have adopted them.

Rhode Island moved next in July, passing legislation that will require 100 percent of electricity in the state to come from or be offset by carbon-free generation by 2033, as well as laws to increase funding for electric-vehicle charging stations and electric heat pumps and expand procurement of offshore wind power.

Massachusetts followed in August with its Act Driving Clean Energy and Offshore Wind, which includes several expansions of its already aggressive offshore-wind development targets. The legislation also takes a number of other steps — boosting the scope of net-metered solar; promoting energy storage; investing in the power grid; increasing rebates on electric vehicles and EV-charging infrastructure; banning the sale of new fossil-fueled cars after 2035; and incentivizing electric heating, geothermal heat pumps and other alternatives to fossil-gas heating in buildings. 

In November’s election, Maryland and Massachusetts voters replaced Republican governors with Democrats who ran on ambitious climate agendas, lowering the potential for veto threats against further climate legislation. Also, voters in Michigan and Minnesota flipped control of state legislatures to Democrats, opening an avenue for Democratic governors in both states to work with lawmakers to craft legislative follow-ups to prior executive actions. 

These state-level policy developments could have massive implications” for how states will direct and manage their share of the $369 billion in energy and climate spending offered by the Inflation Reduction Act, Feldman said. The combined funding from that law and the 2021 infrastructure law add up to the single largest federal investment in combatting climate change in history, and much of it will be put into action — or not — via state-level decisions.

Federal funding meets state policy: Cleaning up electricity

Taken as a whole, the Inflation Reduction Act’s incentives could enable carbon-free electricity to grow to provide three-quarters of U.S. power generation by 2030, Mike O’Boyle, electricity director for nonprofit think tank Energy Innovation, said in a December webinar hosted by his organization. 

The same investments could create about 1.7 million jobs and lower power costs for consumers by replacing more expensive fossil fuels with cheaper clean energy, he said. But the IRA is not sufficient on its own to achieve the promise of rapid emissions reductions,” O’Boyle said. State action is also essential.” 

That’s because the vast majority of utilities in the country are regulated at the state level, and many have a financial interest in keeping existing fossil-fueled power plants running even if the power they generate is more expensive than carbon-free alternatives. 

Whether utilities are compelled to invest in clean-energy resources that are now extremely cheap depends on state policy,” O’Boyle said. What’s more, now that cost is not the bottleneck — building stuff fast enough will be — states have a crucial role in siting permitting and planning this infrastructure, including transmission lines.”

The impacts of federal tax credits and incentives are only beginning to show up in the long-range investment plans of state-regulated utilities. But the results are dramatic where they’ve been calculated. 

In November, Michigan utility DTE Energy submitted a new integrated resource plan to state regulators that will add about four times more clean energy and battery storage than its previous plan in 2019 called for. The utility will also retire one of the country’s largest coal plants well ahead of its prior schedule. 

These changes will come at a net savings of $430 million compared to previous plans, largely as a result of the IRA’s tax credits and incentives, Tremaine Phillips, commissioner with the Michigan Public Service Commission, said during AEE’s December webinar. That’s $430 million that can be passed on to ratepayers,” he said. 

States will also play a major role in implementing a program created by the IRA that authorizes the Department of Energy’s Loan Programs Office to make up to $250 billion in low-interest loans to retrofit or repurpose energy infrastructure in ways that reduce greenhouse gas emissions. That’s more than the estimated $176 billion in legacy utility investment and debt associated with fossil-fueled power plants that need to be closed by 2030 to keep the U.S. on track to meet its international climate commitments, Phillips said. 

Utilities are paying about 8 percent interest rates on this debt, but government-backed loans are much, much cheaper,” he said, meaning consumers can save billions in the energy transition if utilities use these programs.” But aligning those benefits with utilities’ financial interests will require active guidance or mandates from state lawmakers and regulators, he said. 

Phillips said that low-cost financing is needed to help ratepayers in terms of those coal-fired power plants that may be decommissioned before they are fully depreciated.” That funding can also help communities make up for lost tax revenue, job losses and other impacts of early coal-plant closure. 

Federal funding meets state policy: Transportation and buildings 

States will also play a central role in putting to work federal incentives for decarbonizing transportation and buildings, Sarah Baldwin, Energy Innovation’s director of electrification policy, said in her group’s December webinar. That impact will come both from how state agencies manage federal money being passed through them and how supportive state policies are to achieving federal decarbonization goals. 

Energy Innovation’s modeling found, for example, that state policy will be a significant factor in determining how quickly and widely the market for electric vehicles expands. The federal government is promoting EVs through tax credits, manufacturing incentives and funds for deploying charging stations. On their own, these federal policies could be expected to expand the sales of new light-duty EVs from about 12 percent of all sales in 2023 to about 50 percent in 2032, she said. 

But if the 17 states that have already adopted clean-car standards previously set by California move ahead on adopting the even more aggressive California standards set earlier this year, sales of new EVs could rise to as much as 65 percent of total new car sales by 2032, she said. 

The main takeaway here is that state policy action on EVs and clean transportation is still very important, and is going to help increase the overall impact of the IRA incentives,” she said. 

States will also be crucial players in disbursing the $9.5 billion in federal home-electrification and efficiency incentives in the IRA, Baldwin said. Stakeholders can and should be familiarizing themselves with the ins and outs and details of the IRA provisions so that money can start rolling out the door as quickly as possible once funding is allocated,” she said. 

Will Toor, executive director of the Colorado Energy Office, said during AEE’s webinar that his state is already planning ahead for the $140 million share it expects to receive from the two key federal home-electrification programs. 

We’re really looking at the question of, how do we best sort of layer that new funding on top of the state programs and utility programs? And how do we do appropriate public education to make sure that people also understand the tax credits that will be available?” he said. It’s likely that forward-thinking state leaders across the country will be asking similar questions.

If you enjoyed this story, help us produce more like it. Donate to support Canary Media!

Jeff St. John is director of news and special projects at Canary Media.