The Inflation Reduction Act will drive down emissions. But how much?

Canary Media thanks KORE Power for its support of our special coverage of the Inflation Reduction Act’s first year.

There’s no doubt that the Inflation Reduction Act, in just one year’s time, has fundamentally reshaped the trajectory of the U.S. clean energy industry.

But history will not judge the Inflation Reduction Act based on the billions in investments it spurred in 2023. When measuring the law’s effectiveness, one immutable criterion looms above all else, and that is carbon emissions. On his first day in office, President Joe Biden signed an order reinstating the U.S. to the Paris Agreement and pledged to cut U.S. emissions in half by 2030, relative to 2005 levels. The law he signed last August is the strongest effort yet to deliver on that promise.

Is it working?

Answering this question requires peering seven years into the future — a dicey proposition even in less turbulent times. Nonlinear feedback loops, S-curve adoption trends and sociopolitical obstacles abound, making any definitive predictions impossible.

But energy-system modelers have published a veritable library of detailed studies to illustrate the emissions-reducing potential of the law, and their research converges around a general outlook: The U.S. is far closer to meeting its 2030 emissions-reduction goals thanks to the Inflation Reduction Act, but it’s still not all the way there. Keeping the Paris goals alive will require follow-on policies at the city, state and federal levels, exceptional performance by the clean energy industry, and an overhaul to the permitting and grid interconnection regimes that threaten to slow essential clean energy projects today.

Averaging across nine independent studies, a report in Science concludes the country is poised to cut emissions by 33% to 40% by 2030, compared to a 2005 baseline. Before the IRA passed, the country was on track for reductions of just 25% to 31%, so the floor is now higher than the ceiling was prior to the legislation.

Jesse Jenkins, a Princeton professor and one of the modelers featured in the Science paper, put it this way: Factoring in the IRA, we’re running four to five years behind schedule on the Paris goals.

“For the first time in U.S. history, the full financial might of the federal government is aligned behind the clean energy transition,” Jenkins said. ​“Is that necessary? Absolutely. Is it sufficient? No.”

The Inflation Reduction Act will make its biggest dent in power-sector emissions. And that’s for good reason: Electricity is a major emitter itself, but clean electricity can drive decarbonization in transportation, buildings and at least some of the heavy industrial processes. As a result, the near-term success of the law will depend on how rapidly it can drive down emissions from power plants.

The task is made more difficult because the grid can’t just get cleaner than it’s ever been; it has to expand to shoulder this new demand from other sectors. And as it stands — even though power-sector emissions are expected to nosedive by nearly 70 percent compared to 2005 levels — it doesn’t look like the sector will cut carbon fast enough to make the Paris targets come true.

Still, Jenkins doesn’t think the 2030 goals are out of reach.

“There are a number of positive feedbacks that could close the gap,” Jenkins said. ​“I’m optimistic because I think we can get the work done, and the IRA itself will encourage more work to be done.”

The grid is about to get cleaner, faster than you ever imagined

The Inflation Reduction Act strikes hardest and fastest at the power sector, and the emissions outlooks reflect that. A helpful chart from the Rhodium Group breaks out each sector of the economy and shows the precipitous plunge in emissions from the electricity sector, far outstripping the progress in transportation and buildings, and the lack of any improvement in agriculture and heavy industry.

Recall that in 2022, 41% of U.S. power production yielded no carbon emissions; that portion is pretty evenly split between nuclear and assorted renewables. The best-case outlook in the Science study is the model from the National Renewable Energy Laboratory, which shows carbon-free generation rising to 71% in the pessimistic case (!) and as much as 90% if clean energy performance and deployment constraints break more favorably for the transition. And this shift would lower bulk power costs by billions of dollars.

The economics of radically cheap renewable generation were already reshaping the utility sector — again and again, utilities have realized it’s in their interest to build far more wind and solar this decade than they previously considered. Then Congress passed the Inflation Reduction Act and upped the tax credits for investing in clean energy to as much as 50%. That broadens the number of places and situations where solar, wind and energy storage can supply the cheapest electricity, said Daniel Steinberg, lead author of the NREL study.

“It is really a fundamental change in the rate that clean technologies are being deployed,” Steinberg said.

Granted, the grid might not change as fast as NREL’s modeling suggests. The models surveyed in the Science study average out to a more modest 68% reduction in power-sector emissions by 2030 compared to 2005.

One possible reason for this divergence: NREL assumed a ​“marginal increase in load associated with electrification” rather than a ​“radical increase,” Steinberg said. If, say, electric vehicle adoption blows past expectations and drives a voracious uptake in charging at times when renewables aren’t broadly available, this would pressure utilities to burn more fossil fuel to meet this demand.

This is the paradox of the clean-electrification strategy: It’s essential to convert fossil-fuel-powered machines to run on electricity, but doing so increases electricity demand, making the task of decarbonizing the grid that much more difficult. Renewables not only need to replace existing fossil fuel generation — they also need to grow to meet this new demand as well, across time and space.

“The power sector needs to cut [emissions] faster and deeper than any other sector while expanding electricity production to supply EVs and new demands if we want to hit our Paris goals,” Jenkins said.

In fact, Jenkins and his team at Princeton found that the sector on track to overshoot emissions targets the most is the power sector — even in spite of the rapid progress expected. The chart below depicts emissions beyond what’s allowed for the pathway to net zero by 2050; the gray bar for power-plant emissions exceeds any other source in the 2030 timeframe under every modeling scenario.

A bunch of hard-to-model variables could obstruct climate progress

Clean energy clearly has the upper hand in a coolheaded economic analysis of what power plants should be built through the 2020s — a major coup after the early years in which renewable power cost more than the status quo. But humans and legacy institutions rarely act based on a reasoned economic calculus alone.

The conservative scenarios in all the various studies show what happens when these so-called ​“non-economic factors” constrain the pace of clean energy adoption. These limitations could include variables like supply-chain scarcity, workforce bottlenecks, lackluster buildout of transmission wires, and local bans or resistance aimed at clean energy installations and power lines.

That local opposition is a potentially major obstacle that, while not precisely ​“non-modelable,” is ​“challenging to model,” NREL’s Steinberg noted. For instance, NREL researchers approximate land-use constraints by tracking local ordinances that ban renewables or battery storage development. But it’s not possible to ascertain exactly where communities will block the kinds of projects needed to decarbonize the economy.

In one of the most prominent instances thus far, Texas legislators this summer attempted to pass a series of policies to disadvantage renewables in the competitive energy markets; if that push hadn’t failed at the last minute, it could have derailed the largest state market for new solar construction and wind generation.

“States and localities, some of them are closing their door to clean energy,” said Conrad Schneider, who leads U.S. advocacy at the Clean Air Task Force. ​“We need a world where communities are volunteering, saying ​‘I want it!’”

The Biden administration wields more control over another limiting factor: getting the money out the door. The Inflation Reduction Act building spree cannot begin in earnest until the IRS spells out the rules to qualify for the many tax credits; some of those are still rolling out a year later, including the hotly contested qualifications for clean hydrogen production.

The law’s home-electrification credits are live, but that money won’t reach people’s pockets until they file tax returns in 2024, noted Stephen Pantano, head of market transformation at Rewiring America. ​“We had this one year of anticipation” culminating in the Department of Energy publishing guidance for about $9 billion of electrification and home efficiency rebates, separate from the tax credits, in late July. But the rebate money flows through state energy offices, which need to set up their own programs to get the funds to customers.

And though tax credits for clean-energy developers are mostly finalized, it remains to be seen how readily they can take advantage of the relevant tax credits. Clean power plants can knock up to half off their upfront cost if they hit labor standards, use the right amount of domestic content and build in an ​“energy community” as defined in the law. But we haven’t seen projects take advantage of that full stack of credits yet, so modelers have to choose assumptions they think are realistic.

The studies of IRA impact all account for these constraints in their own ways, hence the Science study’s range of economywide emissions falling anywhere between 33% and 40%. Now the task falls to industry and policymakers to push for the higher end of those projections — or to prove the modelers overly pessimistic.

Positive feedback loops could help the U.S. beat expectations

To save the Paris goals, the U.S. needs to chase its landmark legislation with further action, and ideally kick off a chain of feedback loops that reduce emissions further, faster than currently expected. The public and private sectors have roles to play here.

The best shot at substantially reducing power emissions by 2030, per the Princeton study, would be finding ways to phase out coal-fired generation ahead of current timelines. The next biggest chunk to target comes from non-CO₂ emissions, like methane and NO_x, which have an outsize influence on shorter-term warming.

The IRA levies a fee on oil and gas companies that release methane, and uses those funds to pay for methane cleanup efforts. And the Biden administration is already working on additional greenhouse emission regulations for vehicles and power plants. Per the Clean Air Task Force’s analysis, the Biden administration must enforce ​“stringent” regulations (based on its existing authorities) to close the gap on climate goals.

The IRA strengthened the Environmental Protection Agency’s toolkit in two key ways. First, the law codified EPA’s mandate to regulate greenhouse gases under the Clean Air Act, noted Schneider of the Clean Air Task Force. The legislation also made carbon-capture technology significantly more cost-effective with a new set of tax credits; that expands the range of remedies for plant owners to comply with new, stricter emissions rules.

The EPA then drew on its newly strengthened authority to propose power-plant regulations this spring that could clean the sector faster by forcing down emissions from coal plants and large gas plants; to comply, operators could close dirty old plants, switch to cleaner fuels or add carbon-capture equipment. In this case, the IRA carrots for green hydrogen and carbon capture help unlock more powerful regulatory sticks, which could in turn drive more adoption of the IRA incentives — and emissions reductions.

“The companies that have to deploy it and their ratepayers no longer have to swallow the whole cost,” Schneider said of carbon-capture tech. ​“That enabled the regulations to move ahead.”

The private sector can kick off its own feedback loops to close the emissions gap by aggressively building as much clean energy as possible — something the Inflation Reduction Act transformed into a scintillating business proposition.

“The federal government just put clean energy on sale, for everyone, everywhere,” Jenkins said. ​“Whatever level of emissions reductions made economic or political sense prior to the Inflation Reduction Act, you can now do more. And the faster you move, the more federal tax credits you’ll get.”

An unexpected vote of confidence in this likelihood came from Goldman Sachs, which predicted in March that industry will make use of $1.2 trillion of IRA incentives through 2032. That level of uptake would be more than three times the amount that legislators expected to spend on the law’s clean energy provisions when it was passed.

Technological advancements could also break in favor of faster carbon reduction. The cheaper and better solar and storage get, the more installations will ensue. Clean Air Task Force’s research suggests carbon capture could become a meaningful contributor to reductions in that timeframe, especially in the industrial sector that is otherwise hard to decarbonize.

If clean energy outstrips today’s best estimates, it wouldn’t be the first time. Top-of-the-line models failed to register the propulsive growth of early solar installations, year after year. Clean energy technologies exhibit a well-documented tendency to beat the most sophisticated expectations. If that happens again, it would push the U.S. closer to its goals.

But NREL’s Steinberg cautioned against holding out too much hope for that Hail Mary.

“In my opinion, we have decreasing uncertainty in terms of what kind of deployment trajectories we’re seeing under a given scenario,” he said. ​“We have collectively gotten a whole lot better.”

Outperforming the models, then, will take sustained, diligent work from regulators, policymakers, and businesses — and an enthusiastic reception from customers, too. Those actions, coupled with avoiding the worst-case constraints on deployment — could push the U.S. beyond the best-case 40% emissions cuts of the latest studies. The Inflation Reduction Act has already planted seeds for this to happen, but they need to be watered and nourished.

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