Inflation Reduction Act Presents New Funding Opportunities, Fees, and Tax Credits for Green Energy and Infrastructure Improvements in 2023

January 18, 2023
Diana A. Silva, Esq. and Brielle A. Brown, Esq.
MGKF Special Alert - Federal Forecast 2023

On August 16, 2022, President Biden signed the Inflation Reduction Act (the “Act”) into law, marking what is being touted by the Administration as the most significant legislation dedicated to climate investments in U.S. history. Building on the climate and clean energy actions contained in the bipartisan Infrastructure Investment and Jobs Act signed in November 2021, the Act allocates $369 billion dollars for energy security and climate change programs. The stated overall objectives of these investments are to lower consumer energy costs, accelerate private investment in clean energy solutions, and create new jobs.

The climate and energy provisions fall into five general categories that include domestic clean energy manufacturing, decarbonization, targeting investments in environmental justice communities, support to energy consumers, and investments in farmers and forest landowners.

Notable provisions for domestic clean energy manufacturing, which also indirectly promote carbon emission reduction, include (1) production and investment tax credits to accelerate the building of facilities to manufacture solar panels, turbines and batteries, facilities to produce clean fuels, and facilities to process critical minerals and to capture and sequester carbon, and (2) various grants and loans for electric vehicle manufacturing plants. 

More directly aimed at decarbonization, funds are also dedicated to the purchase and installation of zero-emission equipment at ports, funding of clean energy technology enhancement and research and Department of Energy building efficiency programs. Rebates and tax credits will be available to consumers to subsidize their transition to clean energy equipment at home (HVAC) and on the road (electric vehicles) which also will indirectly spur the manufacture of the targeted products and enhance carbon reduction efforts. Other incentives to reduce carbon emissions include tax credits for clean energy technology such as solar, wind, hydrogen, nuclear, and carbon capture utilization and sequestration.

The Act also seeks to significantly reduce emissions of methane, which, in the short term, has been reported to be 80 times more potent at global warming than carbon dioxide, through a new methane emissions reductions program.  The program creates an annual fee to be charged to nine types of petroleum and natural gas facilities and pipelines, already subject to greenhouse gas reporting requirements, that emit 25,000 metric tons of carbon dioxide equivalent. The methane emissions fee begins in 2024, starting at $900 per metric ton, increasing to $1,200 in 2025, and $1,500 in 2026 and beyond. An exemption to the fee would be available only if the Environmental Protection Agency (EPA) adopts a finalized rule for methane emissions that is in effect in all states where facilities subject to the fee are located that will result in equivalent or greater methane emission reductions.

Environmental justice is addressed through a variety of mechanisms, including grants to state and local governments to develop and implement pollution reduction strategies, grants to nonprofit private agencies, institutions, and organizations, and to individuals, for technical assistance, monitoring and other projects in disadvantaged communities, grants to reduce air pollution at ports, as noted earlier, and grants to address air pollution at schools in low-income communities. EPA announced the availability of $100 million in these grants on January 11, 2023 and is hosting pre-application assistance webinars on January 24 and 26, 2023  In addition, many of the clean energy tax credits mentioned above include either a bonus or set-aside structure to drive investments and economic development in disadvantaged communities.

Finally, the Act makes sizeable investments to support agriculture and rural community responses to climate change. These investments include grants and other financial assistance to support (1) farm use of renewable energy, energy efficient and zero-emission equipment, and carbon capture and storage systems, (2) rural cooperatives’ access to renewable energy and associated infrastructure, (3) promotion of fire resilient forests, and (4) natural carbon sequestration through forest conservation.

On November 30, 2022, the Department of Treasury issued initial guidance on the labor standards that facilities must meet to qualify for the clean energy and climate tax incentives. The guidance leaves numerous questions to be answered such as classifications for construction and how to enforce prevailing wage and apprenticeship requirements. However, it is currently the only guidance from a federal agency that details an implementation strategy for the funds outlined in the Act. Throughout 2023, it is expected that guidance from other federal agencies, such as the EPA and HUD, should begin to roll-out, so that businesses can apply for funding allocated in the Act.