George S. Van Nest
President Biden Signs Inflation Reduction Act Containing Climate and Energy Policy Provisions
On August 12, the House of Representatives passed the Inflation Reduction Act. It was signed by President Biden on August 16. The bill is a scaled-back version of his proposed Build Back Better that was agreed to after West Virginia Senator Joe Manchin and Arizona Senator Krysten Sinema agreed to go along with the legislation, despite previous opposition to additional government spending while the country is facing inflation issues. The legislation is massive government spending of approximately $740 billion. The President and supporters are praising the legislation on numerous fronts and claiming it will do wonders for the country.
The legislation has a number of major provisions, including the following: establishing a 15% corporate minimum tax; reforming prescription drug pricing; adding $80 billion to the Internal Revenue Service, including hiring 87,000 new IRS agents; extending subsidies for the Affordable Care Act; and numerous investments in climate change.
Prior to analyzing the environmental provisions of the bill, it’s worth noting that an independent review by the Penn Wharton Budget Model indicates that there is low confidence that the legislation will have any impact on inflation. Similarly, the Congressional Budget Office (CBO) determined that it may not reduce inflation and may actually cause an increase. Hence, despite the timely name of the legislation, it seems ill-suited to reducing inflation that is impacting American citizens and businesses of all sizes. Instead, it serves as a useful vehicle to adopt Democratic policy priorities prior to the November mid-term election cycle, which is projected to bring a defeat in at least one house of Congress.
The legislation will spend approximately $370 billion on energy security and climate change over the next decade as it aims to reduce greenhouse gas emissions by roughly 40% of the 2005 levels prior to 2030. While it is less costly than the New Green Deal, it is on that path, but with a few less restrictions on energy production due to opposition from Senator Manchin, whose home state of West Virginia is a major energy producer.
Among other provisions, the legislation calls for expending $60 billion on manufacturing solar panels, batteries, and other clean energy technologies in the US. The bill includes $9 billion for low-income families to switch over to electrical power in their homes from fossil fuels. The legislation will spend billions on transportation, including $3 billion for the US Postal Service to switch over its 200,000-plus fleet to electric vehicles (EV), $3 billion to address air pollution technology at ports, and $1 billion for clean school and public transit buses, refuse trucks, and heavy equipment conversions.
The legislation also continues the Biden Administration push for environmental justice by funding matters in impacted communities. Among other elements, it provides $3 billion in funding for community projects in areas that are disproportionately impacted by pollution and climate change. The bill re-institutes the Superfund tax on the US industry to fund pollution remediation projects.
The bill provides a $7,500 per EV tax credit that runs through 2032. The tax credit also lifts the current cap on EVs sold by 200,000. Aside from new EV tax credits, there is a $4,000 tax credit available for used EVs if certain price and ownership levels are met. While the long-term tax credit is viewed as beneficial to the auto industry, the legislation includes restrictions on use of raw materials from adversaries, including China, for battery construction. Under the bill, to be eligible for the EV tax credit in 2023 around half of the battery components need to be manufactured or assembled in the US. Similarly, by 2024 over half of the critical minerals used in EV batteries will have to be extracted or processed in a country that the US has a free trade agreement with. The percentages increase to the point where in 2029 all battery components will have to be made or assembled in North America to qualify for the tax credits.
The aggressive schedule for mining and manufacturing in North America is going to be very problematic for auto companies given the source, availability, and mining conglomerates that currently control the process. As we have reported on previously, many of these companies are owned or controlled by aggressive and unfriendly nations, such as China.
The Biden Administration is setting up a webpage to address questions on which vehicles will qualify for the tax credits based on the location of assembly. The Department of Transportation is also publishing a list of eligible 2022 and 2023 EVs. However, the list is likely to be fluid and could be challenging in future years as the heightened requirements kick in. Also, some EV vehicles that were previously eligible but are foreign manufactured will not be eligible after the passage of the legislation.
In order to reach an agreement with recalcitrant Senators, the legislation includes some compromises that are being opposed by environmental groups. Notably, the bill includes tax credits for carbon capture projects that may extend the life of existing coal plants. The bill also requires the government to offer oil and gas leases in the Gulf of Mexico and Alaskan waters.
Pursuant to a separate bill that is thought to move in Congress in September, there is supposed to be permitting reform to address delays and issues with the review of major projects under the National Environmental Policy Act (NEPA). The Biden Administration halted Trump-era changes intended to make the process more efficient. While energy permitting reform was a condition set by Senator Manchin, some recent reports indicate that his Democratic colleagues in the House are not inclined to honor that condition now that the climate bill has passed.
Adoption of the Inflation Reduction Act is being lauded by numerous environmental groups. Business and energy groups are less pleased, noting the marginal impact on inflation reduction and massive spending on Biden Administration pet projects in the green energy area. Rather than an industry-wide approach of encouraging the production of clean energy from the US across all energy markets, the legislation seems to focus on one area without support for boosting national energy supplies during a time of historic inflation and international challenges.
For additional information about the issues discussed above, or if you have any other Environmental Law concerns, please contact the Underberg & Kessler attorney who regularly handles your legal matters or George S. Van Nest, the author of this piece, here or at (716) 847-9105.