Last month, President Biden signed the Inflation Reduction Act (IRA), the most significant climate legislation in United States history that is sure to spur innovation. Over the next 10 years, the IRA will dedicate hundreds of billions of dollars to driving down costs and accelerating adoption of sustainability-related technologies. Experts predict that the resulting capacity expansion in clean energy and carbon capture will reduce net GHG emissions in 2030 to ~40% below 2005 levels – not quite enough to hit the target established in the Paris Climate Accords (50% below 2005 levels) but a clear improvement over our previous trajectory (~30% below 2005 levels).
Carbon Capture, Utilization, and Storage (CCUS)
Before the IRA passed, the main policy incentive for carbon capture, utilization, and storage was a tax credit called “45Q,” which has been in place since 2008 and was expanded in 2018. The IRA expands 45Q even further, increasing the maximum credit value as well as the time horizon during which a project must commence to qualify. These adjustments should help bridge the gap between current CO2 capture costs and the industry’s cost targets, enabling still-emerging technologies to scale up more quickly.
The incentives in the bill support a diverse range of capture and storage solutions, from forest management to BECCS, but direct air capture (DAC) is one of the biggest beneficiaries. We’ve written before about the tremendous innovation potential for industrial technology companies related to DAC, and the money flowing into the space makes it even more compelling.
Clean Energy Production and Storage
Many of the specific measures related to energy production and storage in the IRA are focused on onshoring production capacity for batteries, solar panels, and more. In some cases, this focus has drawn criticism – for example, although the IRA ostensibly incentivizes the purchase of electric vehicles by offering buyers a tax credit, many EVs will not qualify because they contain batteries or other components made outside of the US. Ultimately, however, these incentives should boost innovation in domestic lithium exploration and extraction (e.g., in the Salton Sea) as well as development of more robust supply chains for solar and wind in the US.
In addition to its provisions targeting industrial applications, the IRA also offers diverse incentives to consumers (especially those who are low-income) to adopt more sustainable technology, including grants for housing electrification. Funds are available to replace gas stoves with electric stoves, install heat pumps, and upgrade to more efficient water heaters and HVAC equipment. These grants should also make it easier for residential buildings to install rooftop solar, which should provide a demand-side push to increase solar panel manufacturing capacity and may stimulate additional innovation in panel form factor and functionality.
Some of the most interesting and exciting aspects of the IRA are non-technology-specific and administrative. For example, the bill includes a provision to substantially increase funding for the DOE’s loan programs office (LPO). Up to now, the LPO has been an important but constrained source of investment for innovative energy projects – for example, it recently loaned $2.5B to LG and GM to build a battery manufacturing facility in the Midwest. The $350B allocated by the IRA could be game-changing for first-generation carbon capture facilities, experimental wind farm designs, DAC hubs, or other innovations deemed too risky to be financed through traditional markets.
The incentives offered via the IRA will make or create the business case for many clean technologies that, prior to now, had no chance of scaling at the rate necessary to meet climate targets. These opportunities are not without pitfalls and challenges, of course – bottlenecks ranging from inefficiency of lithium extraction to inadequate supply of certified wells to sequester carbon dioxide underground to permitting hurdles for new hydrogen production facilities will slow progress. Nevertheless, the sheer magnitude of funding made available through the legislation seems likely to motivate producers and consumers alike to explore, experiment with, and invest in sustainability in ambitious and creative ways. There is still work to be done on the climate change front, but the IRA is an exciting step forward for the United States, and a boon to technology innovators around the world.