HISTORY MADE – The Inflation Reduction Act – An Iowa Perspective

By Andy Johnson, Executive Director – Clean Energy Districts of Iowa (CEDI)

The Inflation Reduction Act, aka the Schumer-Manchin climate deal, is historic – for a clean energy transition, rural prosperity, climate stewardship, economic and environmental justice, and for future generations.

For great coverage of the entire bill, see Canary Media, the Bipartisan Policy Center, Rewiring America, and elsewhere. Even better, we encourage clean energy afficionados to listen to these three recent episodes of the podcast Volts: Some Thoughts on the Inflation Reduction Act; Diving further into the Inflation Reduction Act part 1; and Diving further into the Inflation Reduction Act, part 2. Together, they provide an excellent explainer on not only what’s in the bill (including for consumers), but how we got here and why this is such effective and durable policy on all fronts.

In this article, we 1) reflect broadly on the bill and approach, 2) overview the key areas of consumer-facing incentives (fact sheets included!), and 3) conclude with a few brief ideas on how Iowa policy could align with and magnify the benefits of the act for Iowa citizens and communities.

Reflections

The 2022 Inflation Reduction Act (IRA) is a dramatic evolution in climate and clean energy policy strategy. A decade plus ago, most efforts were focused on carbon pricing in some form or other (cap and trade, fee and dividend, etc). Carbon pricing was always a darling of economists, but we were always skeptical. The three afore-linked podcasts explain why the IRA is so likely to be an effective policy; the last six minutes of the third podcast explain why it will also be so much more durable than carbon pricing would likely have been.

So instead of carbon pricing, we got a very large, robust mixture of industrial, market transformation, justice, and consumer-facing policies. Most of these approaches already have a strong track record of success in one form or another. This bill combines proven approaches with major funding over the long haul – that’s smart policy.

Will it get us where we need to go on climate? Three independent and widely respected modeling organizations – Rhodium Group, Energy Innovation, and Princeton University – all concur that the bill will likely contribute toward a roughly 40% reduction of US greenhouse gas emissions by 2030. That’s shy of the 50% goal of the Biden administration committed to on rejoining the Paris agreement in 2021 but keeps us well within striking distance.

It is also worth noting that 42% by 2030 was the target in the 2009 carbon-pricing Waxman-Markey bill that never reached the finish line. We’re on track to reach that target thanks now to the IRA, but also to the extensive tax credit and market transformation policies implemented in the interim and now enhanced in magnitude and duration in the IRA.

The IRA is, to a very large degree, about industrial policy, jobs insourcing, and economic patriotism built around a new clean energy economy. The incentives and support for clean energy-related R&D and domestic manufacturing are combined with strong labor standards and support for training and apprenticeship programs. These programs are both sorely needed and well designed to support the development of quality jobs by the millions over the coming generation.

As well as effective emissions reductions, clean energy transition, and industrial policy, the IRA is also effective national energy security and inflation reduction policy as well. Inflation reduction will come from multiple fronts, the largest (over time) being the transition from fossil fuels to clean energy, nationwide. The manufacturing and electrification incentives will also (over time) increase energy security by decreasing our reliance on global fossil fuel commodity markets, and the extensive geopolitical perils that have long characterized such dependency.

An important but little-known aspect of the IRA is the roughly $25 billion to help the nation’s farmers, ranchers, and forest landowners implement climate smart practices. Most of these dollars go to existing conservation programs within the USDA Natural Resources Conservation Service and the Forest Service. These programs are positive and impactful programs, and elevated funding linked to climate-smart practices is a wise move.

It will also be important for the agencies and stakeholders to focus on beyond business-as-usual-but-more: how can these investments both support the best of what agencies and organizations do well and also catalyze and accelerate the evolution and transformation of agriculture and private lands management into a new era of landscape health, land community, and rural prosperity?

Finally, there has been a good bit of negative commentary from social and environmental justice perspectives. There are problems, but despite the real negatives, we believe this bill bends the moral arc of the clean energy transition very much in the right direction. Canary Media summarizes the progress, Congresswoman Jayapal (Chair of the Congressional Progressive Caucus) makes the case, and specifically:

• The Build Back Better bill passed by the House in 2021 was considered the greatest policy triumph for justice in recent decades: the current IRA preserves the vast majority of those programs in the energy and climate arena, albeit some in scaled back form
• According to Rhodium, the positive greenhouse gas reduction impacts in the bill outweigh potential negatives related to fossil fuels by 24:1; given that climate change magnifies injustice throughout society, successfully mitigating climate change also prevents that injustice
• The broad fossil fuel leasing provisions are not only unlikely to increase fossil fuel production, they will be made irrelevant by a broad and durable reduction in demand for fossil fuels
• The bill is a major victory for labor standards, and for good job creation, and the two together, and according to the national Blue Green Alliance will create 9 million good jobs
• The less wealthy countries and peoples of the world did not cause climate change, but are already suffering the bulk of the burdens; every step the US takes towards climate stewardship is a critical (and long overdue) step towards GLOBAL, as well as domestic, justice

Consumer Facing Incentives

Consumer facing incentives are extensive, and very focused on electrification of households, businesses, and the economy in general. We think of them in roughly three buckets and my colleague, Paul Cutting, has prepared a series of fact sheets to help consumers navigate the opportunities. Note: the fact sheets represent our best understanding at this time and will evolve, especially because some of the programs are under development.

The renewable energy tax credit (fact sheet here) extends and improves upon the credit that was gradually expiring. A 30% credit is available (retroactive for all of 2022) through 2032 for residential and commercial solar, wind, geothermal, fuel cells, and battery storage. A very important note here is that the credit is now a “direct pay” (or refundable) for a broad array of non-taxable entities, including consumer-owned utilities, local governments, and nonprofit organizations and institutions.

The $7,500/new and $4,000/used electric vehicle tax credit (fact sheet here) is certain to be transformational within the industry, but it will also comes with strings attached. These include 1) that vehicles must be assembled in the US (effective immediately), 2) that batteries must be assembled in the US (near future), and 3) that the critical minerals within batteries must come from domestic or trade-friendly countries (%% increases over time). A limited number of vehicles are eligible through the end of this year, but that number may fall in 2023 before rising again over time. If you’re in the market, study hard and consider acting now, if what you want is eligible and available.

The incentives for residential energy efficiency and electrification (fact sheet here) are more than an odd assortment of credits and rebates – they’re an electrify-your-home-and-save-money-and-climate plan. Tax credits of 30% are effective in 2023 for HVAC and hot water heat pumps, windows and doors, central AC, electrical panels, and even (way too small!) home energy audits. Two rebate programs to be run by states cover a broad range of practices and performance standards, with higher incentives for lower income households, but may take some time to become available.

Iowa Policy Alignment with the IRA for Maximum Benefit

The IRA is federal policy, but state administrations and policies will have a significant impact on the level of benefits accruing to Iowa households, businesses, and communities. We have a few ideas for policymakers.

First, we need to focus on aligning Iowa’s rate-payer funded energy efficiency programs with the new IRA programs, and vice versa. The IRA will require extensive rebate administration, oversight, and technical assistance to households covering all energy sources and uses. Utilities have traditionally administered Iowa’s efficiency programs, but they’ve always struggled to provide quality technical assistance, to consider all household energy use, and to allow fuel switching. In fact, since they succeeded in slashing the funding of those programs in 2018, most utilities (including Alliant, MidAmerican, and Black Hills) completely abandoned their in-person technical assistance offerings to most residential and commercial customers.

Most Iowa ratepayers do not receive all their household energy from a single utility, and most will need high quality, holistic technical assistance to navigate the very significant opportunities coming available. Many will also need to switch from gas to electric fuel for home and hot water heating.

To maximize impact of the IRA residential rebate programs, the Reynolds administration and the Iowa Energy Office should ensure that they are administered by a governmental, quasi-governmental, or non-profit entity entirely independent of utilities. There are models for this in other states. Then the administration and the legislature should work together to carve out a portion (say, a third) of the current ratepayer-funded energy efficiency programs for universal technical assistance for all Iowans, and run those funds through this same third party administrator.

It would not be difficult to set qualifications for energy auditors/planners, and for varying levels of technical assistance, to ensure that Iowans are getting their money’s worth in help planning their home improvements, and in accessing the federal dollars. A technical assistance fund managed independently of utilities will also help to grow Iowa’s young but very capable energy auditing workforce and support locally-led clean energy transition organizations that provide such services, such as Energy Districts.

The Weatherization program is a federal program administered in collaboration with states, and in Iowa implemented locally through the Community Action Agencies. For decades, it has helped low-income households with more or less whole-home energy efficiency retrofits. Unfortunately, in many places the program continues to install natural gas (or propane) heating and hot water systems, and to achieve inadequate air sealing and insulation levels. This is often thanks to cost and ranking criteria embedded in the program.

The IRA, on the other hand, is all about home electrification, and the rebate programs will highly incentivize heat pumps, and whole-house efficiency performance levels. It will be important for state energy offices and other entities to collaborate with Weatherization program managers to align standards, and possibly even link program funding. Weatherization ranking systems should adjust to favor electrification, and the IRA rebate programs may be able to provide differential funding. Iowa customers will be better served, and a Weatherization program focused on heat pumps will have significant ancillary benefits of accelerating market transformation in the contractor world.

Iowa needs virtual net metering and meter aggregation. The utilities were allowed to refuse these practices when developing the net metering tariffs required by the legislature in 2020, but they’re more important now than ever. This is because the IRA makes the 30% tax credit for investments in solar, geothermal, and other forms of renewable energy by non-taxable entities a “direct pay”, or refundable, credit.

The direct pay provision is a tremendous opportunity for local governments, schools, colleges, churches, and other nonprofits to own a piece of the energy future, and keep their taxpayer and member dollars local. These entities, however, often have many electrical meters, and not enough rooftop or other space “behind the meter”. Meter aggregation and virtual net metering would be a relatively minor administrative tweak to the existing net metering tariffs, and would open the door to significant wealth creation and local job creation.

The Iowa legislature should remove the electric fuel tax before it goes into effect in 2023. In 2019, HF767 imposed both higher registration fees, and set in motion a future EV charging tax, in order to ensure EVs pay their fair share of the road use fund. This is important, but they overreached. Most states are finding the higher registration fees more than enough to keep road funds whole in the early stages of the EV transition, and the national momentum for a miles-driven approach is towards road use charges.

Iowa is not alone in also attempting to tax electric charging stations, but should think hard before continuing with implementation. There are likely hundreds of low-voltage charge stations in communities and workplaces, and many do not have the ability to meter or charge, much less tax, the fuel. The process will be an administrative nightmare of red tape and inefficiency for the state Department of Revenue. Taxing public charge stations but not in-home EV charging is highly discriminatory against renters and others without an in-home option.

Taxing electric fuel charging is inefficient, redundant to registration fees, and unfair relative to road use charges. The state could consider joining with other Midwestern states to study a regional RUC initiative, as western states are already doing. Utah is already piloting a RUC, that allows drivers to choose between paying higher EV registration fees, or a fee based on miles-driven. The options for good policy are there, and a first item of business of the 2023 Legislature should be to undo the electric fuel tax portion of HF767.