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Introduction

Thirteen years is a long time in the climate policy world — but that is how long advocates of climate action have been waiting for another chance at implementing sweeping federal legislation to address U.S. greenhouse gas emissions. Back in 2008-2009, negotiators were working to replace the expiring Kyoto Protocol, Europe adopted a major climate and energy package to achieve emissions, renewable and energy efficiency targets and Barack Obama had been elected president with expectations of climate action. In June 2009, the Waxman Markey Bill passed the U.S. House of Representatives by a very slim margin and included a framework to drive change through subsidies, renewable electricity standards, and an economy-wide carbon cap and trade system. It never made it further.

By the end of 2009, many major economies, including the U.S., had agreed to the Copenhagen Accord and essentially the entire world has since agreed to the Paris Agreement. Recognizing the challenges of passing climate legislation, the Obama Administration tried to make progress via a regulatory approach. But those regulations needed to withstand legal challenges —and in 2016, the Supreme Court stayed the Obama Administration’s ambitious Clean Power Plan for decarbonizing the power sector. In July 2022, the US Supreme Court’s West Virginia vs. EPA decision closed that door further —limiting regulatory options to set climate policy absent “clear congressional authorization” or legislative intent. SPGI Commodities Insights forecasts were indicating the U.S. falling far short of its aggressive 2030 Paris Agreement targets.

Since the Russian invasion of Ukraine, the EU has sought to meld its ambitious “Fit for 55” decarbonization goals for 2030 with the need to address near-term concerns around energy security and a lasting cutback of Russian fossil fuel imports. Commodity Insights forecasts indicate that China’s plans and directives will achieve their goal of peaking country-level GHG emissions by 2030. Meanwhile, the U.S. was offering another reminder of how a divided electorate and the checks and balances of government can lead to policy paralysis.

One month later —after intense public and private negotiations and compromises, and by the slimmest of margins, Congress passed and President Joe Biden signed the Inflation Reduction Act. The bill provides $369 billion in meaningful incentives for clean technologies such as wind, solar, storage, hydrogen, nuclear, carbon capture, and biofuels that will drive energy sector transformation and emissions reduction. Instead of a structure built on carbon trading and pricing, the IRA looks to leverage federal funding and tax policy to drive private sector clean energy investment, building on the successful track record of tax credits for wind and solar. Instead of trading carbon allowances, project developers and financiers will need to be engaged in markets for tax equity — which will need to scale up.

Instead of a carbon bill, the IRA offers comprehensive industrial policy, which through implementation will bring about emissions reductions. Concerns about budget deficits would be in part offset by increased corporate taxes. Concerns about jobs and the disadvantaged would be addressed by apprenticeship and locational project requirements. The bill looks to ensure reliable clean energy supply chains by tying the full value of tax benefits to materials sourcing and manufacturing requirements. For those concerned about an overly rapid transition, the bill reopens some leasing for fossil fuels and facilitates long-stalled pipelines — although a methane fee will help ensure cleaner upstream supply.

The IRA benefits a full spectrum of clean energy, extending long-running programs for wind and solar and EVs. It also bolsters programs for carbon capture and creates new programs for low carbon hydrogen, stand-alone energy storage and existing nuclear. The incentives will not only ensure that new capacity is clean, but will replace existing emitting capital stock —including accelerating coal plant retirements.

The new law did leave other clean energy issues unresolved. Direct incentives for transmission buildout —critical for moving power from areas of cheap clean energy to demand centers — did not make the final bill. Without a carbon price, investments may not be fully “carbon-efficient.” It is unclear whether some of the hurdles for qualifying for credits, including domestic sourcing and employment considerations, are achievable. It is also uncertain whether clean energy supply chains are ready to meet the expected additional demand. There is no funding provided for international climate financing efforts, nor is it clear how U.S. efforts would fit into considerations of Article 6 or border carbon adjustments. But after 13 years, the U.S. can for the first time begin relying on a comprehensive, federally-driven policy to channel investments, transform the sector, and drive down emissions — all while bringing aspirational Paris Agreement targets more firmly into the realm of achievable.

Roman Kramarchuk
Head Future Energy Analytics, S&P Global Commodity Insights



President, S&P Global Sustainable1


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General Overview

Clean Energy Technology Insight: Inflation Reduction Act Supports Storage, EVs

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Finance

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Oil, Gas & Transport

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Biofuels & Ag

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