Inflation Reduction Act: 9 Takeaways for Climate Tech
The passage of the Inflation Reduction Act (IRA) is a pivotal moment for the entire climate tech industry. It represents the single largest investment in reducing emissions in U.S. history, with ~$370B in funding in the form of tax credits and appropriations toward climate change and energy security. The IRA is projected to have a huge impact on US emissions, bringing them to ~40% of 2005 levels by 2030, and enabling the US to achieve 80% of its commitment under the Paris Agreement.
Our focus at G2 is to invest in companies that are accelerating climate technologies with strong unit economics at scale, and which have sustainable business models with or without government incentives. From that lens, we are excited about the potential of the IRA to accelerate these transitions and enhance the value proposition of great products and technologies.
We pored over the IRA last week, and we’re excited to share key components of the bill that are particularly meaningful for companies building in climate tech.
1. Monica: 5x increase in annual solar and wind capacity additions in 5 years
Much of the bill’s emissions impact will come from decarbonization of the power and electricity sector, with Princeton University’s Zero Lab modeling a 5x increase in annual deployments of solar and wind capacity by the end of the decade. While the challenges of siting projects, building interconnections, and meeting domestic content requirements in the bill are non-trivial, the IRA incentivizes a massive expansion of the domestic renewables manufacturing and asset deployment industries. Utilities and asset owners will need new tools to manage an increasingly flexible, resilient, and decentralized grid. Within solar specifically, companies including Sunfolding, Enphase, and Arcadia stand to greatly benefit.
2. Dave: $10B to strengthen US manufacturing and accelerate green growth
The IRA provides $10B of fresh funding for the 48C manufacturing tax credit to spur the ongoing development of renewable energy manufacturing infrastructure, as well as EV infrastructure and other project types. Importantly, this credit also provides incentives for refurbishment or overhaul of existing manufacturing facilities that will reduce those facilities’ emissions by greater than 20%. While these credits are not necessarily required to justify investments in efficiency or new capacity, they will help accelerate the efficiency of US manufacturing and drive green growth, reducing emissions while increasing economic productivity.
3. Jake: A compelling path to home electrification
Heating buildings accounts for an incredible 25% of global energy use (IEA). And, today, most of this heat is provided by fossil fuels (primarily natural gas). We already have the solution to decarbonize this heat — high efficiency heat pumps. But, while heat pump sales are growing quickly, the U.S. still installs more furnaces than heat pumps. These are long lived assets, and every furnace we install locks in emissions for another 15+ years. By providing $1,000s of credits for high efficiency heat pumps and other appliances, as well as incentives for enabling technology like panel upgrades, the U.S. will pull forward the electrification of homes by years.
4. Neel: First ever-tax credit for commercial clean vehicles
Starting in 2023, commercial vehicles will be eligible for a tax credit equal to 30% of the difference between the cost of the clean vehicle and its gas-powered counterpart. While there are limitations ($40K cap for vehicles >14K lbs), this will be significant for the industrial economy, as medium/heavy duty vehicles account for ~24% of U.S. transportation GHG emissions, despite representing 5% of vehicles on the road (C2ES). The credit makes the “total cost of ownership (TCO)” math simpler for mega-fleet owners (e.g., UPS, Pepsi, etc) contemplating the transition to electric (or other clean vehicles). The entire EV value chain stands to benefit from the credit, including domestic manufacturers of electric commercial vehicles, battery packs, and e-drivetrains (e.g., Proterra, Our Next Energy), emerging ‘charging-as-service’ businesses (e.g., Forum Mobility, EV Realty), and fleet management software providers (e.g., Synop, Optibus).
5. Zach: The first ever incentive to buy a used EV
Behind range anxiety and charging, concerns around cost are the largest barrier to EV adoption, with a recent Consumer Reports survey finding that 52% of Americans see cost as a barrier to buying an EV. To be broadly adopted, EVs have to be seen as approachable, affordable, and reasonable for all car buyers, and the IRA helps make that a reality by offering the first tax credit for previously owned EVs of $4,000 or 30% of the price of the car. At a time when the F-150 Lightning, one of the most anticipated EV launches, is pricing at close to $100,000 on the high end, this benefit will be critical to bringing the benefits of an EV to everyone.
6. Valerie: A meaningful and rising fee on methane emissions
Methane emissions will be charged $900 per ton in 2024, $1,200 in 2025, and $1,500 in 2026 and each year thereafter. This is significant in that it is the first ever federal fee or tax on greenhouse gas emissions in the US. Economists on both sides of the aisle have long agreed that setting a price on carbon and letting the market figure out specific emissions reduction solutions results in the most efficient changes being made. While this is far from that ideal (it only pertains to methane, and only ~40% of methane emissions after all the exemptions), it is a step in the right direction and perhaps a trial run for a price on a broader set of emissions (which has thus far been politically unfeasible). More tactically, this fee helps companies turning gas that would have been flared into useful electricity (e.g. Crusoe Energy, Plexus) and companies working on methane leak detection / prevention (e.g. AiDash, Project Canary).
7. Fran: Supporting farmers as they improve agricultural practices
Farmers have a deep appreciation of the importance of preserving soil and reducing extreme weather events as they directly impact their livelihoods. However, many sustainable solutions have high price points and/or require new equipment and process changes. On top of these costs, farmers have faced significant headwinds such as COVID highlighting the rigidity of supply chains, the war in Ukraine causing food shortages, rising inflation, and record high commodity prices. Given this context, farmer incentives are necessary for us to improve our food supply chain, and the bill has earmarked $20B to (1) target methane and nitrous oxide emission reduction (e.g. Arable, Trace Genomics), (2) improve soil carbon and nitrogen content (e.g. Pivot Bio), and (3) avoiding / sequestering GHG emission (e.g. ProducePay, Regrow, Cloud Agronomics). This will drive unprecedented change in our food supply chain, helping us reach our collective climate goal while maintaining their income and food security for decades to come.
8. Eric: Clearing a path to carbon capture, use, and sequestration at scale
A comprehensive strategy to achieve net zero global emissions by 2050 must include carbon capture, use, and sequestration (CCUS) alongside decarbonization. To achieve net zero by 2050, the IEA estimates that direct air capture (DAC) alone must remove 85 million tons of CO2 p.a. in 2030 and almost 1 billion tons p.a. in 2050. That will require a significant and rapid scale-up from the 10,000 tons removed p.a. by DAC today. Yet, deploying CCUS solutions has proven challenging while costs remain high at small volumes. That is where the IRA comes in: extending and expanding the 45Q tax credit through 2033. Under the IRA, power plants, industrial facilities, and DAC facilities can qualify for 45Q at lower thresholds (e.g., 1,000 tons p.a., down from 500,000 tons p.a. for DAC). In addition, the tax credit for integrated DAC and sequestration solutions has increased to $180 per ton CO2. These changes will enable CCUS technologies to be more readily deployed in heavy industries like cement production (e.g., CarbonCure, Brimstone Energy) and put broader carbon removal solutions (e.g., Charm, Carbon Engineering) another step closer to megaton scale.
9. Brook: What happened to electric bike tax credits?!
There are so many positives in this bill that I’m reluctant to criticize it, but it’s surprising and disappointing that the 30% tax credit (up to $900) originally proposed in Build Back Better didn’t make the final cut. Across both Europe and the US, e-bike’s are currently the most popular EV by sales volume, outselling electric cars on a unit basis by more than 3x in aggregate. As a means to reduce transportation carbon emissions, e-bikes can be a powerful tool, generating about 1/150th of the carbon emissions of a Tesla Model-3 to produce and requiring 1/25th of the energy to move/charge. They also cost >10x less, so per-dollar of subsidy they can have a disproportionate impact if replacing car-trips. This is a key assumption, which is why it should have been coupled with protected bike lane infrastructure funding as well. E-bike companies like Super73, RadPower, and VanMoof are experiencing record sales without subsidies, but tax credits would make them more accessible to a broader demographic.
Sources:
The Inflation Reduction Act: Summary of Budget Reconciliation Legislation (Holland & Knight)
Center for Climate and Energy Solutions
FarmdocDaily (University of Illinois)
The war in Ukraine triggered a global food shortage (Brookings)
In the U.S. and around the world, inflation is high and getting higher (Pew Research Center)
Commodity prices soar to highest level since 2008 over Russia supply fears (Financial Times)
