Inflation Reduction Act: Environmental Provisions

Inflation Reduction Act: Environmental Provisions

Client Alert


The Inflation Reduction Act (IRA), the Biden Administration’s signature legislative achievement, includes several provisions aimed at fighting climate change by reducing greenhouse gas (GHG) emissions. The law represents the federal government’s most significant action on clean energy, climate change, and environmental justice. In total, the law commits at least $369 billion to support a transition to a clean energy economy and reduce GHG emissions, including $60 billion to support environmental justice initiatives. The significant achievement passed on a party-line vote, meaning that future implementation and funding may be subject to review by subsequent Administrations and Congresses.

But the law stops short of requiring or even directly authorizing the Environmental Protection Agency (EPA) to use the Clean Air Act’s “command and control” provisions to mandate emissions reductions that would slow climate change. Achieving additional GHG reductions will require regulatory action, as well as cooperative efforts by local and state governments, private industry, and individual citizens.

I.  Major Environmental Implications of the IRA

a.  New Clean Air Act Grant Programs

The IRA adds seven new sections to the Clean Air Act, each of which appropriates funding to EPA for new grant programs. The programs address clean heavy-duty vehicles, reducing air pollution at ports, zero-emissions technologies, low-emissions electricity, methane emissions reductions, state and local planning for GHG emission reductions, and environmental and climate justice issues. Together, the programs authorize billions of dollars in funding for these issues.

Within each of the new sections, “greenhouse gas” is defined as “the air pollutants carbon dioxide, hydrofluorocarbons, methane, nitrous oxide, perfluorocarbons, and sulfur hexafluoride.” Although the Supreme Court held in Massachusetts v. EPA, 549 U.S. 497 (2007), that carbon dioxide is an air pollutant that EPA may regulate under the Clean Air Act, the IRA specifies for the first time legislatively that GHGs, including carbon dioxide, are air pollutants under the Clean Air Act, although only for the purposes of the newly added sections.

b.  Methane Fee

The IRA implements a charge (or fee) on “waste” methane emissions resulting from certain petroleum and natural gas operations. The IRA establishes annual waste emissions thresholds and, for exceedances of those thresholds, a graduated fee structure that starts with a charge of $900 per metric ton of methane emissions in 2024 and increases to $1,200 in 2025 and $1,500 in 2026 and thereafter. This methane fee applies only to facilities with annual methane emissions exceeding the equivalent of 25,000 metric tons of carbon dioxide, within industry segments that are required to report their emissions under EPA’s Greenhouse Gas Emissions Reporting Program, including petroleum and natural gas production, nonproduction petroleum and natural gas systems, and natural gas transmission, but excluding natural gas distribution facilities. According to the Congressional Research Service, 2,172 facilities are likely to be subject to the methane charge.

The methane fee aims to provide an economic incentive for regulated facilities to modify their equipment and/or operations to reduce methane emissions to below the annual reporting threshold before 2024, thus avoiding the fee entirely. Due to methane’s potency (or “Global Warming Potential”) and abundance, reduction of methane emissions in the atmosphere is considered paramount in order to reduce the effects of global warming. Over a 100-year period, methane traps 25 times more heat in the atmosphere than does carbon dioxide. And according to EPA, methane is the “second most abundant anthropogenic GHG after carbon dioxide,” accounting for approximately 20% of global emissions. If the methane fee spurs the largest emitters to reduce methane emissions, climate impacts are likely to be reduced. 

c.  Clean Energy Incentives

The law offers a myriad of tax incentives, grants, and other funding mechanisms to achieve the Biden Administration’s clean energy goals. The legislation extends both the Investment Tax Credit (ITC) and Production Tax Credit (PTC) for qualified solar, wind, geothermal and other renewable energy projects that begin construction before January 1, 2025. Projects must pay prevailing wages during construction to receive either credit and must pay prevailing wages for the first five years after the project is placed in service to qualify for the ITC and for the first 10 years after the project is placed in service to qualify for the PTC. Additionally, a certain percentage of labor hours must be performed by qualified apprentices participating in registered programs through the National Apprenticeship Act. Projects can also receive bonus credits if certain percentages of a project’s steel, iron or other components are produced domestically; if projects are located within a brownfield site or communities otherwise dependent on the coal, oil and natural gas industries; and if projects exist in low-income communities or Native American lands.

Further, the IRA provides incentives to encourage the expanded manufacture and purchase of electric vehicles (EVs), but also contains restrictions limiting which entities and individuals will be able to take advantage of the incentives. For example, buyers looking to qualify for EV purchasing credits must have incomes of less than $150,000 for individuals and less than $300,000 for couples. As to EV manufacturers, they are no longer bound by the 200,000 EV phaseout cap that previously limited a manufacturer’s access to EV tax credits. The credit value for lightweight vehicles remains at $7,500, and the credit value for vehicles weighing more than 14,000 pounds is increased to $40,000. To receive the credits, manufacturers must ensure that a percentage of critical minerals are processed domestically, or by a country with a free trade agreement, or recycled in North America. The percentage starts at 40% before 2024 and increases to 100% by 2028. The final assembly of a car and manufacture or assembly of certain portions of car battery components must also occur in North America for a car to qualify. However, some automotive manufacturers’ current processes do not meet these requirements, making them ineligible for the credits. In addition, the IRA addresses a deterrent to EV ownership—lagging EV charging infrastructure—by extending to December 31, 2032 the Alternative Fuel Vehicle Refueling Property tax credit (which previously expired in 2021 and provides 30% discounts to EV charging hardware purchases). Lawmakers anticipate that these changes will increase sales of EVs to meet President Biden’s goal that 50% of all new cars sold by 2030 will be electric vehicles, notwithstanding the barriers for some manufacturers and buyers.

d.  Oil and Gas Leases and Sales 

The IRA requires certain oil and gas leases to be awarded, but those leases will be accompanied by higher costs. Under the IRA, the Department of the Interior (DOI) must award leases to the highest bidders from the Gulf of Mexico Lease Sale 257 that was conducted in November 2021 (but subsequently vacated by a district court1 after finding that the environmental review was inadequate). The IRA also requires DOI to conduct lease sales in Alaska’s Cook Inlet Sale 258 by the end of this year, and in the Gulf of Mexico by March 2023 (Sale 259) and September 2023 (Sale 261). These leases will be subject to higher costs, including eliminating noncompetitive leasing and incorporating higher rental rates, minimum bids and fees for submitting expressions of interest. The IRA also increases royalty rates under the Mineral Leasing Act from 12.5% to a minimum of 16⅔%. 

For the next 10 years, the IRA also requires wind and solar development rights be tied to oil and gas lease offerings. Specifically, before an offshore wind sale can occur, DOI must have offered for sale at least 60 million acres in offshore oil and gas leases during the previous year. A wind or solar energy right of way (ROW) may not be issued on federal lands unless an onshore oil and gas lease sale occurs during the 120 days prior to the ROW being granted, and the sum of the acres offered for lease is the lesser of 2 million acres or 50% of the acreage for which expressions of interest have been submitted. The provisions tying together renewable and nonrenewable energy production have been heralded by some as a creative solution to move a diverse energy portfolio forward. Others have condemned the required development of oil and gas resources in the Gulf of Mexico and Alaska. 

e.  Environmental Justice

As part of President Biden’s broader environmental justice policy summarized in a prior WilmerHale alert, the IRA supports community engagement and environmental justice initiatives by providing funding for several new grant programs that address air pollution, GHGs and other legacy pollution. For example, according to a press release by Democratic senators, the $3 billion Neighborhood Access and Equity Grants support “neighborhood equity, safety, and affordable transportation access” by providing competitive grants to “reconnect communities divided by existing infrastructure barriers, mitigate negative impacts of transportation facilities or construction projects on disadvantaged or underserved communities, and support equitable transportation planning and community engagement activities.” The IRA also implements other funding initiatives to help underserved communities, such as tax credits for used electric vehicles, grant programs for energy and water efficiency installations, and more than $200 million in funding for Air Pollution Monitoring that will benefit communities exposed to areas with persistent air pollution, especially environmental justice communities. Together with federal enforcement efforts directed at pollution in environmental justice communities, these IRA provisions are intended to move the needle toward achieving President Biden’s environmental justice and racial equity goals.

f.  Carbon Capture and Sequestration

The IRA provides several incentives for carbon capture and sequestration. First, the IRA extends and modifies tax credits under Section 45Q of the Internal Revenue Code for carbon sequestration projects. More specifically, the IRA extends to January 1, 2033 (from January 1, 2026) the deadline for qualifying facilities to begin construction; significantly reduces the annual capture requirements for qualifying facilities (to 1,000 metric tons for direct air capture facilities, 18,750 metric tons for electricity generating facilities, and 12,500 metric tons for all other industrial facilities); and increases the dollar amounts of the credits for qualifying facilities. In addition, the IRA allows tax credits for carbon sequestration (attributable to carbon capture equipment which is originally placed in service after December 31, 2022) to be monetized through an “elective payment” that treats the taxpayer as having made a tax payment equal to the amount of the credit. The IRA also appropriates nearly $10 billion in US Department of Agriculture assistance for rural electric cooperatives to transition to renewable energy or make energy efficiency improvements, including the use of carbon capture technologies.

II.  West Virginia v. EPA and the IRA

The IRA makes clear that Congress intends EPA to take significant action on climate, but the new law does not directly affect the legal issues in West Virginia. As summarized in a prior WilmerHale alert, the Supreme Court held in that case that, under the major questions doctrine, Congress did not grant EPA the authority to devise emissions caps for existing sources through generation shifting. It reasoned that all prior GHG emissions regulation was source-based to require cleaner technologies, rather than system-based to require shifts in the type of energy produced.

The IRA does not affect the core holding of West Virginia. Its climate provisions do not amend the Clean Air Act to clarify that EPA may (or may not) use generation shifting to devise emissions caps for existing sources. Although the new sections of the Clean Air Act added by the IRA define GHGs as air pollutants, that definition applies only to the newly added sections—not the statutory provisions at issue in West Virginia.

However, the IRA does make clear that Congress intends EPA to have a significant role in fighting climate change. Once EPA formally proposes its replacement of the Clean Power Plan—the Obama-era regulation to reduce GHG emissions from existing power plants that was at issue in West Virginia—EPA will likely face litigation challenging the new rule, and arguments about the applicability of the major questions doctrine are likely to be central to those challenges. In response, EPA will likely lean heavily on the climate provisions of the IRA to show that Congress intended EPA to act on climate change, while opponents will point to the limited applicability of the new definition of GHGs as air pollutants.

III.  Conclusion

The IRA is a significant milestone in federal efforts to reduce climate change, creating a number of programs designed to incentivize a transition to clean energy and advance the Biden Administration’s goal of significantly reducing GHG emissions. It is expected to reduce emissions by approximately 40% by 2030.2 As the regulated community assesses the impact of the IRA on their development and production plans, investment goals, and risk management strategies, they should consider ways to access the numerous tax credits, grants and loans the law offers. 

But the IRA stops short of redefining federal regulatory authority to limit emissions, instead pursuing an approach primarily based on carrots rather than sticks. As a result, although EPA will likely rely on the IRA in defense of future climate regulation, the agency is likely to still face headwinds in court. 




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