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How the New Climate Bill Promises to Cut Inflation, Upgrade the Economy, and Slash Emissions

The Inflation Reduction Act is poised to re-energize the US economy, our industries, vehicles, and homes. In this roundup, RMI unpacks the details of this landmark climate legislation.

For the United States, the Inflation Reduction Act offers an unprecedented opportunity to lower energy costs, increase investment in clean energy economic opportunities, and stimulate jobs and economic growth. For the world, the US move will likely lead other nations to cut emissions faster. In this roundup, RMI experts tease out the legislation’s key implications.

The US move will likely lead other nations to cut emissions faster.

Committing $369 billion to energy and climate, the act targets renewable electricity, clean transportation, efficient buildings, and supply chain infrastructure, investing in sectors that are supply-constrained today so they won’t be tomorrow.

These fragile global supply chains were a primary driver of post-COVID inflation. By securing more robust, reliable, and efficient supply chains for clean energy — such as for electric vehicle (EV) batteries, critical mineral refining, and components for solar and wind energy systems — the act should not only lower costs, but also spur hiring, and bring manufacturing back to the United States.

Over time, these investments promise to boost US innovation and stimulate regional economic growth, from car manufacturing in the Midwest to solar production in the Sun Belt. The broad investment should improve overall US economic competitiveness: By accelerating a clean energy industrial revolution, the bill can permanently lower costs for US households and businesses.

Below we discuss the bill’s potential impacts on buildings, electricity, transportation, hard-to-abate sectors, and more. With reconciliation and passage anticipated in early August, the final details of the act may yet shift. This page will be updated to reflect those changes.

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Cars and Trucks — Subsidizing EVs, Boosting Batteries, Stimulating Manufacturing

The act would both stimulate supply and demand for electric vehicles, making it more affordable to both build and purchase EVs. On the supply side, it provides billions of dollars to support domestic sourcing, refining, and recycling of critical minerals as well as domestic battery and component manufacturing and assembly.

On the demand side, it extends the tax credit for the purchase of a new vehicle, and lifts the manufacturer production cap, which would have prevented the cars made by the four largest EV companies to be eligible for the credit over the next year. The credit would also be able to be transferred to a dealer, making it much easier for low- and middle-income buyers to take advantage of it, and the bill even includes tax credits for previously owned clean vehicles. The $40,000 tax credit for vehicles over 14,000 pounds will help turbocharge zero-emissions truck adoption and can make buying an electric truck cheaper than comparable diesel trucks.

A further $1 billion in the bill supports clean heavy-duty vehicles — including electric school buses, transit buses, and garbage trucks. Approximately $400 million of these funds are dedicated to high pollution communities to ensure the clean vehicle transition improves the health and transportation options for historically low-income, disadvantaged, and minority communities.

Buildings — Funding Home Upgrades, Lifting Low-Income Neighborhoods

If passed, the act will make it cheaper to upgrade our homes and businesses while providing healthier indoor air quality and reducing climate pollution. The act introduces a much-needed suite of rebates and incentives to ensure new and existing buildings are highly efficient, resilient, safe, and comfortable in the face of high energy prices, a deteriorating building stock, a housing crisis, and extreme weather caused by climate change.

Most importantly, the bill prioritizes housing improvements for low- and moderate-income families who experience disproportionately high energy burden and harmful health effects from fossil fuel pollution, including language RMI helped shape in retrofitting low-income housing.

The residential tax credits — which can be used for heat pumps, electric water heaters, energy audits, electrical upgrades, and better insulation — could save 103 million households $37 billion a year on energy bills. There are also tax credits for commercial buildings and multifamily homes. Billions of dollars are also being put toward rebates for whole-house energy retrofits and electrification projects. And there is even a grant and loan program for water efficiency and climate resilience projects for affordable housing.

We’re on the precipice of historic progress for the US climate action movement.

David Smedick, RMI senior associate working on federal building policy

With these tax credits and rebates, the US can upgrade its building stock to shield households against energy cost inflation, improve living conditions, and tackle one of the country’s largest sources of climate pollution.

“We’re on the precipice of historic progress for the US climate action movement,” said David Smedick, RMI senior associate working on federal building policy. “With tens of billions of dollars invested into decarbonizing our building stock, the US people would benefit with lower energy bills, more jobs, and less pollution.”

Cities — Localizing Clean Energy and Storage, Urban Trees

In addition to maintaining critical subsidies for large-scale wind and solar projects, the act provides new subsidies for local clean energy projects such as low-income solar, brightfields — solar projects installed on contaminated land and closed landfills — and standalone storage systems. These local investments will not only provide critical grid services and cost savings but also infuse the economic and health benefits of these investments into the communities that most need them.

It also includes programs like the Neighborhood Access and Equity Grant Program and Greenhouse Gas Reduction Fund that will be instrumental to redirecting public and private dollars toward places that need climate investment the most: frontline communities living in multifamily housing in metro, rural, and tribal areas.

And to get local governments the resources they need to maximize nature’s benefits in cities, the bill includes the largest-ever injection of funds ($1.5 billion) into urban and community forestry. The Urban and Community Forestry Assistance Program will help cities tackle inequity, mitigate extreme urban heat, reduce pollution, increase resilience, and save energy and carbon.

Aviation — Scaling Low-Carbon Jet Fuel

This bill would increase the availability and affordability of Made-in-the-USA sustainable aviation fuel (SAF), a crucial low carbon fuel that is usable in today’s aircraft and can reduce the lifecycle emissions of flight by up to 80 percent. Production tax credits in the bill would greatly reduce the cost of commercially available SAF — made from sustainable feedstocks like used cooking oil, crop residues and municipal solid waste — making air travel more sustainable for Americans without increasing costs to consumers.

In the next five years, SAF capacity is expected to grow 15 times and exceed 500 million gallons per year. By 2027, the proposed credits would increase US SAF production creating jobs across multiple sectors and could save producers a minimum of $1.3 billion.

Hydrogen — Developing a Cleaner Fuel to Power Industry

The bill’s hydrogen production tax credit would compensate producers of hydrogen made with renewable electricity — known as ‘green hydrogen’ — with $3 for each kilogram of zero-carbon fuel they can supply. This will lower green hydrogen costs to rates competitive with traditional fossil fuels. Energy-intensive industrial and heavy transport sectors will rapidly transition to green hydrogen use as it becomes the quickest and most predictable way to save on energy costs and benefit from green premiums.

Shifting to green hydrogen promises to decarbonize major industrial sources of carbon — by taking the natural gas out of fertilizer production, the coking coal out of steel production, and the bunker fuel out of shipping. Moving these crucial US sectors away from fossil fuels also promises sustained relief from their price volatility and recent inflationary price spikes.

Shifting to green hydrogen promises to decarbonize major industrial sources of carbon

The bill can help US industry lead the way forward on decarbonization in hard-to-abate sectors and demonstrate to other countries how to reduce their industrial and transport emissions, all while boosting economic growth and stabilizing inflation.

Cement, Steel, Aluminum, and Chemicals — Maturing Low-Carbon Production

Hydrogen, carbon capture, and cheap clean electricity are the building blocks required to decarbonize the production of essential commodities like steel, cement, aluminum, and chemicals. The bill provides tax credits to close the cost gap now facing pathways necessary decarbonize these essential industries. Increased funds for technologies that cut industrial emissions — by $5.8 billion — provide another crucial incentive.

These provisions will allow for greater private sector investments in these sectors as well as support existing public procurement efforts to “buy clean” and “buy green” at federal, state, and local levels by driving greater transparency and adoption. The legislation includes funding to expand government procurement of low-carbon products, along with funding for Environmental Product Declarations to track emissions from building materials.

For example, a production tax credit will make green hydrogen-based steelmaking competitive with today’s coal- and gas-based processes. This will enable a faster transition away from carbon-intensive steelmaking, while maintaining jobs and reducing pollution risk in industrial communities. It will position the United States to reduce its reliance on steel imports and potentially become a net exporter of green steel.

If passed, this bill will allow the United States to lead the world in green industrial revitalization. Businesses today will get a shot-in-the-arm with credits for clean energy and tech investments. Businesses tomorrow will benefit from the low-cost, low-carbon supply chain that will develop around these incentives.

Jobs — Transitioning Fossil Fuel Communities with Support for New Industries

The clean energy tax credits for the power sector in the bill are even larger when using domestically manufactured products, providing prevailing wages for workers, or when clean energy infrastructure is built in former fossil energy communities — places with historically high employment in coal, gas, and oil industries. This will ensure that the clean energy transition strengthens domestic supply chains and does not leave communities behind.

The bill also permanently extends funding for the Black Lung Disability Trust Fund — securing health benefits for former coal miners with black lung, a condition where intense exposure to coal dust causes scarring in the lungs, often impairing ability to breathe. The bill also offers loans and other financing for communities facing job losses from the shift to clean energy, boosting revitalization opportunities and increasing the opportunity for good-paying jobs.

These supports would drive reinvestments into communities facing coal plant and mine closures

These supports would drive reinvestments into communities facing coal plant and mine closures, such as communities throughout Appalachia, which a recent RMI report identifies as essential to energy community recovery and revitalization.

Electricity — Extending Credits for Solar, Wind, and Storage

The bill will advance clean energy while lowering costs to consumers by encouraging cheaper forms of energy and diverting demand away from fossil fuels. The extension and expansion of tax credits for clean electricity provides tax credits for renewable energy like solar, wind, and battery storage, as well as other zero-carbon resources, for 10 years, which will only start to scale down once the United States has begun meeting its emissions targets.

These tax credits will make clean energy cheaper, encouraging electricity providers to more quickly transition away from the fossil fuels that have been largely driving today’s inflationary environment. Furthermore, these tax credits will be “direct pay” for municipal utilities and rural electric cooperatives, and allow for transferability for other electricity providers, reducing transaction costs and allowing more savings to be passed onto consumers.

These tax credits will make clean energy cheaper, encouraging electricity providers to more quickly transition away from the fossil fuels

Previous RMI analysis found that these tax credits could reduce electricity bills nationwide by $5 billion a year by 2024. The Inflation Reduction Act has other critical provisions not previously modeled, like additional support to support renewable energy for rural cooperatives and refinancing programs that will yield even more savings.

Oil & Gas — Cutting Methane Leakage with Carrots and Sticks

The methane emissions reduction program in the bill will boost the oil and gas industry’s incentive to scale up emissions measurement and cut methane emissions across the value chain. It would impose a methane fee on facilities that exceed a certain amount of emissions per year.

Especially in the current price environment, most methane abatement measures can be done at no net cost — or even at a net benefit — giving companies to whom the fee applies a clear reason to take action before 2024. This program can be a great complement to a robust EPA oil and gas methane rule and state-level policies that more fully internalize the costs — and accelerate the dramatic reduction — of methane emissions.

Carbon Dioxide Removal — Boosting Incentives to Develop Nascent Technology

The bill increases the current tax credit for direct air capture (DAC) — capturing carbon directly from the atmosphere. The proposed increase of up to $180/tCO2 for qualifying DAC projects is unprecedented globally and could represent a 30 to 50 percent subsidy for DAC projects.

This approach is like the solar PV subsidies deployed by the United States in the late 2000s, which kickstarted the market for solar PV in the country. The increased credits for DAC in the bill could have a similar effect today and jump start a new market in earnest.