The Inflation Reduction Act’s compromises are symbolic of the energy transition

Finally. Nearly 18 months after President Joe Biden in March 2021 first proposed a $2 trillion infrastructure spending plan – watered down to $1.2 trillion – which would be passed alongside a $3.5 trillion Build Back Better act, the president’s infrastructure and climate agenda has successfully made its way through the tricky legislative paths of Congress.

The Build Back Better plan was rebranded as the Inflation Reduction Act and contained a rather more modest spend of $739 billion, as it passed through the legislature last weekend. That this was considered a victory was partly emblematic of the expectation management that has been tempered with this bill, with such prospects looking dead in the water only a few weeks ago when talks with Senator Joe Manchin broke down, not for the first time since March 2021.

The merits of a political system so dependent on the whims of one member of the upper legislative chamber are up for a debate, but you can find those arguments in other publications. However, despite the sacrifices that have been made to accommodate it, the package is a landmark bill that finally places the US on a climate change trajectory in the right direction, with the bill tipped to help meet the US’s 2030 target of reducing emissions by 50-52 percent below 2005 levels. It is hoped the rest of the world can look at the US and no longer accuse executive-level talk of hypocrisy.

There are key elements of the bill that have been applauded by the clean energy industry in the US. The extensions of tax credits for wind and solar investments by 10 years provide much-needed long-term certainty for the measures that have been in an almost constant state of doubt for the best part of a decade.

Yet the Inflation Reduction Act is reflective of large parts of the investment community in looking beyond wind and solar development to accelerate the energy transition. For the first time, tax credits will be available to standalone energy storage projects, which previously only qualified for such measures when co-located with renewable generation. And in a market where the installation of renewables has slowed significantly, this has only had a negative knock-on effect for the deployment of energy storage.

A $27 billion Greenhouse Gas Reduction Fund has been created, whose directives to provide loans, grants and technical assistance for zero-emissions technologies sound suspiciously like the US’s first national green bank in all but name.

There are also first-time measures to support the development of a hydrogen industry. The bill will support hydrogen production based on the carbon intensity of projects, while there is an increase in the value of measures to support direct air capture and carbon sequestration, and measures to limit methane emissions in the agriculture sector.

Make no bones about it, this is not the perfect climate bill, though a comparison with the original Build Back Better act, courtesy of Princeton University’s REPEAT Project, shows it is set to deliver on more than 78 percent of the emissions reduction that Build Back Better would have produced in 2030 (and more than 90 percent by 2035, as first reported by The New York Times).

Some of the bill’s measures are also designed to help the oil and gas industry, which Senator Manchin had been looking to protect. Indeed, there is a provision that leases for renewable energy development will be made in conjunction with the sale of leases for oil and gas drilling. Tax credits to keep ageing nuclear plants online also raise other environmental questions.

This, however, is the uncomfortable reality for a country like the US. Sometimes disingenuously and sometimes in earnest, the point is often made that the energy transition is exactly that – a transition rather than a transformation. The US will be dependent on fossil fuels for many years to come, but for one of the first times in its history, it is making efforts to engineer a more holistic transition.

Other countries playing whack-a-mole with gas and nuclear may want to take note.