History was made Tuesday afternoon when President Joe Biden signed the Inflation Reduction Act — a landmark bill focused on climate, health care and tax breaks.
The House approved the more than $430 billion package with a 220-207 margin on Friday, with all Democrats voting in favor and all Republicans voting against. This came five days after the legislation narrowly passed the Senate, with Vice President Kamala Harris casting the tie-breaking vote that was split evenly among party lines.
The Inflation Reduction Act has been in the works for over a year now. Senate Democrats had to substantially reshape the bill to gain full support from their party to pass the measure, but that agreement was finally made in late July.
Why it matters
The Inflation Reduction Act includes roughly $369 billion in investments toward energy security and climate change mitigation, making it the largest climate investment in American history.
How it affects you
The passage of the Inflation Reduction Act is expected to shift energy consumption in the U.S. away from fossil fuels and toward clean energy alternatives. This will affect how we power our homes, which cars we drive, the appliances we purchase and much more.
How it affects your wallet
The package is expected to reduce energy bills for every homeowner in America, while also offering financial incentives for consumers who invest in clean energy (think solar panels, electric vehicles and energy efficient home upgrades).
Breaking it down: What’s in the climate portion of the bill?
The Inflation Reduction Act includes roughly $369 billion in spending towards “energy security and climate change investments.” The goal is to slash the country’s carbon emissions by roughly 40% by 2030.2
But how exactly is that money being spent, and how will it fight climate change? Let’s look a bit closer at the five main climate investment areas:
- Lowering energy costs for Americans
- Advancing U.S. energy security and domestic manufacturing
- Decarbonizing all sectors of the economy
- Aiding disadvantaged communities and environmental justice
- Increasing resiliency of rural communities (farmers and forestland owners)
1. Lowering energy costs for Americans
Good news for all Americans: The Inflation Reduction Act works to lower the rising cost of domestic energy and, therefore, your utility bills. How will it do that?
- Funding home energy rebate programs and energy efficient upgrades with a focus on low-income consumers.
- Offering 10 years of consumer tax credits to make homes more energy efficient and encourage clean energy alternatives.
- Making heat pumps, rooftop solar, electric HVAC and water heaters more affordable.
- Offering a $4,000 tax credit for lower- and middle-income Americans to buy used clean vehicles and up to a $7,500 tax credit to buy new clean vehicles.
- Creating a grant program to make affordable housing more energy efficient.
2. Advancing U.S. energy security and domestic manufacturing
The bill includes over $60 billion for on-shore clean energy manufacturing in the U.S. in hopes to alleviate inflation, make clean energy more affordable and relieve any supply chain bottlenecks.
- Offering production tax credits to accelerate manufacturing of solar panels, wind turbines, batteries and critical mineral processing.
- Offering an investment tax credit to build clean technology manufacturing facilities.
- Further investing in the Defense Production Act for heat pumps and critical mineral processing.
- Creating grants for existing auto manufacturers to make more electric vehicles.
- Creating jobs for American workers.
To help convey just how impactful this legislation will be for the U.S. solar manufacturing industry, the Solar Energy Industries Association (SEIA) created the following projections for solar panel production scenarios over the next 10 years.
3. Decarbonizing all sectors of the economy
So far, around $161 billion has been allocated to reduce emissions in every sector of the economy, including electricity production, transportation, industrial manufacturing, buildings and agriculture.
- Helping states and electric utilities transition to clean energy production and energy storage through use of tax credits, grants and loan programs.
- Reducing emissions from the industrial manufacturing process, targeting the largest industrial emitters — like chemical, steel and cement plants — through the use of tax credits and grants.
- Getting zero-emissions vehicles for the U.S. Postal Service.
- Deploying technologies to reduce emissions, especially in disadvantaged communities.
- Reducing leaks from the production and distribution of natural gas.
4. Aiding disadvantaged communities and environmental justice
The package includes more than $60 billion in environmental justice priorities, driving investments into disadvantaged communities.
- Creating “Environmental and Climate Justice Block Grants” ($3 billion) to address the disproportionate effects of pollution and climate change.
- Creating Neighborhood Access and Equity Grants ($3 billion) to support neighborhood equity, safety and affordable transportation access. It also aims to reconnect communities that have been divided by infrastructure.
- Reducing air pollution at ports by installing zero-emission equipment and technology at ports ($3 billion).
- Investing in clean heavy-duty vehicles ($1 billion) like school buses, transit buses and garbage trucks.
- Helping families served by U.S. Department of Housing and Urban Development (HUD) programs transition to shared community solar power.
5. Increasing resiliency of rural communities
The bill aims to ensure that rural communities, farmers and forestland owners are not negatively impacted by — and are instead benefiting from — these climate solutions.
- Investing in climate-smart agriculture practices.
- Supporting healthy, fire-resilient forests, forest conservation and urban tree planning.
- Creating tax credits and grants to support domestic production of biofuels.
- Creating grants to conserve and restore coastal habitats and protect the communities that rely on those habitats.
How the climate change bill will pay you to make greener choices
One of the main goals of the Inflation Reduction Act is to make it cheaper (and more enticing) for qualifying Americans to make energy efficient lifestyle upgrades. Families that take advantage of these clean energy and electric vehicle (EV) tax credits are expected to save more than $1,000 a year, according to The White House.3
Some estimates suggest families could save even more. Nonprofit organization Rewiring America found the average household could save $1,800 annually in gasoline and utility bills, but that’s if homeowners invest in an electric heat pump to replace their furnace and water heater, install solar panels and switch to an EV.4
Without making any lifestyle or home improvement changes, the average household still stands to save about $170 to $220 per year in electricity costs, according to an estimate by Resources for the Future.5
Let’s take a closer look at the three main areas where homeowners can capitalize on the Inflation Reduction Act:
- Energy efficient home upgrades
- Renewable energy production and storage
- Electric vehicles
1. Energy efficient home upgrades
The Energy Efficiency Home Improvement credit — which had expired at the end of 2021 — is back and better than ever.
With the passing of the Inflation Reduction Act, homeowners can receive a tax credit equal to 30% of their energy efficiency upgrades during the taxable year, up to $1,200 — although a larger $2,000 total applies to certain projects. The incentive program is set to run through 2033.
The legislation also establishes two rebate programs: Home Energy Performance-Based Whole House Rebates (called the HOMES program) and the High-Efficiency Electric Home Rebate Act (HEEHRA).
The HOMES rebate program pays homeowners who reduce their energy consumption through means like insulation and HVAC installations, while HEEHRA offers up to $14,000 for buying qualifying electric appliances.
These are the energy efficient incentives qualifying homeowners can receive a tax credit or rebate for:
- Heat pump (space heating and cooling): Up to $8,000 in rebates and up to $2,000 in tax credits
- Electric stove: Up to $840 in rebates
- Insulation, air sealing and ventilation: Up to $1,600 in rebates
- Energy efficient windows and doors: Up to $1,200 in tax credits
- All-electric water heater: Up to $1,750 in rebates
- All-electric heat pump clothes dryer: Up to $840 in rebates
- New electric panel: Up to $4,000 in rebates
- Electrical rewiring: Up to $2,500 in rebates
It’s important to note that not all homeowners will qualify for each tax credit or rebate. There are provisions, including the amount of your annual tax bill and household income. For example, rebates aren’t available to households earning over 150% of an area’s median income.
2. Investment in renewable energy production and storage
If you’re ready to start generating your own clean energy, the Investment Reduction Act beefs up existing tax credits for residential solar and home energy storage systems.
The legislation extends the federal Solar Investment Tax Credit (ITC) — now called the Clean Energy Credit, and bumps the tax credit amount up to 30% of the total cost of a home solar panel system. The previous ITC was for 26% of the total cost of a home solar panel system, set to decrease to 22% in 2023 and disappear for residential installations come 2024.
Fortunately, the new Clean Energy Credit will allow residential solar consumers to claim 30% in tax credits if they install solar panels between January 2022 and the end of 2032. The same goes for an energy storage system.
The Clean Energy Credit is set to decrease to 26% in 2033 and 22% in 2034 before expiring in 2035.
3. Driving an electric vehicle (EV)
Lastly, the bill extends tax credits for drivers who make the switch to an EV with the Clean Vehicle Credit.
The current $7,500 tax credit for those who purchase a new all-electric or hybrid plug-in vehicle has been extended through 2032. Additionally, the bill adds a $4,000 credit for consumers who buy a used EV. The tax credits can also be transferred to car dealers to apply at the time of sale.
However, the eligibility for these credits has become a bit more complicated.
To qualify for the full $7,500 credit amount, the price of the new EV must be $55,000 or below for sedans and $80,000 or below for SUVs, trucks and vans.
There’s also an income limit. The following are not eligible for the new EV tax credit:
- Single tax filers with modified adjusted gross income above $150,000
- Married couples filing jointly with an income above $300,000
- Individuals who file as head of household with an income above $225,000
For the used electric vehicle credit, cars need to be at least two model years old and the credit is worth either $4,000 or 30% of the auto’s price, whichever is less, with a price cap of $25,000.
The income limit for the used EV tax credit is as follows:
- Single tax filers with income above $75,000
- Married couples filing jointly with an income above $150,000
- Individuals who file as head of household with an income above $112,500
Whether a vehicle qualifies for a full or partial tax credit also depends on if the car gets its battery components from countries where the U.S. has a free trade agreement, which is completely out of the consumer’s control.
How will the Inflation Reduction Act bring down inflation?
We’ve mostly focused on the climate portion of the Inflation Reduction Act. But, considering its name, many are wondering how the bill will actually bring down inflation rates.
There are three main ways the bill will target rising prices:
- Reducing the federal deficit, which is the difference between how much the U.S. government spends and how much it makes in taxes and revenue.
- Promoting the production of certain goods, mainly in renewable energy (as we’ve discussed above).
- Limiting the price growth of certain drugs by allowing Medicare to negotiate costs with pharmaceutical companies.
Of course, we won’t see inflation rates drop right away. This is a complex bill with many moving parts. Some provisions will take effect immediately, while others will take months, even years to go into effect.
Fortunately, the climate-focused aspects of the bill are expected to be felt sooner, with most of those provisions either taking effect immediately or at the beginning of 2023.