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After going back and forth over energy and climate-related legislation for over a year, Senate Democrats unveiled the Inflation Reduction Act of 2022 last week. Along with funding for healthcare and changes to the tax code, the bill includes $369 billion in energy security and climate spending. The bill aims to fight inflation while cutting emissions by 40% over the next decade. If passed, it would be the most significant climate bill in U.S. history.

“The Inflation Reduction Act of 2022 addresses our nation’s energy and climate crisis by adopting common sense solutions through strategic and historic investments that allow us to decarbonize while ensuring American energy is affordable, reliable, clean and secure,” said bill sponsor Senator Joe Manchin in a statement.

How will the bill affect energy policy? First, the bill includes an extension and expansion of renewable tax credits as well as incentives for next-generation technologies such as green hydrogen and nuclear. Also included are provisions for heat pumps, rooftop solar, and standalone battery storage. In a win for U.S. manufacturing, the package includes a five-year, $60 billion production tax credit for companies involved in clean energy manufacturing. These tax credits will help reduce our reliance on foreign nations for renewable energy supplies while supporting U.S. jobs. 

Electric vehicles (EVs) also fare well under the legislation. The bill includes new tax rebates for EV purchases, $7,500 for new vehicles and $4,500 for used ones. The rebates are good news for anyone hoping to switch to an EV. As we’ve written before, cost and lack of charging infrastructure are two major issues holding buyers back. This section, too, includes credits to encourage domestic manufacturing.

There are some wins for traditional energy sources as well. For instance, the bill requires the Biden Administration to reinstate an offshore oil and gas lease sale in the Gulf of Mexico, which had previously been canceled. While the move is good news in the face of rising energy prices, the legislation raises royalty rates that companies pay the government for the oil and gas they produce on federal land. Ultimately, this cost will likely get passed onto consumers who are already feeling financial pain in the face of the worst inflation in decades. 

Also included are new regulations that place heavy fines on methane emissions over a certain threshold. While the oil and gas industry is still digesting the potential effects of the new rules, it’s worth noting that the industry itself has led the way in cutting methane over the years. Not only is methane a marketable product, but cutting leaks makes sense for many other reasons.  

Will the Inflation Reduction Act live up to its name? That depends on who you ask. One study found that it will have a minimal impact on inflation we likely won’t see for years. Another study projected that it could actually increase inflation.

The Inflation Reduction Act of 2022 could broadly change our energy landscape if passed. We’ll be watching this bill closely in the weeks to come.