The Inflation Reduction Act contains the most substantial investment in history to fight the climate crisis: US$375Bn over the next decade.

The bill is a victory for the Democrats, and for President Biden’s legislative agenda ahead of the November midterms.  The final Senate vote was 51-50 with every Democrat supporting the bill and all Republicans in opposition.  Vice-President Kamala Harris cast the tie-breaking vote.  As the Democrats used the reconciliation process to advance the bill, they needed only a simple majority to pass the proposal, allowing them to avoid a Republican filibuster.

The US$740Bn will largely be funded through taxation, with new corporate taxes, including a 15% minimum tax on big corporations to ensure they don’t avoid tax payments, as well as projected federal savings from lower Medicare drug costs.  Spending will be split amongst various Government and Democrat priorities.  As much as US$300Bn will go toward paying down federal deficits.

The bill aims to reduce greenhouse gas emissions in two ways: electrification of fossil fuel-consuming processes/industries, and more generation of renewable and clean energy. 

The former includes consumer tax credits to buy new (US$7,500) or used (US$4,000) EVs, and consumer tax credits for renewable energy investments in wind and solar.  There are additional tax credits for low-carbon renovations to homes (e.g., heat pumps and solar panels).  For industry, there is US$6Bn towards reducing emissions from hard-to-decarbonise industries like cement, chemical and steel plants, and US$60Bn for clean energy manufacturing tax credits. 

The latter includes US$30Bn of tax credits for states and electric utilities to adopt clean energy and energy storage. The bill also gives tax credits for nuclear power and carbon capture technology, while imposing a new fee on excess methane emissions from oil and gas drilling.

Democrats believe the strategy could put the country on a path to cutting greenhouse gas emissions by 40% by 2030, still short of the Biden administration’s target of a 50% reduction by the end of the decade.  An early analysis from Rhodium Group, an independent energy think tank, estimates the bill would reduce US greenhouse gas emissions by 31 to 44% below 2005 levels by 2030.  Without the bill, Rhodium found the USA was on track to reduce emissions by 24 to 35% below 2005 levels by 2030.

While being generally welcomed for prioritising climate change policy, the bill is not without critics.  Environmental groups have been critical of the bill’s simultaneous support for new fossil fuel development with one provision in the bill stipulating that approval for renewable energy development on federal lands is contingent on auctioning oil and gas leases.

The bill’s passing and implementation imply huge additional future demand for the critical materials that will underpin the energy transition.  Tax credits for clean energy and consumer credits for EVs, wind and solar, if effective, will add further demand for metals such as aluminium, copper, lithium, cobalt, nickel, graphite, REEs silicon and manganese.

A sustainable supply of these materials at scale is by no means guaranteed, and the potential for raw material bottlenecks causing a barrier to the Act's implementation is considerable.  Importantly, the bill stipulates that a sizable proportion of the materials consumed in future need to be mined, recycled, and refined in the USA or in a free trade partner country.  Thus, to ensure that the Act’s ambitions are met, it will be essential for the US government to create the conditions for the further development of sustainable, resilient critical material supply chains in North America.