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Reviewing the Climate & Agriculture provisions of the Inflation Reduction Act

CLIMATE

Summary

The Inflation Reduction Act (IRA) is many things at once: It makes Big Polluters pay more than they have in a generation; It is a doubling-down on the disastrous status quo for oil and gas leasing; It is an investment in renewables designed to support good paying jobs, domestic supply chains, and historically marginalized communities; And it is a lifeline to blue hydrogen, carbon capture, and other fossil fuel industry scams. The good and the bad all need to be considered together.

THE GOOD

Superfund Tax

The Superfund Program to remediate legacy contamination sites was always predicated on the simple principle that polluters should pay for their own messes. When the program was first established in 1980, this principle was reflected in the three taxes through which the program was funded: A per barrel excise tax on oil refiners, an excise tax on chemical producers, and a 0.12% income tax on polluting industries. Unsurprisingly, when the taxes all expired in 1996, the budget for the program began to shrink without a dedicated source of revenue.

The situation changed in 2021, when the Bipartisan Infrastructure Bill restored the tax on chemicals. Now, the IRA is proposing to restore and nearly double the tax on refiners from 9.4 cents per barrel to 16.9 cents, boosting funding for remediation and sending Big Oil an estimated tax increase of $11.7 billion. If the IRA becomes law, this will be the single biggest targeted tax increase on oil and gas since 2005.

National Green Bank

Sec. 60103 “Greenhouse Gas Reduction Fund” provides nearly $30 billion for what advocates are dubbing a National Green Bank. This includes funds to states, municipalities, tribal governments, and certain nonprofits (that provide capital) which, in turn, will provide grants, loans, other forms of financial assistance, and technical assistance for zero emissions technologies and projects that reduce or avoid greenhouses gasses (GHGs), with a priority on low income and disadvantaged communities.

In theory, these funds could support green financing by public banks that Friends of the Earth (FOE) and allies have been campaigning to establish in California and other states. Funds could also potentially support local Community Development Financial Institutions, which have been increasingly interested in funding projects that help low income and disadvantaged communities respond to climate change.

If enacted, the Environmental Protection Agency (EPA) will administer the Fund. As with many aspects of the IRA, definitional and operational details will need to be encouraged, supported, and watchdogged.

Green Ports

The IRA includes billions of dollars in spending to lessen air pollution from port-related activities, thereby improving air quality and reducing climate-warming emissions. The main provision being $3 billion in Clean Ports Investment. These funds would be used to purchase zero-emission equipment or technology, plan for such purchases, or develop climate action plans in order to reduce air pollution at ports (Sec. 60102).

In addition, the following provisions could be applied to ports or port-adjacent communities:

  • $1 billion for Clean Heavy-Duty Vehicles grants and rebates for the purchase of zero-emission trucks (Sec. 60101)
  • $60 million in Diesel Emissions Reduction funds to identify and reduce diesel emissions resulting from goods movement operations in low-income communities (Sec. 60104)
  • $117.5 million to Address Air Pollution funding to deploy, integrate, support, and maintain various air monitoring stations (Sec. 60105)
  • $50 million in Multipollutant Monitoring Stations grants to expand monitoring networks and to maintain existing monitors (Sec. 60105)
  • $3 million in Air Quality Sensors in Low-Income and Disadvantaged Communities grants for air quality sensors in these communities (Sec. 60105)
  • $50 million for Addressing Air Pollution at Schools funding to monitor and reduce air pollution at schools in low-income and disadvantaged communities (Sec. 60106)
  • $3.045 billion for a Neighborhood Access and Equity Grant Program grants for community development (Sec. 60501)
  • $5 billion for a Climate Pollution Reduction Grant Program funds for reducing greenhouse gasses (Sec. 60114)
  • $3 billion for an Environmental and Climate Justice Grant Program community-focused funding to combat environmental and climate threats (Sec. 60201)

Renewable Energy

Renewable energy tax credits have existed in various forms for decades. Never permanent parts of the tax code and often extended temporarily as part of last minute deals, the 30% investment tax credit (ITC) for solar and the $15 per mwh production tax credit (PTC) for wind have nonetheless been the most generous and effective federal incentives for clean renewables. The IRA is poised to change this system significantly, and for the better.

The IRA would offer a decade of incentives for wind, solar, and storage technologies. Beginning in 2025, any zero-emission power source would be eligible to opt for a new “technology neutral” option with the opportunity to apply either the PTC or the ITC to new projects. Most important of all, it would create a new system of “adders” designed to steer the renewable energy economy towards justice. The full value of the credit will only kick in if projects are built with workers paid at the prevailing wage. If projects are constructed with inputs from US manufacturers or in historically marginalized communities, the value of the credit can be increased by an additional (and stackable) ten percent each.

Unfortunately, these new provisions to harness renewable tax credits for justice do not include the vital mechanism of direct pay. A tax credit worth $100 is only useful to someone with a tax bill of $100 or more. What direct pay does is allow for the value of the credit to be treated as a tax refund — in other words, as a direct infusion of cash.

Although direct pay featured prominently in versions of Build Back Better negotiated in 2021, it has been narrowed significantly in the IRA so that only entities without tax obligations like churches and co-ops can utilize it. This is certain to foster continued dependence on something called the tax equity market. In essence, financial institutions provide equity investments in eligible projects and in exchange claim the credits for themselves. The result is a handful of rentier Wall Street mega-banks delaying the deployment of wind and solar while netting a handsome tax windfall for themselves. This could have been prevented with a more robust commitment to direct pay–a possibility that Manchin himself foreclosed.

THE SHOULD BE BETTER

Environmental Justice Provisions

The bill contains funding for environmental and climate justice activities. While fact sheets from the Senate Majority Leaders office calculates $60 billion in funding for Environmental Justice (EJ), other analyses by the Indigenous Environmental Network, the Climate and Community Project and the Just Solutions Collective calculate less funding. There are also definitional concerns in the bill over what qualifies as EJ funding as well as who is eligible to receive the funding. More broadly, with a generous accounting of $60 billion, there is deep disappointment that more resources are not available for communities that have been both deeply scarred by the fossil fuel economy and perpetually forgotten.

Additionally, we have deep concerns that the EJ provisions appear to provide a very limited spend down window for investments in low income and disadvantaged communities while fossil fuel, nuclear, and renewable provisions extend the entire length of the bill.

Inadequate Leasing Reforms

The IRA contains a suite of economic reforms to the leasing program that FOE generally supports from a taxpayer fairness angle. However, pro-fossil fuel and centrist voices have argued that these economic reforms to the leasing program should replace efforts for comprehensive changes to the leasing program, which FOE adamantly opposes.

Royalty Rates
The bill raises the minimum royalty rate for offshore oil and gas leases from 12.5% to 16.66%, with a cap at 18.75% while shallow water lease royalty rates would rise to at least 16.66%. Current royalty rates for deepwater leases are already at 18.75% and would be prevented from raising any further. While these adjustments begin to address taxpayer fairness issues, they are not nearly high enough to have any real impact on production or climate emissions. The text also attempts to limit the ability of the Interior Department (Interior) to raise rates further.

Rental Rates
Additionally, minimum rental rates would be raised to $3/acre per year for 2 years, $5/acre per year for 6 years, and $15/acre per year thereafter. Reinstated leases would have rental rates raised to $20/acre per year. Again, these changes begin to address taxpayer fairness issues, but are not sufficient to address climate concerns.

Noncompetitive Leasing
Currently, parcels of public lands that receive no bids during competitive auctions can be scooped up by industry for a little as $1.50 per acre. The IRA ends this practice, which will help stem the tide of public lands falling into the hands of industry and allow Interior to manage lands for other purposes. However, much of the land that is leased non-competitively has a low potential of actually being developed.

Methane Royalties
All leases will include an unspecified royalty on extracted methane. This will generate revenue and, when combined with EPA regulations, help discourage unmitigated flaring and methane pollution. However, there are exceptions for gas vented or flared in emergency situations, used or consumed within the area of the lease, or routine burn-off — coined as “unavoidably” lost by the industry.

Bonding Requirements
We are glad that the minimum bonding requirements, money companies must set aside before drilling to pay for cleanup, would be raised to $150,000 for individual, $500,000 for statewide, and $2 million for nationwide with an adjustment for inflation required at least every four years. This will help shift the burden for cleanup from taxpayers to industry.

THE BAD

Nuclear Energy

One of the most unfortunate provisions of the IRA is an industry-wide rescue of the country’s aging and increasingly uneconomical nuclear fleet. At an estimated cost in revenue of $30 billion over nine years, the bailout would take the form of a production tax credit (PTC) worth $15 per megawatt-hour (MWh) that would begin to phase out for reactor revenue above $25 per mwh.

This is some of the worst spent money in the entire bill for the simple reason that the nuclear industry already got a bailout in 2021. As part of Manchin’s bipartisan Infrastructure Investment and Jobs Act (IIJA), $6 billion was set aside for economically distressed reactors whose premature closure might increase emissions. Eligible reactors would be able to “bid” for subsidies to stay online and payments would be prioritized based on where operations could continue most cheaply. Although far from perfect, the policy is a fair answer to the nuclear question: Targeted, means-tested subsidies only when old nukes can’t be replaced quickly enough with new renewables.

In contrast, the PTC is a blatant cash grab likely to steer billions towards a handful of profitable corporations. It won’t reduce emissions and it likely won’t even prevent any imminent reactor closures. With the shuttering of Palisades in Michigan earlier this year and the planned retirement of the two reactors at Diablo Canyon in California, only two more reactors are even scheduled to be relicensed between now and 2028. Constellation and Energy Harbor, the biggest potential beneficiaries, will net billions, but no emissions increases will be prevented that existing policy couldn’t prevent more cheaply and efficiently.

Carbon Capture and Storage (CCS)

The IRA would supercharge one of Big Oil’s favorite giveaways: The 45Q tax credit for carbon capture and sequestration. This subsidy will now award $85 per ton for underground storage and $60 per metric ton for enhanced oil recovery, a sharp increase from the current levels of $50 and $35 per ton, respectively. This expansion would occur without addressing the long pattern of 45Q fraud and the underlying uncertainty of carbon storage leaking.

Perhaps most problematically of all, the new 45Q would establish weak requirements for qualifying projects. For example, in the power sector it requires a unit design capability of at least 75% capture. Since actual capture rates are commonly much lower than the touted maximum capability, this is a potentially major loophole. Arguably, utilities with CCS units within the qualifying design capacity would be incentivized to minimize any shortfall by the tax credit itself. However, the fact remains that the only way to ensure that 45Q only subsidizes CCS with at least 75% capture rate in real operating conditions is to require that CCS achieves that capture rate. This language did not happen by accident and shows that even fossil interests aren’t confident in the ability of CCS to meet even the already weak requirements of 45Q.

The standards for capture in the industrial sector are even weaker, only requiring a minimum 12,500 metric tons of capture with no minimum capture percentage. One of the biggest expected winners of this new low standard is the ethanol industry.

This highly subsidized liquid biofuel made predominantly from corn starch has long been a driver of harmful farming practices and the resulting product is often worse for the climate than gasoline. Despite this, ethanol producers are poised to rake in massive federal subsidies under the guise of being a ‘clean’ transportation fuel. Ethanol production is easier to pair with carbon capture, as it is substantially cheaper to capture some amount of carbon while producing ethanol than it is while burning fossil fuels. CCS in ethanol production costs between $25–35 per ton of carbon, meaning ethanol producers can cover their costs and still make up to $60 in pure profit off the 45Q tax credit. Biomass advocates included the 45Q changes in their victory lap about biofuel subsidies in IRA, and over 30 new ethanol CCS projects are in the wings, ready to cash-in on this credit.

Hydrogen

The IRA includes a new $13 billion PTC for ‘clean’ hydrogen, an umbrella term that bundles hydrogen produced from fossil gas with CCS, renewables, nuclear, and biomass. Although the hydrogen PTC outlined in the IRA certainly subscribes to the erratic ‘all of the above’ philosophy that characterizes this bill, its structure is a moderate improvement over previous subsidies for “clean” hydrogen, including the billions in fossil-based giveaways Manchin included in last year’s bipartisan infrastructure bill.

Crucially, the PTC requires a lifecycle analysis of the carbon intensity of hydrogen production, rather than the mere facility-level analysis required for Manchin’s $8 billion hydrogen hub program. However, the implementation of lifecycle analysis will likely not disqualify fossil-based blue hydrogen from the lowest tier of the subsidy. The upstream emission leakage of fossil gas is frequently underestimated in models, such as ANL’s GREET model which assumes a methane leakage rate of slightly over 1% rather than the more realistic 3.5%. Nevertheless, even with this underestimation of upstream emissions, blue hydrogen would have to achieve approximately 80% capture rates to qualify for the lowest tier of PTC, $0.12 per kg of hydrogen or $0.60 with the labor multiplier.

Renewably produced green hydrogen and nuclear pink hydrogen would likely qualify for the full PTC of $0.60 per kg of hydrogen or $3 per kg of hydrogen with the labor multiplier. This reverses the highly problematic equal treatment of green and blue hydrogen in Manchin’s earlier bipartisan bill — an approach that effectively skews the market towards the currently cheaper blue hydrogen technology, despite the dramatically better climate outcome from green hydrogen. The economics of the hydrogen PTC tiers will likely continue to shift in favor of green hydrogen over time if the Department of Energy (DOE) Hydrogen Shot (and other countries’ similar initiatives) successfully brings green hydrogen costs below $1 per kg in the next decade and if the volatility of fossil fuel prices continues to drive up the cost of blue hydrogen.

An important caveat is that blue hydrogen production will be able to qualify for either the PTC or 45Q. At first glance the PTC will be much more lucrative, allowing producers to earn up to $600 per metric ton of hydrogen. However, this will require high capture rates — approximately 80% capture — and must account for upstream and downstream leakages. A friendlier approach for blue hydrogen producers may be the 45Q tax credit, which would allow a facility just barely ineligible for the PTC to claim as much as $0.50 per kg of hydrogen. Although less than the PTC, the barriers to entry for higher emitting blue hydrogen projects would be lower. This is because under 45Q the carbon intensity of the hydrogen would be irrelevant and to qualify producers would only need to reach the very low minimum annual capture requirement of 12,500 metric tons.

In a notable deviation from the renewable tax credits, hydrogen and CCS will benefit from direct pay options. Project developers can opt for full direct pay for five years, then a gradual direct pay phase out over seven years. This makes hydrogen and CCS more attractive and accessible for project developers and operators — unlike with the renewable PTC. If the hydrogen PTC or the 45Q credit exceeds their tax liability, they are eligible for a tax refund. This is a clear favoring of fossil fuels over renewables.

Oil & Gas Leasing

Fossil fuel extraction on public lands accounts for nearly 25% of U.S. climate emissions. This is before we consider the impacts of emissions from offshore extraction. Overhauling the federal fossil fuel leasing program was one of the few actions President Biden could take without Congress to meaningfully reduce emissions from the oil and gas industry. The IRA attempts to tie the Biden administration’s hands by mandating sales move forward, including sales previously canceled by the administration, and attempts to validate leases from a sale that has been vacated by a federal court. This undermines public participation and our bedrock environmental laws.

Perhaps most troubling is the way the IRA perpetuates the Gulf of Mexico and Alaska’s Cook Inlet as sacrifice zones. The IRA mandates reinstating offshore oil and gas leases on 1.7 million acres in the Gulf of Mexico, disregarding a court’s vacatur of the sale, and attempts to force additional sales forward in these two regions, where people of color and Indigenous peoples have been enduring harm from the fossil fuel industry for generations. The bill also fails to reinstate protections for the Arctic Refuge, which were included in previous packages. All of this injustice has been committed without any opportunity for feedback or input from impacted communities on the frontlines of the climate crisis.

Perhaps most concerning is that the IRA ties the development of renewable energy on public lands and waters to the continued development of fossil fuel resources for the next decade. This faulty addition to the IRA has nothing to do with appropriations or spending, and should be uncoupled by the Parliamentarian prior to a vote. These disturbing provisions essentially mandate that renewables carry the fossil fuel industry on their back. Biden promised to end new fossil fuel leasing on public lands and waters. Congress is substantially delaying a just transition for impacted communities who have been living with the harms of fossil fuel production for generations. The IRA prohibits offshore wind development until Interior first holds an offshore oil and gas lease sale totaling at least 60 million acres. It also prohibits onshore renewable energy development until Interior has completed at least one offshore oil and gas lease sale within the previous quarter, and must be either less than 2 million acres or 50% of the land nominated by industry. Further, any acceptable bids must result in a lease being issued, undermining Interior’s ability to make decisions on the appropriate management of public lands.

“Permitting Reform” Side Deal

Behind closed doors, members of Congress are currently working up an additional bill that is closely connected to this package. This forthcoming bill is expected to streamline a slew of dirty energy projects, from pipelines to fossil fuel development, including gutting the full application of federal conservation laws like the National Environmental Policy Act and the Clean Water Act. Not only would this place the climate and vulnerable ecosystems at substantial risk, but it would rob communities of their voice and role in the administrative process and decision-making. Even with renewable energy, this streamlined push is a dangerous one. We need to treat new technology with great care to ensure it’s done right. The bill would also attempt to expedite court processes, limit the court’s ability to provide adequate remedies for unlawful agency action, and undercut agencies ability to fully comply with court orders to correct unlawful action.

Regardless of what happens to the IRA, any and all attacks on our bedrock environmental laws must be defeated.

AGRICULTURE

Summary

The Inflation Reduction Act (IRA) includes $20 billion in agriculture spending to mitigate climate change, including:

  • $3.25 billion for the Conservation Stewardship Program (CSP). CSP pays farmers for implementing conservation activities like cover crops, rotational grazing, and transitioning to organic farming. Despite being the largest federal conservation program by acreage, it is heavily oversubscribed so increased funding, especially for conservation activities that mitigate GHG emissions, will help more producers participate in this effective program.
  • $8.45 billion for the Environmental Quality Incentives Program (EQIP). EQIP is another voluntary conservation program that provides technical and financial support to producers implementing conservation practices. Unfortunately, a significant portion of EQIP funds support practices that do not reduce GHG emissions and fund highly polluting Concentrated Animal Feeding Operations (CAFOs) that are actively making the climate crisis worse. Meanwhile, thousands of farmers applying for money for beneficial practices are turned away. If Congress does not focus this funding on effective practices and limit subsidies to CAFOs in the 2023 Farm Bill, this additional support for EQIP will have a mixed impact.
  • $1 billion for the Natural Resources Conservation Service to provide technical assistance on conservation to producers. If focused on the most effective conservation practices, this additional funding could have a significant positive impact.
  • $300 million to carry out a carbon sequestration and greenhouse gas emissions quantification program. While quantifying the carbon sequestration and GHG reduction benefits associated with various practices is a good thing, the provision provides no guidelines for who can receive this money, opening the door for dubious projects led by large agribusinesses.
  • $6.75 billion for the Regional Conservation Partnership Program (RCPP), which is a dramatic increase to this program designed to address natural resource challenges at a regional scale. While additional funding could yield tremendous benefits, the IRA provisions could also allow USDA to set up carbon markets for methane and nitrous oxide emissions, a counterproductive measure.

Unfortunately, the IRA also includes additional subsidies and tax breaks for so-called “biofuels” and “biogas” infrastructure, including support for factory farmed methane gas. Not only do biofuels compete with food production for land and water, they also increase fertilizer and pesticide use, water pollution, and greenhouse gas emissions. In the case of biofuels generated from factory farms, these provisions provide yet another subsidy to CAFOs, further entrenching this unsustainable model of agriculture.

What’s Next

Our food and agriculture system accounts for around a third of global greenhouse gas emissions and is the largest source of U.S. methane emissions. Increased conservation spending (as envisaged in the IRA) is critical to curtail agriculture-related GHG emissions and achieve U.S. climate goals. However, unless this new funding is spent on effective conservation practices, coupled with adequate oversight and guardrails, these programs could actually do more harm than good. To ensure these investments have the intended effect, Congress must:

  • Require that USDA prioritize conservation funding for high-impact ecological management practices (e.g. cover cropping, nutrient management, filter strips, and conservation tillage) that have been found to be most effective in reducing GHG emissions, air and water pollution;
  • Prevent USDA from setting up carbon markets, which generate negligible climate benefits while allowing industry to continue polluting and harming frontline communities;
  • Prevent conservation subsidies from going to CAFOs other than to support a transition to well-managed pasture-based animal production or production of plant-based foods; and
  • Insofar as conservation subsidies go to CAFOs, impose safeguards such as requiring recipients of funding to limit herd size expansion and adopt the best available technologies to mitigate pollution from CAFOs.

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Friends of the Earth

Friends of the Earth

Friends of the Earth U.S. defends the environment and champions a healthy and just world. www.foe.org