The United States has committed to reduce greenhouse gas emissions by 50-52% below 2005 levels by 2030 and aims to achieve net-zero by 2050. Efforts in this direction are being driven by two landmark acts, namely the Inflation Reduction Act (IRA) and the Infrastructure Investment and Jobs Act (IIJA) more commonly known as the Bipartisan Infrastructure Law (BIL). The IRA, with an estimated budget of USD 660 bn. through 2031, focuses on clean technology adoption along with its socio-economic benefits, through provisions for tax credits and direct federal funding. The BIL, with an allocation of USD 75 bn. for clean energy projects, aims to modernize the US infrastructure to support energy transition, including electric grid enhancements and development of clean hydrogen solutions. Both Acts represent a significant mobilization of resources towards achieving the U.S.’s ambitious climate goals, favouring incentive-based approach over disincentives like taxes on emitters or mandates for climate change mitigation measures.
The COP28 Presidency has identified acceleration of the energy transition as one of the four foundational pillars to guide global climate action efforts. In 2021, the US rejoined the Paris Agreement under the Biden Administration and has since set an ambitious nationally determined contribution (NDC) of reducing of greenhouse gas (GHG) emissions by 50-52% below 2005 levels by 2030. Since 2010, a total of 68 energy transition policies have been implemented, with the majority being focused on renewable energy and the transportation sector. There are 128 energy transition regulations in force at federal level and around 70 of them are newly implemented since 2010. Majority of the newly implemented policies are focused on renewable energy and the transportation sector
The United States aims to achieve net-zero emissions by 2050, supported by significant financial and political efforts toward clean energy transition. Key focus areas include decarbonizing electricity, electrifying end uses, adopting clean fuels, improving energy efficiency, reducing methane and non-CO2 emissions, and enhancing CO2 removal. The Inflation Reduction Act of 2022 and the Bipartisan Infrastructure Law of 2021 are central legislative measures addressing these challenges comprehensively.
As of 2022, the United States accounts to 4.7 Gt of CO2 emissions per year which makes up around 14% of the world’s Green House Gas (GHG) emissions. It is estimated that the clean energy provisions of the IRA and BIL together could reduce CO2 emissions by approximately 1 Gt by 2030 helping to bring the US within 0.5 Gt of the 2030 targets.
The Inflation Reduction Act of 2022 represents a historic investment in the modernization of the American energy system – the latest estimated financial outlay standing at USD 660 bn through the year 2031. The Act provides long term policy assurance to nurture investments and efforts in the areas of clean technology adoption and manufacturing capabilities while also addressing socio-economic aspects like employment generation, community development and domestic manufacturing. The funds under the Act are disbursed through two key mechanisms: tax credits to business and individual taxpayers, and direct allocation to federal agencies for effecting various grants, loans, and spending programmes. The incentives can be availed either in the form of investment tax credits (ITC) for capital funding or as production tax credits (PTC). While the PTC scheme’s availability is for a shorter time horizon – some of them expiring in 2025, the ITC schemes have visibility up to 2032.
The schemes typically consist of a base credit amount and a performance-based bonus which rewards activities with higher environmental or societal benefits. Some of the key areas of focus are:
The Bipartisan Infrastructure Law (BIL) is an effort to modernise infrastructure and public utilities like land transport, broadband internet and drinking water supply through dedicated funds and schemes from the Government. The total outlay of new funding plus the baseline over an 8-year period amounts to USD 1.2 trillion making it one of the most ambitious development plans in the country to date. The energy sector is a focus area with USD 75 bn. allocated for new and ongoing clean energy projects.
Agencies like the Department of Energy (DoE) bear the responsibility for the creation of both competitive and non-competitive programmes for energy transition where they utilize calculated methods for allocation of funds to eligible recipients. The BIL allocates funding across the entire value chain of the energy sector and includes investments in clean energy, enhancements to the electric grid, carbon capture technologies, and the development of clean hydrogen solutions.
The IRA and the BIL have set in motion substantial efforts towards energy transition in the US. With these laws, the US has shown a preference for an incentive-based approach rather than disincentives like carbon taxes and mandates for implementation of clean energy projects. It thus runs a risk of delayed phase-out of high emission sources.
The IRA’s financial outlay is not limited by a predefined cap – while the initial estimate of spending in 2022 was USD 400 bn., it has now ballooned to USD 870 bn as per Figure 2. Such an approach could lead to a significant increase in national debt. While the BIL focuses on a host of infrastructure developments, critics feel that certain provisions of the law promote fossil fuel use – for instance, fast-tracking permits and removing loan caps on natural gas projects in Alaska, promotion of CCUS which may indirectly prolong the life of fossil fuel plants, and production of hydrogen from natural gas. The duty to utilize the funds provided by the IRA is progressively being handed over to subnational entities, including states, cities, businesses, and non-profit organizations. As more entities get involved, the process tends to become less efficient.
Thus, there are a multitude of critical success factors involved in the energy transition with many interplays between them. Thus, investors should ensure the viability of projects on a first-principal basis and find suitable mitigation measures for addressing gaps, if any. FutureBridge helps its clients identify the market drivers, assess techno-commercial viability of business ideas and suitable trigger points for execution for a 1-to-25-year time horizon.
Share your focus area or question to engage with our Analysts through the Business Objectives service.
Submit My Business ObjectiveOur long-standing clients include some of the worlds leading brands and forward-thinking corporations.
