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April 17, 2024
In the time since this article was first published, McKinsey has continued to explore the topics it covers. Read on for a summary of our latest insights.
Net zero is a critical global imperative. But achieving it will come down to actions taken on the national, state, community, and even individual level. In pursuit of net zero, the United States passed the Inflation Reduction Act (IRA) in August 2022. In coming years, the IRA will direct nearly $400 billion in federal funding toward clean energy, with the goal of substantially lowering the nation’s carbon emissions by 2030—and reinvigorating America’s global economic competitiveness, innovation, and industrial productivity. The IRA is one of three major investment bills passed since November 2021; together, the IRA, the Bipartisan Infrastructure Law (BIL), and the CHIPS and Science Act (CHIPS) are projected to inject more than $2 trillion into the US economy.
What progress has been made since the IRA was signed into law? 2023 was spent primarily in the planning stages. The federal government drew up a variety of new programs and state governments launched coordinating bodies with the goal of winning federal grants and efficiently deploying funding.
2024 will mark a transition from planning to implementation. To establish the future American economy, leaders at the federal, state, and local levels can work with industry leaders on unlocking three specific challenges: complex service procurement timelines, supply chain shortages, and permitting restrictions.
How can states initiate or accelerate their decarbonization plans? We’ve identified three no-regrets moves.
- Understand the state’s current carbon footprint and potential for progress. This includes creating a comprehensive baseline of state emissions, enacting policies to reduce emissions, and setting metrics to monitor progress.
- Develop or update decarbonization pathways based on different scenarios, taking into account emerging technologies, supply chain challenges, workforce changes, and shifting policies.
- Coordinate with stakeholders on progress toward goals. This involves identifying skills and capabilities that could accelerate the transition, staying up-to-date on funding opportunities and emerging technologies, and staying accountable on efficient resource deployment.
Equity matters. The BIL, CHIPS, and IRA seek to redress long-standing inequalities by laying a stronger foundation for sustainable, inclusive growth. When making funding decisions, stakeholders at all levels should consider the needs of communities that have historically been underrepresented in shaping public works. These include people living in rural, low-income, tribal, climate-vulnerable, and other marginalized areas. To harness federal funds for these goals, state leaders could consider three actions: include a diverse range of stakeholders in decision making, provide targeted support to critical stakeholders pursuing grants, and take proactive steps to promote transparency in the investment process.
Articles referenced include:
- “How US states can advance a successful clean-energy transition,” January 2024
- “Reinvesting in America,” December 2023
- “What would it take to scale critical climate technologies?,” December 2023
- “Inclusive infrastructure investment: How to empower communities,” September 2023
The Inflation Reduction Act of 2022 (IRA), signed into law on August 16, 2022, directs new federal spending toward reducing carbon emissions, lowering healthcare costs, funding the Internal Revenue Service, and improving taxpayer compliance.1
The act aims to catalyze investments in domestic manufacturing capacity, encourage procurement of critical supplies domestically or from free-trade partners, and jump-start R&D and commercialization of leading-edge technologies such as carbon capture and storage and clean hydrogen. It also allocates money directly to environmental justice priorities and requires recipients of many funding streams to demonstrate equity impacts. The Congressional Budget Office (CBO) estimates that the law will reduce budget deficits by $237 billion over the next decade.2
This is the third piece of legislation passed since late 2021 that seeks to improve US economic competitiveness, innovation, and industrial productivity. The Bipartisan Infrastructure Law (BIL), the CHIPS & Science Act, and IRA have partially overlapping priorities and together introduce $2 trillion in new federal spending over the next ten years.
Here’s a breakdown of the IRA’s major provisions—by the numbers.
Significant federal funding for climate efforts. The IRA directs nearly $400 billion in federal funding to clean energy, with the goal of substantially lowering the nation’s carbon emissions by the end of this decade.1 The funds will be delivered through a mix of tax incentives, grants, and loan guarantees. Clean electricity and transmission command the biggest slice, followed by clean transportation, including electric-vehicle (EV) incentives.
Upgrade, repurpose, or replace energy infrastructure. The US Department of Energy’s Loan Program Office will receive roughly $12 billion to expand its existing loan authority by tenfold and create a new loan program capped at $250 billion to upgrade, repurpose, or replace energy infrastructure.
Provide incentives for private investment. The majority of the $394 billion in energy and climate funding is in the form of tax credits. Corporations are the biggest recipient, with an estimated $216 billion worth of tax credits. These are designed to catalyze private investment in clean energy, transport, and manufacturing. Many of the tax incentives in the bill are direct pay, meaning that an entity can claim the full amount even if its tax liability is less than the credit.
Consumer incentives. Some $43 billion in IRA tax credits aim to lower emissions by making EVs, energy-efficient appliances, rooftop solar panels, geothermal heating, and home batteries more affordable. Starting in 2023, qualifying EVs will be eligible for a tax credit of up to $7,500 and $4,000 for new and used vehicles, respectively. Qualifying home improvements will be eligible for a tax credit of up to 30 percent of the total cost, capped at $1,200 per year. For heat pumps, the credit is capped at $2,000 per year.1
Strings attached. To help build stronger, more diverse science, technology, engineering, and math (STEM) talent pipelines, manufacturing facilities are only eligible for full IRA tax credits if they meet prevailing wage and apprenticeship requirements. Many IRA tax incentives also contain scaling domestic-production or domestic-procurement requirements. For example, to unlock the full EV consumer credit, a scaling percentage of critical minerals in the battery must have been recycled in North America or been extracted or processed in a country that has a free-trade agreement with the United States. The battery must have also been manufactured or assembled in North America.
Compliment and amplify. The IRA’s clean-energy tax credits and product credits could catalyze and potentially amplify the $70 billion in clean-energy technology and demonstration projects funded under the BIL. The two acts together mount an estimated $370 billion in federal funding over the next five to ten years to facilitate the clean-energy transition.
Lowering healthcare costs. The IRA seeks to lower prescription drug costs by allowing Medicare to negotiate prices with drug companies, put an inflation cap on drug prices, and lower out-of-pocket expenses for Medicare recipients. It also extends Affordable Care Act (ACA) subsidies for three years. Together, the CBO estimates these measures will save the federal government $173 billion through 2031.
Many agencies. IRA funds will flow through more than a dozen federal agencies. The US Treasury Department is expected to handle the lion’s share—more than $250 billion—given the prevalence of tax credits in the law. More than $100 billion worth of subsidies to extend ACA coverage fall to the US Department of Health and Human Services. The Departments of Agriculture and Energy, as well as the Environmental Protection Agency, will receive $120 billion combined to bolster climate, environmental justice, conservation, and resilience programs.
Raising revenue. Much of the new spending in the IRA is designed to be offset by measures to increase government revenues. The act raises the minimum tax on large corporations to 15 percent, imposes a 1 percent excise tax on stock buybacks, and provides new funding to enhance IRS collection and enforcement. Combined with savings from the healthcare initiatives, the CBO estimates the IRA will lower government deficits by $237 billion over the next ten years.
