The IRA: what’s in It for manufacturers?

In the United States, greenhouse gas emissions derive almost evenly from transportation (27%), electricity (25%) and industrial sources (24%).1 The Inflation Reduction Act (IRA) has been rightly heralded for enabling an additional billion ton reduction in CO2e emissions by 2030.2 Most of those reductions come from accelerating the development of carbon free electricity and clean transportation.3 These are sectors where multiple paths forward to decarbonization are apparent and, particularly in the case of electricity, many of the decarbonization solutions are technologically and commercially advanced. They should be well-positioned to take advantage of the tax credits that abound in the IRA.

Decarbonization paths in the industrial manufacturing sector are more varied and challenging. One might argue, for that reason, they deserve more support in climate-focused legislation.  The Infrastructure Investment and Jobs Act (IIJA), passed at the end of 2021, is providing tens of billions of dollars in funding that will directly support the demonstration and early deployment of decarbonization strategies across the industrial sector, including for battery manufacture, industrial sector carbon capture, hydrogen hub and innovative clean manufacturing projects.  But more is plainly needed, and the IRA is part of the answer.  Although those provisions have drawn less attention, the IRA did not leave out the manufacturing sector.  There are direct benefits, some indirect benefits and opportunities to produce new and different products that will put manufacturers at the heart of a lower carbon economy.

Direct Grants

The IRA includes almost $6 billion for competitive grants to be made by DOE on a 50/50 cost share basis for advanced industrial technology designed to accelerate greenhouse gas emissions reductions in an industrial process.  It can be for new equipment or for retrofits and upgrades.  DOE is directed to use as its selection criteria the expected greenhouse gas emissions reductions, the extent of the benefits to the people in the area where the facility is located, and whether the project will be undertaken in partnership with purchasers of the output of the facility. 

For vehicle manufacturers, there is $2 billion for competitive grants to be made by DOE on a 50/50 cost share basis for electric, hybrid and hydrogen fuel cell vehicles. 

These are small additions to the $62 billion in greenhouse gas reducing grants DOE is administering under the IIJA, but they should not be ignored.

Investment Tax Credits for Clean Energy Manufacturing Facilities

The 2009 American Recovery and Reinvestment Act established a 30% tax credit (the 48C credit), awarded competitively (with a cap on funding authorized for the credits) on the basis of recommendations by DOE, for investment in the manufacture of clean energy technologies and equipment.  The IRA provides $10 billion in new funding for this program and expands the categories of qualifying energy technologies, with the goal of building a robust manufacturing capacity to supply the clean energy economy. 

Among the categories of qualifying manufacturing and recycling projects are those that produce:  electric and fuel cell vehicles and their components, along with refueling infrastructure; renewable energy equipment and components, and renewable fuels; energy storage equipment and components; energy conservation products; grid modernization equipment; and carbon capture, transport and storage equipment.  Also qualifying are projects that re-equip industrial or manufacturing facilities with equipment that will reduce greenhouse gas emissions by at least 20% through such measures as efficiency, waste reduction, carbon capture, and the introduction of low or zero carbon heat processes.  Likewise, establishing or retrofitting a facility for the processing or recycling of critical materials can compete for the available credits. 

Among the considerations DOE will apply in selecting awardees for these credits are: greatest job creation, greatest reduction in greenhouse gas emissions, shortest time to completion, greatest potential for innovation, geographic diversity, commercial viability and regional economic development potential.  As with so many of the other provisions of the IRA, there is also a requirement that, to receive the full 30% credit, construction jobs pay Davis Bacon prevailing wages and that the manufacturing facility operate an apprenticeship program.  If those requirements are not satisfied, the credit is reduced to 6%. 

The Advanced Manufacturing Production Tax Credit

With a purpose similar to that of the Section 48C manufacturing investment tax credit of building a robust domestic manufacturing capacity to supply the clean energy economy, the IRA includes a new, alternative Section 45X advanced manufacturing production tax credit. The production tax credit requires production in the US and a sale to an unrelated third party, but it is a tax credit available for all qualified component (and mineral) sales, requiring no competition among projects. An array of solar energy, battery, and wind energy components, along with critical mineral production qualify for this production tax credit. The amount of the award is set on varying sliding scales, which depend on the particular technology.  Significantly, this Section 45X production tax credit is not subject to prevailing wage or apprenticeship requirements.

Tax Credits for Hydrogen and Carbon Capture

Although focused more directly on energy production than manufacture, the tax credits in the IRA for hydrogen and carbon capture likewise are relevant to manufacturers. 

There are new, generous credits for clean hydrogen production – on a sliding scale that depends on just how carbon-free the production is.  These credits can prove important in enabling heavy industry such as steel, cement, chemical and ammonia manufacture that require large quantities of process heat to begin to decarbonize their manufacturing processes.

The tax credits for carbon capture under section 45Q of the tax code have been extended and significantly increased in dollar value. The credits are scaled, enabling industrial facilities to qualify at lower volumes of carbon capture than electricity generating facilities.

Loans and Loan Guarantees

DOE’s loan and loan guarantee programs had been relatively moribund for much of the last ten years, but that may be changing, and the IRA adds new lending authority to the loan guarantee program for innovative greenhouse gas reducing technologies and to the loan program for advanced vehicle manufacture.  Established manufacturing companies with strong capitalization tend not to find these programs of interest, but the favorable interest rates can be attractive to start-ups with strong purchase commitments for their production or other loan security.

Indirect Benefits for Manufacturers

Not all of the benefits to manufacturers under the IRA come directly to the manufacturer.  However, certain of the tax credits are structured in a way that is nevertheless likely to produce indirect benefits.  For example, tax credits for energy storage, combined heat and power systems and wind and solar facilities get a 10% plus-up for domestic content.  There are also tax credits for individuals purchasing energy efficient products such as doors, windows and heat pumps.  On the day of enactment, the consumer electric vehicle credit provision requires that final assembly of such vehicles occurs in North America.  These kinds of provisions can be expected to have a positive impact on the manufacturing sector, by making the affected products more desirable to purchasers, while driving down greenhouse gas emissions in other sectors of the economy.

In short, while manufacturing may not have been the principal advertised focus of the legislation, there is much in the IRA that will help the industrial sector reduce its share of U.S. greenhouse gas emissions by creating incentives, reducing costs and helping to advance the needed technology so that it can move to broader deployment in the manufacturing sector.

 

 

Authored by Mary Anne Sullivan, Jamie Wickett, and Joanne Rotondi.

References

Sources of Greenhouse Gas Emissions | US EPA (2020 numbers).  The remaining emissions coming from commercial and residential facilities (14%) and agriculture (11%).

REPEAT | Rapid Energy Policy Evaluation & Analysis Toolkit (repeatproject.org) at 7 (preliminary analysis as of August 4, 2022) .

3 Id. at 8.

 

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