Recent New York Times commentary on the Inflation Reduction Act, enacted in August 2022, hails it as “the Biden administration’s signature policy achievement.” The measure, often referred to simply as the IRA, has generated a lot of commentary, and for good reason – it’s big. The legislation, somewhat counter to its name, authorizes $370 billion in spending to address the deepening challenge of climate change – the largest climate-related investment in U.S. history.
At the outset, most of the buzz around the IRA has centered on its incentives for private residences and energy companies. But what about manufacturers? How does the new law affect them, and are there any incentives that producers might be able to use to become more sustainable – and more profitable?
A key sign of the success of the IRA is that businesses are lining up to take advantage of the subsidies, meaning that the budget cost of the act is likely to run over—possibly hundreds of billions over. This is not necessarily bad news, as it means more innovation and speedier climate change damage control.
We’ve been assessing the relevance of the IRA for manufacturers by watching the rising relevance of environmental, social, and corporate governance considerations (ESG) in brand development; regulatory compliance; shareholder relations; consumer perceptions; and the attraction and retention of employees in an increasingly competitive talent market.
For many producers, an important ESG metric is the Greenhouse Gas Protocol, a widely recognized accounting and reporting standard for the greenhouse gas (GHG) emissions that accelerate climate change.
This standard requires reporting of direct emissions from a company’s facilities and vehicles (referred to as Scope 1 emissions under the protocol); indirect emissions from its purchased energy (Scope 2); and indirect emissions from its supply chain (Scope 3).
Companies with larger Scope 1 and Scope 2 footprints have been increasingly penalized by investors due to heightened concerns about the impacts of these emissions – concerns that have been mounting amid increasingly severe and frequent wildfires, storms, droughts, heat waves, and other climate-related disruptions across much of the world.
The IRA provides valuable incentives to reduce GHG emissions, but to truly take advantage of those incentives requires thoughtful planning. Below are three primary categories of IRA incentives for manufacturers, as well as considerations that companies should keep in mind as they implement new policies and practices in response to these measures.
Turn your fleet green
According to the latest Inventory of US Greenhouse Gas Emissions and Sinks, the transportation sector accounted for the largest portion (27%) of nationwide GHG emissions. Light-duty and medium-heavy-duty trucks generate 57% and 26% of total transportation emissions, respectively.
What the act offers:
- The IRA tax credit for commercial clean vehicles covers the lesser of a vehicle’s incremental cost (the price difference between a combustion engine and electric vehicle) or 30% of vehicle purchase price, for vehicles placed in service after December 31, 2022. The credit is capped at $7,500 for vehicles weighing less than 14,000 pounds and $40,000 for all other vehicles.
- The IRA also provides a tax credit for the installation of electric charging infrastructure, up to $100,000 per charger – an incentive that was previously maxed at $100,000 for an entire charging location.
While the IRA provides significant cost-reduction benefits, companies should anticipate that it will not cover the full bill for converting to electric, especially for medium- and heavy-duty trucks. The cost of operating gas and diesel vehicles has spiked with rising fuel prices. Our own research indicates that the market will achieve price parity sometime between 2026 and 2030, making conversion to electric vehicles increasingly viable – and pragmatic.
Beyond conversion costs, manufacturers will need to anticipate rethinking how those vehicles are serviced. With electric-vehicle range varying from 200 to 300 miles (up to around 500 km) on most trucks, the use of such vehicles for cross-country transport will require route adjustments to navigate to charging stations and longer times spent at stations to recharge. The bill will also sharply increase the number of charging stations, which, placed thoughtfully along trucking routes, could reduce impact from longer transit times.
Invest in renewable energy sources
The electric power sector is the second-largest source of emissions, accounting for 25% of total US emissions. Consumer action to reduce electricity usage can only get us so far toward our goals. Most experts agree, therefore, that increasing the supply of clean energy is vital to any hopes we might have of achieving net zero emissions. (Increasing clean energy is defined as: increasing the share of total electricity generated from renewable sources such as wind, solar, hydropower, and geothermal energy, as well as certain categories of biofuels.)
We’re getting there – gradually. As of 2021, 40% of US electricity was from non-fossil sources. Half of that total came from nuclear power plants and the other half from renewable sources such as hydro, wind, and solar power. And within the last couple of years, solar and wind alone have made up over 80% of the new electricity-generating capacity annually in the US.
What the act offers:
- The IRA provides a clean energy investment tax credit (ITC) worth up to 60% of the value of installation for qualified properties including solar, fiber-optic solar, fuel cell, microturbine, wind, and waste energy recovery assets.
- This clean-energy ITC begins at a base rate of 6% but increases to 30% when wage and apprenticeship requirements are met. Additional bonuses include a 10% bump for projects that meet certain domestic content minimums; another 10% for brownfields or former coal production sites; and another 10% for projects that benefit low-income areas. It’s worth noting that this last category includes caps on production levels. The act envisions relatively small-scale projects to boost local clean energy capabilities, such as the deployment of solar panels – not the siting of massive power plants in poor or lower-middle-class neighborhoods.
- Once clean energy is installed, the IRA provides a production tax credit (PTC) with a base credit amount of 0.3 cents per kWh, and an increased credit amount of 1.5 cents per kWh. This includes a 10% increase on the tax credit for meeting domestic qualifications aligned to the original purchase of the installation.
Such programs are worthwhile investments – and become especially so when the new incentives are thrown in. But they must include a complete business case that incorporates additional factors at both a strategic and implementation level.
Companies that are implementing renewable sources must consider the environmental dependencies of these resources, which affect their abundancy and consistency. For example, a producer seeking to shift to higher use of wind energy must consider such factors as a site’s wind-generation potential and proximity to energy highways among other factors.
Then there are more market-specific considerations: The cost of solar-energy technology has come down more than 60% over the last decade, but “soft costs” in the US, such as labor and permitting, remain much higher than those found in other developed solar markets around the world.
Sequester your carbon output
Using clean energy is by far the most effective path to net zero. However, in circumstances where a conversion to clean energy may not be feasible right away, carbon sequestering is another tool that can be leveraged to curb emissions. The latest advancement in sequestration is direct air capture (DAC), which removes carbon from the atmosphere and stores it underground.
What the act offers:
- The IRA provides a tax credit for capturing and sequestering carbon oxide (a category that includes both carbon dioxide and carbon monoxide). This credit ranges from $85 per metric ton using conventional technology to as much as $180 per metric ton for capture with DAC technology in facilities that begin construction before 2033.
- Companies sequestering carbon can take advantage of the IRA if they meet the following capture thresholds: 18,750 tons of carbon oxide for power plants; 12,500 tons of carbon oxide for industrial facilities; and 1,000 tons of carbon oxide for DAC facilities.
DAC is still in development but is getting greater attention and backing from both the private and public sectors. The voluntary market for DAC-based CO2 removal has expanded, with companies such as Microsoft, Stripe, Shopify, and Swiss Re purchasing future DAC-removal capabilities to offset their CO2 emissions.
Forecasts show the DAC market may increase fifty-fold by 2050 as demand skyrockets and supply remains limited. Companies committed to this exciting but novel technology should evaluate the potential for DAC but do so in tandem with a broader decarbonization strategy.
Closing
There is no doubt that the business cost of inaction is rising across a range of areas – from international regulatory compliance to consumer sentiment. The IRA provides meaningful credits to reduce investment costs and increase the rate of emission reductions, allowing business to do what it does best—innovate new technologies—while making progress on improving the planet.
As companies invest in electric vehicles, renewable energy, and sequestration technologies, this will have a cascading impact on the emission footprint of their entire supply chain.
Such a shift will of course entail some significant near-term costs, but these and other incentives will meaningfully abate those for many producers. Early indications are that the IRA will be “an enormous success story,” placing the U.S. squarely in the position of being part of the solution rather than part of the problem.
About the Authors
Brent Ross is a Partner in the Private Equity Practice, Alysia Evanitsky is a Principal in the Strategic Operations practice, and Avi Mendelson is a Consultant at Kearney, a global strategy and management consulting firm. They can be reached respectively at [email protected], [email protected] and [email protected].
