The largest investment in climate action in US history was made with the signing of the Inflation Reduction Act by President Joe Biden. It devotes almost $400 billion to fostering home manufacturing of sustainable energy technology and generally preparing the United States for climate change. If everything goes according to plan, the act will reduce US emissions by 40% by 2030.
The bill shouts, in the legendary words of Uncle Sam, “I Want You!” to combat the effects of climate change The proposed legislation includes numerous tax breaks and subsidies to encourage Americans to purchase electric vehicles (EVs), put in heat pumps and greater insulation, and cover their roofs with solar panels. Per household, we’re talking tens of thousands of dollars. The market should be stimulated as a result of all the additional investment in green technologies, hastening the shift to a cleaner economy.
Ben Evans, federal legislative director of the US Green Building Council, a nonprofit organization that promotes sustainability, describes it as “basically just a big green light for everyone—for the consumer, for the companies making these products, for building owners, for utilities, everybody—to start doing this stuff.” “And we believe that will significantly alter these markets. It is not an exaggeration to call this historic, in my opinion.
If homeowners all throughout the US individually make their homes more efficient, collectively we’ll reduce down carbon emissions, significantly. This is a covert strategy to urge mass action on climate change. Homes are responsible for one-fifth of both the nation’s energy use and CO2 emissions. Gernot Wagner, a climate economist at Columbia Business School, believes that what this bill does is, in many respects, at least as much about psychology as it is about economics. You and your contractor have your typical discussion about whether or not to install a gas boiler given the current high cost of gas.
The obvious course of action, continues Wagner, “is perhaps to spend a bit more money today on things that practically pay for themselves within months. So if you insulate the property better, you can cut your electricity bill in half.
The federal government has turned to the tax system in order to finance the public good of broad decarbonization after failing to pass legislation requiring genuine action on climate change, including—heaven forbid—a real phaseout of fossil fuels. Taxes are definitely not fun, and tax credits sound even more complicated. But obtaining your part of the Inflation Reduction Act is actually pretty simple.
Home Renovation
First of all, a tax credit is superior to a tax deduction and is not the same thing. The latter would allow you to lower your taxable income, for example, from $65,000 to $60,000. This indicates that the government does not retain its portion of the $5,000. In contrast, you would receive the full $5,000 back if you received a tax credit. As a result, if you owe the government $10,000 after filing your taxes but have a $5,000 credit, you only have to pay $5,000.
New windows, doors, insulation, and water heaters are among the home upgrades that qualify for tax credits under the Inflation Reduction Act. As a result, when you file your taxes, the amount you owe the government is reduced. If you spend $1,000 on insulation, for example, you may be eligible for a 30% tax credit, according to Evans. “So, a $300 tax credit that is applied immediately to your tax debt. As a result, instead of paying $5,000 in taxes at the end of the year, you only owe $4,700.
According to Evans, this represents a big increase over earlier incentives for home upgrades, which credited 10% of costs up to $500 for your entire damn lifetime. The new limit is 30% of purchases, with a maximum tax credit of $1,200 per year beginning on January 1, 2023, and lasting through 2032. So you may get reimbursed for new windows, insulation, leak-proof doors, etc., the following year.
Regarding solar, the law extends a current federal tax credit—which pays for 30% of home solar costs—through 2032. The credit expires at the end of that year and is reduced to 26% the following year and 22% in 2034.
The Inflation Reduction Act’s $1,200 yearly cap on tax credits is unique for having a $2,000 exception for heat pumps. These appliances are incredibly effective weapons against climate change because they utilize electricity, not gas, like a standard furnace, to draw heat from the outside air and pump it indoors or from the inside air and push it outside. According to Lowell Ungar, the American Council for an Energy-Efficient Economy’s director of federal policy, “it’s a tremendously efficient technique of transporting heat from one location to another.” It is essentially a reversible air conditioner for when you need to cool the house.
If you were eligible for a rebate, the other method the bill gives money to homeowners, you would receive an even greater discount—$8,000—on a heat pump. This discount at the point of sale is intended for lower- and middle-income households that can’t wait a year to receive a tax credit and might not even have a high enough tax obligation to be eligible for reductions in the first place.
In actuality, renovating a home with stronger windows, insulation, or electric appliances isn’t inexpensive. However, if people with lower incomes are able to receive assistance under the Inflation Reduction Act, they will be able to save money on heating and cooling over time, easily covering the cost of the investments and then some. The motivation for landlords to climate-proof their houses has increased. According to Kara Saul-Rinaldi, president and chief executive officer of AnnDyl Policy Group, a company that develops energy and environmental policy strategies, “you’re both offsetting some of these additional costs and helping people make a choice that is more environmentally friendly, which will ultimately make them healthier, make their homes more affordable, and more comfortable.” “People with lesser incomes now have more access to these higher-end, more efficient goods that reduce the cost of operating the home.”
“Clean Cars”
Everyone should be able to purchase electric vehicles, especially lower-income people who already reside in areas with poor air quality as a result of gasoline-powered vehicles’ pollution output. The law extends a prior incentive and provides a maximum credit of $7,500 for new EVs. Consumers can choose to receive the money as a point-of-sale rebate starting on January 1, 2024. The tax credit for used EVs is $4,000 or 30% of the sale price, however the car cannot be more than $25,000 in price.
These credits are available until 2032. According to Katherine Stainken, vice president of policy at the Electrification Coalition, which encourages the use of EVs, “it’s great for consumers to have that long-term certainty to know that, OK, maybe I’m not ready to purchase a new vehicle tomorrow or next month, but sometime within the next 10 years.”
The tricky part of the Inflation Reduction Act is that you might need to purchase an EV that complies with specific requirements in order to be eligible for the tax credits. Its “final assembly,” or the place where it is put together, must take place in North America, and a specific percentage of the minerals used to make the battery must be harvested or processed there or in another nation with which the US has a free-trade agreement.
All of this has caused some consumer misunderstanding on whether the EV they purchase would qualify for a tax credit under the new law. Therefore, for the consumer, it will unfortunately be a little difficult to understand, but Stainken is convinced that the automakers will give the dealerships the proper information. In fact, I’ve already observed emails from a few auto firms sent to customers on waiting lists just outlining the various regulations.
The Future’s Holistically Clean House
When all of it is combined: The Inflation Reduction Act encourages Americans to build homes that are better insulated to keep heat or cold inside or outside, making them more climate-proof. If a result, it will use less energy to maintain a reasonable indoor temperature (especially as heat waves become more powerful) and there will be a higher likelihood that the electricity is generated using a sustainable resource, such as rooftop solar panels. Additionally, it will encourage the use of electric heat pumps rather than gas-powered ones like furnaces, which is a good thing because burning gas indoors is extremely harmful to human health. Wagner, a climate economist at Columbia Business School, advises “insulating, insulating, insulating—electrifying, electrifying, electrifying.” And after all of that is completed, you should unquestionably decarbonize the grid.
Your home becomes significantly more energy-efficient when you switch to a heat pump, but it still likely uses electricity produced by a utility burning fossil fuels. Gregory Wetstone, president and CEO of the nonprofit American Council on Renewable Energy, declares that “we need to live in a world where, when you flip on your light switch, you know that electricity is coming from carbon-free generating.” “Today’s technology allows us to achieve that.”
Wetstone claims that the cost of solar has decreased by 90% and the cost of wind has decreased by 70% over the past ten years. Building wind farms and placing solar panels all around the nation has become more and more feasible economically as a result. Now all that needs to be done is expand the use of renewable energy sources and modernize the aging US power grid so that it can transport wind and solar energy across great distances. (And so it doesn’t crumble as a result of increased air conditioning use due to excessive heat.) Additionally, when more EVs are parked in garages, grid operators will have access to the extra electricity stored in those batteries in case neither the wind nor the sun are blowing.
According to Rinaldi, the Inflation Reduction Act will hasten the market for decarbonization technologies while also preparing American households for the future. Your typical homeowner getting to make a decision that can help save the globe is something we haven’t seen very often, the speaker claims. “And I believe that’s why it’s very unique,”
