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Lindsey Hall: Hi. I'm Lindsey Hall, Head of Thought Leadership at S&P Global Sustainable1.

Esther Whieldon: And I'm Esther Whieldon, a Senior Writer on the Sustainable1 Thought Leadership team.

Lindsey Hall: Welcome to ESG Insider, a podcast hosted by S&P Global, where we explore environmental, social and governance issues that are shaping investor activity and company strategy.

Esther Whieldon: On August 16, 2022, U.S. President Joe Biden signed into law the Inflation Reduction Act or the IRA. And while you may not know it from the name, the IRA is a comprehensive energy and climate law that allocates nearly $370 billion in federal spending to decarbonization efforts over the next decade. The new law includes tens of billions of dollars in spending and tax credits to support domestic clean energy and transportation manufacturing, renewable energy development and more.

Lindsey Hall: President Biden has set a goal for the U.S. under the Paris Agreement to achieve 50% to 52% emission reductions by 2030. A number of groups and academic experts have analyzed just how much closer this new IRA puts the U.S. on the path toward that target.

One group that conducted this kind of analysis is called Energy Innovation. And that's a nonpartisan energy and climate policy think tank based in Washington, D.C. Today, we're going to hear from the think tank Senior Director of Modeling and Analysis. That's Robbie Orvis, and he was involved in that analysis.

Esther Whieldon: As you'll hear Robbie say in the interview, this law is expected to lead to transformational changes for the energy, industrial and transportation sectors. The IRA also includes a number of measures, specifically geared towards increasing domestic production and supply chains for low carbon technologies and minerals.

If you recall, Lindsey, I interviewed an official with General Motors in June, who said shoring of domestic supply chains for electric vehicles needed for the low carbon transition is a high priority for the automaker. We'll be sure to include a link to that episode in our show notes.

But before we turn to the interview, here's a few terms you'll hear Robbie mention. One is the EPA. That stands for the U.S. Environmental Protection Agency. The EPA is an independent federal agency tasked with protecting human health and the environment. Another term you will hear is FERC or the U.S. Federal Energy Regulatory Commission. FERC is an independent agency that regulates the interstate transmission of natural gas, oil and electricity.

Okay. Now let's turn to my interview with Robbie. 

Let's start off with just a big picture view. We have this massive bill passed, the inflation Reduction Act. There's a lot of measures in there related to climate and the environment. Can you give us a high-level sense of what provisions are in there?

Robbie Orvis: Sure. Yes. And there is, like you said, so much in there related to climate and clean energy. So we can start, of course, with the tax credits. There's a lot of focus on all the different clean energy tax credits. Now that includes things like a production tax credit and an investment tax credit for clean electricity technologies that ultimately becomes technology neutral after several years. So instead of having specific technologies called out, anything that meets the emissions requirements will be able to qualify. Storage is now part of that.

There are clean vehicle tax credits for both personal vehicles and commercial vehicles. There is tax credits for clean fuels, whether that's biofuels, sustainable aviation fuels. There's a hydrogen production tax credit. There's also tax credits for existing nuclear power plants to keep those around since they're a large source of carbon-free electricity. And then some of the other tax credits are related to building and building energy efficiency and electrification. So there's just lots of different tax credits that cover the full spectrum basically of clean energy technologies.

There's also a whole bunch of money for different programs oriented around deploying that clean energy and kind of catalyzing the market for those different clean energy technologies. So you can think of the Greenhouse Gas Reduction Fund, which is essentially a green bank.

There's a methane emissions reduction program, which charges a fee on methane emissions for producers who exceed certain threshold emission targets. And then just a lot of other funding for kind of community investment, helping to clean up the power sector and deploy clean energy technologies across the economy as well as to scale the manufacturing industries to produce all of those clean energy technologies.

So this is really kind of a very comprehensive both clean energy technology deployment bill, but also a bill that's focused on kind of onshoring the manufacturing industries and growing those jobs at home to create a runway for scaling those industries in the future.

Esther Whieldon: So can you give us a sense then of what the ultimate result could be from this, when it comes to like helping the nation achieve the climate targets that Biden has set out?

Robbie Orvis: So President Biden last year committed to reducing the U.S.' emissions 50% to 52% below 2005 levels by 2030. Now we've already come about 20% down from 2005. And then in our modeling, we envision we might get to 24% to 25% below 2005 by 2030, just with kind of existing federal and state policy. And so when we layered on the Inflation Reduction Act on top of that, we get a range of 37% to 43% below 2005 levels.

And so what that means is that this bill relative to kind of a business as usual with existing policies, does somewhere between 50% and 70% of the work that needs to be done in 2030 by itself to cut emissions in line with President Biden's commitment. So it's really quite transformational in terms of getting the U.S. on track to hit those targets.

We do think that, coupled with other executive branch action, for example, standards at EPA, state action, which could be state building code standards or clean electricity standards, et cetera, that there is a pretty clear path now to achieving that U.S. target of 50% to 52% by 2030, which was not the case just a few weeks ago when this bill was not law and was actually off the table there for a few weeks. So it really is a landmark moment for the U.S. and what's possible by 2030.

Esther Whieldon: Are there any things that will need to happen outside of this bill to kind of make it more effective and get us closer to that target?

Robbie Orvis: Definitely. There are lots of things that have to go right to hit those types of targets and numbers. To name a few, for example, for folks who've been studying clean electricity or working in the field, it will not come as a surprise that there are some significant kind of noneconomic barriers to clean energy uptake. So things like whether or not we can and how quickly we can build transmission, how quickly clean energy projects can interconnect to the grid.

And also things like whether or not the supply chains will be there in time and at the scale needed to deploy all this clean energy. Broadly speaking, the modeling efforts, including ours at Energy Innovation, assume that these things can be worked out. And there is some good real-world evidence that progress is being made on that front. For example, there's lots of funding in the Infrastructure bill from last year as well as this bill to kind of address some of the supply chain issues and to help grow transmission.

And for example, FERC has a current rulemaking in progress that specifically relates to transmission and interconnection, but that doesn't mean that those things will necessarily happen. So there definitely needs to be further reforms, especially on transmission, supply chains and interconnection to make sure that the levels of clean energy deployment that all of the models are kind of envisioning actually happens.

And then I would also mention that this -- again, this bill does a lot, but it doesn't actually get all the way to the 50% target in 2030. And so we are definitely going to need additional things like standards, future legislation, if that's a possibility, and other actions, could be corporate actions as well or commitments from utilities, for example, to help close that gap by 2030.

Esther Whieldon: So you had mentioned previously the methane emissions reduction program or sort of the methane penalties. Can you give me a brief overview of how that will work? And I was a little unclear when I was kind of looking at coverage of it, the extent to which it could potentially put a dent in methane emissions from utilities at this point.

Robbie Orvis: Yes. And there's been some reporting on the uncertainty around the way that, that program has written. But the idea is that for facilities that are required to report today to the EPA under the Greenhouse Gas Reporting Program. Those facilities, if they meet a certain leakage rate are required to either reduce emissions to below the leakage rate or pay a fee.

Now there is the ability to aggregate so a company say that owns multiple facilities or multiple parts of the supply chain, they're allowed to aggregate their emissions. And so that is a question mark around how they'll do that, and what that means for whether or not when they aggregate, they'll actually exceed or be below the emissions threshold. 

But for facilities that do report and do exceed the threshold, they either can, of course, reduce their emissions, which is the goal, or after the fee ramps up over a few years, they'll have to pay what's equivalent to $60 per ton equivalent CO2 to kind of pay for those emissions.

And I know there's also some funding in the bill to help EPA do some more research on kind of more testing of methane leakage to try and compare some of the reported estimates of methane leakage relative to kind of what actual physical testing of leakage rates produces in terms of emission. So there might eventually be more there in terms of coverage of the program.

But those 2 pieces, the kind of scope being limited to facilities that have to report to the Greenhouse Gas Reporting Program plus the ability to aggregate emissions across the supply chain for holding companies means that there's some uncertainty in terms of the magnitude of that program in terms of emissions reductions.

I think also we have to mention that there is a proposed rule at the Environmental Protection Agency right now targeting oil and gas methane emissions. So those 2 pieces, once that rule is finalized, will definitely be working together, but it's a little unclear exactly what that means as of right now.

Esther Whieldon: Great. Thank you. And what is the EPA's rulemaking proposing? I know we're getting a little far field from the bill that just passed, but...

Robbie Orvis: They're proposing new standards for existing oil and gas wells that would basically require existing facilities to reduce the amount of methane that is vented or leaked, and in some cases, reduce the amount of flaring or to at least control the methane that's leaking with flaring. So it's still being worked on. We don't have a final rule yet. And again, it's not entirely clear how it will work with this. But the goal of the 2 pieces together is to significantly cut down on the amount of methane that's leaking throughout the supply chain.

Esther Whieldon: So you mentioned that there are tax incentives also for nuclear, right, tax credit. And I know there's been a huge effort on the part of companies that have nuclear plants to find ways to stay -- to keep their plants going economically. To what extent could these tax credits actually resolve that issue for the utilities?

Robbie Orvis: And I think they could basically fully resolve the issue. The tax credits, recall, too, that there's funding in the civilian nuclear program from the Infrastructure bill. There is funding for existing nuclear plants to help them remain online. And in fact, we're seeing now in California, that program may be pivotal to keeping Diablo Canyon online, Governor Newsom now exploring that possibility.

But the tax credit in the Inflation Reduction Act is actually basically tied to market revenues and basically the forward cost for power plants to make sure that they are at least staying viable in the market. And so all 3 of the studies, including ours that looked at this, we all are basically assuming that the combination of the Infrastructure bill funding and the production tax credit for nuclear and the Inflation Reduction Act results in the existing nuclear fleet remaining around at least through 2032.

Esther Whieldon: Now most of our focus thus far in this episode has been on the low carbon provisions in the IRA, but the law also includes some measures related to increased oil and gas leasing. I asked Robbie about the impact those measures could have on the emissions reduction goals that Biden set out.

Robbie Orvis: So the thing that a lot of people have been focused on is the new provisions around oil and gas lease auctions. They're called lease sales in the bill, but they are auctions for federal land for oil and gas development. And so what got added is a new requirement that reinstates the canceled leases from 2022 and also ties future renewable energy land leases to making lease auctions for oil and gas development.

And in particular, there's a new requirement that before the government can lease any land for renewables development for onshore land, there has to be an auction of at least 2 million acres in the prior year. And for offshore, it's 60 million acres. So before the government can lease any land for renewables development on federal waters, there has to be an auction for 60 million acres.

Now that doesn't mean that all of that land or any of that land actually has to be sold at auction. There is a requirement that if the government receives so-called acceptable bids that they have to accept them and issue a lease sale as part of that process. But if you look historically at the rate at which both onshore and offshore lease auctions have resulted in sales, it's pretty low. So for offshore, historically, it's around 2%, and that's true across multiple administrations of different parties. For onshore, it's higher, it's closer to 30%, but the amount of land offered is usually significantly smaller.

So we tried to develop a scenario to explore kind of in a worst-case scenario what this might lead to in terms of emissions reductions. And before going down there, I just want to say that by and large, what drives production, whether it's on federal land or private land, is global prices or regional prices for different energy commodities. So here, we're talking about oil, which is the price is mostly set on the global market; and natural gas, whose price is set on the global market, but in the U.S., given kind of the abilities to export out of the U.S., it's really -- the U.S. has its own typically lower natural gas prices.

And so one of the things that the Inflation Reduction Act is very likely to do is to actually decrease demand, especially for natural gas, but also to some extent for petroleum products which then ties back to kind of demand for crude oil. So if that's the case and demand is what drives prices and ultimately supply then we would expect to actually see a decrease in production, not an increase in production.

However, for our modeling, we wanted to kind of look at what a worst-case scenario might be if we assumed that the land that is now going to be available at auction is actually kind of goes into a lease sale at historical average rates and then goes into production. And so what we did is we developed a model that looks just at that, we kind of developed a baseline scenario that looks either at kind of no new leasing or kind of looks at what the Biden administration has done to date on average in terms of lease sales and then compares that to a scenario in which the government now has annual auctions of 60 million acres of offshore land and 2 million acres for onshore land.

And when we did all that and we accounted for both the production and associated emissions as well as demand changes domestically and internationally, we find that the emissions come in maybe an increase of 20 million to 30 million metric tons at the upper end of things. And to put that another way, when you look at all the other things in the bill that are reducing emissions, for every 1 ton of emissions increases we might see from the oil and gas leasing provisions, there are more than 28 tons of emissions reductions from other things in the bill.

So even if we get that production and we do expect to see a decrease in demand, not an increase, which should actually decrease production. But in the worst case, where we do get that production, it's still a 28:1 benefit in terms of emissions reductions relative to increases from those supply provisions.

Esther Whieldon: So then how soon realistically, infrastructure takes a while to build, bills take a while to implement, all that. How soon might we start to see the actual impacts of the bill, of the law, make a difference? What kind of timeline are we talking about here?

Robbie Orvis: Well, some of the provisions have already gone into effect for anyone out there who's interested in buying an EV, those rules changed earlier this week. So as of the signing of this bill earlier this week, vehicles that are not assembled in North America are no longer eligible for the EV tax credit. And so that has already changed that part of the market.

There are other large changes related to the tax credit that are on the way. They seem to basically be -- every year, there's some change that's likely to change which vehicles qualify and the size of the credit. So I think we will start to see signs of change very quickly. We've already seen some how quickly that translates into incremental deployment of renewables and actually putting kind of steel in the ground, probably at least several months I would imagine. A lot of the tax credits don't actually start until early next year, but you might get decisions, investment decisions happening earlier than that kind of based on the availability of the tax credits.

And then we would expect to see -- as a different industry scale, we would expect to see the impact kind of grow and scale over time. I think the Solar Energy Industries Association released a nice study today, kind of looking at their expectations for what could be accomplished. And it's pretty clear you can see that there's a ramp-up, but the ramp-up grows throughout the end of the decade. And by the end they were installing at least 50 gigawatts of solar a year, just given the credits in the bill. So it could take a little bit of time, but you're already starting to see some policymakers at least starting to make new decisions given the change in the cost for all the different clean energy technologies now.

Esther Whieldon: So it seems many of the measures are focused on energy. What's in here that might help the industrial or transportation sectors?

Robbie Orvis: There are a whole host of things. So -- for one, in terms of kind of investment in manufacturing, there are clean manufacturing production tax credits. So there's a lot of money to basically pay for domestic producers to build things like solar panels and batteries. For example, there's a $45 per kilowatt hour incentive for battery manufacturers who are in the U.S. There's also a pot of money in the advanced industrial facilities program that's specifically targeted at emissions reductions for the heavy industry sector.

The hydrogen production tax credit is another one where given what's possible with cost declines, that could help certain industries, especially those that currently rely on hydrogen, like refining ammonia and so on could help them decarbonize by providing a clean source of hydrogen for their manufacturing.

And so there's a few other things in there. I think 45Q, which is the tax credit for carbon capture is another one where there's the opportunity for significant reductions in industrial CO2 emissions, especially industries that as a byproduct, kind of produce a pure-ish stream of CO2. So those are some of the big ones in the industry sector.

For transportation, there are also funds in the bill to help retrofit existing vehicle manufacturing facilities to produce EVs. And then there are 2 tax credits, in particular, for electric vehicles. One is the one for kind of new clean personal vehicles and the other is one for new clean commercial vehicles.

The commercial vehicle tax credit provides up to $7,500 for vehicles under 14,000 pounds and up to $40,000 for vehicles over 14,000 pounds for vehicles that qualify as clean, so you could think hydrogen fuel cell or battery electric vehicles. And then there's the personal EV tax credit, which provides in theory up to $7,500 split into 2 pieces, one of which is related to where the minerals come from in the battery and the other is where the assembly of the battery takes place.

However, there are some pretty strict requirements for qualifying for those incentives that has created a lot of confusion, especially in the auto industry around whether or not their vehicles will even be able to qualify for the credit at least for several years until the industries that are in North America or in free trade agreement countries with the U.S. can scale to provide them the necessary materials.

So I think there's quite a bit of uncertainty on the personal tax credit. That I think the commercial tax credit is a little cleaner. And we do expect to see a pretty significant increase in the sale of clean kind of local light and medium heavy-duty trucks, and to some extent for heavy-duty trucks as well.

Esther Whieldon: Is there anything that isn't captured directly in your modeling that is also noteworthy?

Robbie Orvis: So some of the things we talked about earlier, like transmission, ability to interconnect, supply chains and then I think kind of the available labor force. The rate at which we're talking about scaling these industries would require a lot of skilled labor to be able to kind of deploy at the scale we're talking about.

And so those are important things to consider when evaluating any of the modeling. There are also things that are very, very hard to model, which is why we weren't able to factor them in, and the other 2 groups that did kind of broad modeling of the Inflation Reduction Act also don't really account for them. So if we're not able to build out the transmission system or to improve the interconnection process or likewise, if we're not able to get the supply chains in place or we don't have enough of the skilled labor, all of those things could serve as kind of a brake on the rates of deployment that the models envision. And that would, of course, reduce the emissions impact by 2030.

So I do think it's important to account for those things and to understand that solving for those, which is not something the Inflation Reduction Act does is going to be really important to making sure that we can grow the clean energy economy at the rate that the models kind of say is economic and envision happening.

Esther Whieldon: Robbie also noted that the law provides benefits beyond reducing greenhouse gas emissions. Here he is again.

Robbie Orvis: So the measures in the bill, they, of course, reduce greenhouse gas emissions by deploying clean energy. They also come with a whole bunch of health benefits. So our modeling finds potentially up to 4,500 avoided premature deaths by 2030 per year just from the reduced pollution from the deployment of all these clean energy technologies.

And of course, there's huge economic benefits as well. So more than 1 million -- we're finding up to 1.4 million jobs per year in 2030 as a result of this bill, and that's net new jobs in 2030. That also doesn't account for the fact that the way some of the tax credits are designed specifically to increase the use of domestically made materials and commodities in solar panels and wind turbines and so on. And so that could have even an additional knock-on effect.

So I think when you look at that and you look at the other companion pieces to this bill, the Infrastructure bill that was passed last year and the CHIPS bill that was passed this summer to help kind of bring chips manufacturing and semiconductor manufacturing to the U.S. You have a really strong industrial clean energy policy that's really geared towards making the U.S. a powerhouse for these industries in the future and bringing down the costs both in the U.S., but abroad and allowing the U.S. to export those technologies.

So altogether, we have a pretty comprehensive clean energy industrial policy now that brings those benefits of emissions reductions, but also has these other benefits such as improved air quality and reduced health impacts, large increases in the labor force and so on. So I'm excited to see how this experiment plays out in real time over the next 10 years.

Esther Whieldon: So as you can hear, Lindsey, the energy and climate-related measures in this newly passed law could bring the U.S. much closer to its stated climate targets. But a lot of other factors will come into play as well, including the need to build out more transmission capacity and addressing supply chain and workforce needs. And for our listeners who want to hear more about the implications of the IRA, we'll include a link in our show notes to a recent episode by the Energy Evolution podcast from our colleagues at S&P Global Market Intelligence.

Lindsey Hall: And please also stay tuned as we head into what promises to be a busy fall season of climate events, starting with New York Climate Week in September. Thanks so much for listening to this episode of ESG Insider, and a special thanks to our producer, Kyle Cangialosi. Please be sure to subscribe to our podcast and sign up for our weekly newsletter ESG Insider. See you next time.

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