A Greener Economy puts Green Back in Your Pockets
After a year of contentious political wrangling and maneuvering, President Biden’s Build Back Better initiatives morphed into the Inflation Reduction Act (IRA). The IRA, signed into law on August 16th, 2022, now sets a new highwater mark for America’s transition to a greener economy.
To the frustration of hardline ecologists, the IRA stripped many climate initiatives from the original framework. The more ambitious proposals were removed, in part, as a matter of legislative due course but mainly because of concessions to Democratic dissent in the Senate and runaway inflation taking center stage.
Those initiatives were ambitious indeed – one provision included a comprehensive energy program called the Clean Energy Performance Program (CEPP). The CEPP incentivized utility companies to expand solar, wind, and other renewable energy sources.
One problem with the CEPP? That program would create almost 8M new jobs. That sounds great, but the proposal clashes with 2022’s economic reality as the Federal Reserve executes its unspoken mandate to cool down a strong labor market.
Other lofty initiatives bundled into the original omnibus bill didn’t make the cut, like banning oil drilling in areas deemed sensitive by the House’s Natural Resource Committee and budget allocations to slash transportation carbon emissions.
The long-term result of these removals remains to be seen. In the short term, though, none would have had an immediate or noticeable impact on millions of Americans. The post-COVID economy sees much of the populace crippled by high gas and grocery prices. Not only are costs rising, but many are facing job insecurity and dwindling investment values, and struggling citizens do not favor initiatives with 10+ year horizons.
There’s little doubt that green initiatives and climate-focused legislation will continue to capture the policy agenda. According to experts, the IRA is an opening move towards that vision. The act alone is expected to reduce America’s carbon emissions by 42% over the next eight years. But again, hopes and dreams about a net-zero future won’t put food on the table, and legislators had to account for that reality.
To grapple with that reality, the IRA provides some financial relief. That relief comes as incentivization to adopt “green tech” in the home, so Americans wanting to take advantage of the IRA will have to do some legwork.
A green garage
Tax credits for electric vehicles have existed since the technology found wide public adoption, but those credits were burdensome. Automakers could only sell 200,000 cars annually with the credit applied, so high-output manufacturers like Tesla couldn’t use the credit as a significant selling point.
Other limitations like narrow definitions of eligible vehicles, deferred compensation through tax returns, and exclusion of used vehicles left much desired for most consumers.
The IRA slashes many of these limitations, and more consumers can now take advantage of up to $7,500 in credits. Some of the access-expanding changes include:
- The 200,000-vehicle cap per manufacturer? Gone.
- Previous definitions that limited the scope and type of “clean car” expanded, and now plug-in hybrids and fuel cell electric vehicles qualify.
- Before, only new cars were eligible for the credits, which denied the opportunity to lower-income families. Used vehicles are eligible for credit as high as $4,000, while new cars still qualify for up to $7,500.
- Instead of waiting for the IRS to review your tax returns to see the benefit, new provisions let dealers deduct the credit from the vehicle’s sticker price at the point of sale.
Unfortunately, some of that relief won’t be immediate, and there are some new limitations imposed:
- Immediately after President Biden signed the bill, qualifying electric vehicles were restricted to those “for which final assembly occurred in North America.” Luckily, the US Department of Energy’s Alternative Fuels Data Center released a tool that lets owners check whether their vehicle qualifies using the VIN.
- The IRA’s Made in America mandate also extends to the battery. Manufacturers must produce the vehicle’s battery stateside in an (admirable) effort to reduce reliance on global supply chains after the pandemic exposed weaknesses.
- If one of the latter two mandates isn’t met, you lose half of the total credit. If both aren’t, you’re out of luck and disqualified.
- That price slashing on the lot? It doesn’t take effect until 2024, so buyers will still need to wait on the IRS’ due diligence on their tax returns before they see the benefit. We want to think that the hiring boom at the IRS will mean expedited processing, but that remains to be seen.
- Many clean cars are expensive, and the IRA prices out higher-end models – if the vehicle sells for $55,000, you won’t see the credit. And, in what some perceive as a “war on wealth,” single filers with over $150,000 and joint filers exceeding $300,000 in annual taxable income are disqualified.
- The manufacturer’s cap remains in effect until 2023.
So, is going green in the garage worth it? Definitely, if you intended to buy any electric or clean car anyway to avoid pain at the pump. It’s an added incentive to going green, provided you aren’t picky about make and model. But, since the manufacturer cap remains, many popular models, like every single Tesla offering,don’t qualify. So, if you have your heart set on a Model S, 3, X, or Y, you may want to wait until 2023. However, you must balance the tax benefit with inventory uncertainty.
The road isn’t the only way average, green-minded Americans can take advantage of the benefits of the IRA. Much as the Internet of Things (IoT) helps industrial and retail operations curb climate impact, the IoT is increasingly migrating to households as technology improves, scales, and becomes more accessible.
The IRA tacitly endorses the transition by rewarding IoT-driven and emerging technology climate-friendly installations in the home. These credits collectively put as much as $19,000 or more in eligible households’ pockets. There are already calculators that help families see what they can claim and how much they can save, but the whole package is comprehensive.
The IRA authorizes two ways to put money in your pocket: standard tax credits and upfront discounts from the installation team or manufacturer, similar to the 2024 clean vehicle sticker discount. Tax credits are staggered and don’t take effect simultaneously, so don’t expect to see a vast refund when you file in 2023. Most upfront discounts are also delayed until 2023, but that allows plenty of time to plan and prepare for home upgrades.
- Heat Pump Water Heaters (HPWH): more than twice as efficient as traditional water heaters, an HPWH draws air in from the environment and heats it, which heats the water. Both low and moderate-income households can get an upfront discount of $1,750 for their HPWH and installation.
- Electrical panels: New IoT-based smart panel technology is rapidly replacing the legacy breaker box and reduces energy costs by modulating and optimizing the flow of electricity. Some homes are eligible for $4,000 in upfront discounts for replacing their existing unit.
- Stoves: By replacing an existing stove with an electric stove, homes can save up to $840 in upfront discounts. Unfortunately, this upfront discount applies only to gas-heated stoves and won’t cover the cost of replacing an existing electric stove.
- Weatherization and insulation: by sealing doors and windows, home weatherization reduces energy costs by keeping cool or warm air where it’s wanted rather than escaping outside. Home weatherization projects like new insulation, sealing, and improved ventilation can enjoy as much as $1,600 in upfront costs.
- Heat pump clothes dryer (HPCD): using the same air-heating technology as the HPWH, an HPCD installation will get up to $840 in upfront discounts. However, it does not apply to replacing existing electric dryers – only to new installations.
- Heat pump air conditioner & heater (HPACH): clearly, heat pumps in the home are the future, and that technology applies to your heating and cooling systems too. You can get a whopping $8,000 discount on installing a new HPACH unit. Unlike the stove and dryer, this benefit applies to replacing any existing unit. Not only that, but eligible households can also get a subsequent $2,000 tax credit to offset costs above the already-steep discount.
- Solar: solar companies are increasing, and it’s easy to see why. As energy costs rise alongside utility instability, reducing your reliance on the state grid is more attractive. Solar can save around $1,000 annually, depending on your state’s additional incentives. The IRA allows an extra 30% tax credit to households with solar. This provision is unique in that it is also retroactive to January 2022.
Again, unfortunately, all of these upfront discounts won’t take effect until as late as mid-2023 due to bureaucratic wranglings. The US Department of Energy has to set strict regulations on the IRA’s broad guidelines to prevent fraud. States, in turn, must apply for grants to pay their citizens as the money is “state-funded.” However, the money ultimately comes from the federal government. Frustrating, yes, but standard for initiatives of this size and scope. Therefore, citizens eager to modernize their homes should lobby local and state governments to be proactive in securing these grants.
That’s a lot to digest. The IRA’s sweeping climate provisions are ambitious, and the effectiveness of rolling out the programs into reality remains to be seen. Despite this, families and households already inclined towards “greenifying” their homes should begin putting together a plan of action. Once the upfront discounts for homes are fully funded, contractors will be busier than they’ve ever been installing home-based green technology. And, if you had your eye on an electric vehicle, you may want to temper expectations. Since the most popular manufacturers already see record low inventories and the $55,000 price ceiling, the likelihood of settling for a basic, economy-tier green car is high.
You can find IRA implementation status, as well as additional state-specific financial benefits, here.