Monday Study – Big Gains From Dems’ New Climate Bill

Preliminary Report: The Climate and Energy Impacts of the Inflation Reduction Act of 2022

Jenkins, J.D., Mayfield, E.N., Farbes, J., Jones, R., Patankar, N., Xu, Q., Schivley, G., August 2022 (REPEAT Project/Princeton University)

Preliminary Findings

Historical and Modeled Net U.S. Greenhouse Gas Emissions (Including Land Carbon Sinks)

The Senate Inflation Reduction Act would: • cut annual emissions in 2030 by an additional ~1 billion metric tons below current policy (including the Bipartisan Infrastructure Law) • close two-thirds of the remaining emissions gap between current policy and the nation’s 2030 climate target (50% below 2005) • get the U.S. to within ~0.5 billion tons of the 2030 climate target • reduce cumulative GHG emissions by about 6.3 billion tons over the next decade (through 2032).

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Annual Change in Net U.S. Greenhouse Gas Emissions Relative to Current Policy (including Bipartisan Infrastructure Law)

The Inflation Reduction Act cuts U.S. emissions primarily by accelerating deployment of clean electricity and vehicles, reducing 2030 emissions ~360 Mt and ~280 Mt respectively. The Act also incentivizes installation of efficiency upgrades and carbon capture in industrial sectors, contributing ~130 Mt of reductions. Rebates, tax credits and grants to spur electrification and efficiency improvements in buildings; reductions in methane emissions in the oil and gas sector spurred by the methane fee and grants; and funding to improve conservation and carbon sequestration in forest and agricultural lands also contribute important reductions (~210 Mt collectively)

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Contributions to Additional Net U.S. Greenhouse Gas Emissions Reductions Below Current Policy Needed to Reach 2030 Climate Target

percentage of net emissions reductions relative to Current Policy (including the Bipartisan Infrastructure Law) to reach 50% below 2005 levels (-1.5 Gt CO2e)

The Inflation Reduction Act closes about two-thirds of the remaining emissions gap between current policy and the nation’s 2030 climate target (50% below 2005) By driving down the cost of clean energy and other climate solutions, the Act also makes it easier for states or cities or companies to increase their climate ambitions. It also reinforces the economic benefits of any future federal regulations. (These dynamic effects of the bill are not captured in this modeling.)

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Change in annual U.S. energy expenditures vs Current Policy (including Bipartisan Infrastructure Law)

Enacting the Inflation Reduction Act would lower annual U.S. energy expenditures by at least 4% in 2030, a savings of nearly $50 billion dollars per year for households, businesses and industry. That translates into hundreds of dollars in annual energy cost savings for U.S. households.

Tax credits, rebates, and federal investments in the Act would shift costs from energy bills to the progressive federal tax base, lower the cost of electric and zero emissions vehicles, heat pumps, and efficiency upgrades for individuals and businesses, and finance investments in energy productivity improvements and carbon capture equipment by industry.

These savings do not include the additional downward pressure the Act will put on prices for oil and natural gas by driving lower consumption of these commodities, which will further reduce U.S. energy costs. Price responses to changes in demand are not captured in our energy system modeling.

Using a spreadsheet model of oil and gas elasticities, REPEAT Project estimates that lower U.S. consumption of petroleum products and natural gas could reduce crude oil prices by approximately 5% and reduce U.S. natural gas prices by ~10-20% in the medium term (2030-2035)

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Historical Annual Capacity Additions vs. Modeled Annual Average Capacity Additions

The Inflation Reduction Act could spur record-setting growth in wind and solar capacity, with annual additions increasing from 15 GW of wind and 10 GW of utility-scale solar PV in 2020 to an average of 39 GW/year of wind additions in 2025- 2026 (~2x the 2020 pace) and 49 GW/year of solar (~5x the 2020 pace), with solar growth rates increasing thereafter.

The bill would also incentivize deployment of carbon capture at new and existing natural gas power plants and retrofits of existing coal plants, due to the enhanced 45Q tax credit.

Several constraints that are difficult to model may limit these growth rates in practice, including the ability to site and permit projects at requisite pace and scale, expand electricity transmission and CO2 transport and storage to accommodate new generating capacity, and hire and train the expanded energy workforce to build these projects. Modeled results should thus be taken as indicative that IRA establishes strong financial incentives to build capacity at the modeled pace, while non-financial challenges may constrain the pace of real-world deployment relative to modeled results. Several policies in IRA and the Bipartisan Infrastructure Law, as well as proposed permitting reforms to be considered by Congress this Fall, can reduce these non-financial barriers (e.g. reforms to transmission siting and funding for CO2 transport & storage in IIJA; funding to expedite NEPA review in IRA; transmission investment funding in both bills).

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Annual capital investment in energy supply related infrastructure

The Inflation Reduction Act would drive nearly $3.5 trillion in cumulative capital investment in new American energy supply infrastructure over the next decade (2023-2032).

That includes more than $20 billion in annual investment in CO2 transport & storage and fossil power generation w/carbon capture by 2030.

Annual investment in hydrogen production (including electrolysis and methane reforming w/carbon capture) increases to $3 billion annually by 2030, triple levels under current policy, and rises to over $50 billion by 2035.

The Act has the greatest impact on investment in wind power and solar PV, which nearly doubles to $321 billion in 2030, versus $177 billion under current policy.

The Act will drive substantial additional investments by households and businesses on the demand side of the energy system, including purchases of more efficient and electric vehicles, appliances, heating systems, and industrial process.

It also provides tens of billions of dollars in grants, tax credits, and loan programs to develop manufacturing and supply chains for clean energy components, batteries, electric vehicles and critical minerals, spurring additional capital investment (and associated jobs) not captured in this report.

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Annual carbon dioxide captured for transport and geologic storage

Incentives for carbon capture, storage, and use in the Inflation Reduction Act would build on demonstration funding in the Bipartisan Infrastructure Law to make carbon capture a viable economic option for the most heavily emitting industries, such as steel, cement, and refineries, as well as power generation from coal and natural gas.

The total volume of CO2 captured for transport and geologic storage across energy and industry could reach 200 million tons per year by 2030, if sufficient investment in transport networks and storage basins can be deployed.1

That includes roughly 110 million tons across industries and 90 million tons in power generation.2 Modeled results include 6 gigawatts of carbon capture retrofits at existing coal-fired power plants and 18 gigawatts of gas power plants with carbon capture installed by 2030.

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Modeled Net U.S. Greenhouse Gas Emissions (Including Land Carbon Sinks) Under High and Low Oil and Gas Production Scenarios

Global and domestic demand for petroleum products and natural gas will be much larger drivers of future U.S. oil and gas production than the changes to public lands provisions in the Inflation Reduction Act.

To address this uncertainty, REPEAT Project constructs high and low oil and gas production scenarios that span a wide range of potential future domestic production (the variation in 2030 equals 11-12% of 2021 production levels, see p. 15) and estimates the impact on U.S. emissions for each scenario.

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The low oil and gas production scenario assumes that reductions in U.S. petroleum products and natural gas consumption spurred by the Act result in lower domestic fossil fuel production while holding exports of oil and liquefied natural gas (LNG) fixed at the trajectory in the EIA’s Annual Energy Outlook 2022 (AEO 2022).

The high oil and gas production scenario assumes declining domestic consumption increases U.S. fossil fuel exports, with domestic production of oil and gas equal to the levels in AEO2022.

Despite wide variation in oil and gas production, the difference in 2030 U.S. emissions between high and low oil and gas production scenarios spans only 40 million metric tons per year; that’s a plus or minus 2 percent variation around the ~1 billion tons per year of emissions reductions driven by the bill in 2030 (see p. 6).

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The Inflation Reduction Act does include several notable changes to public lands policy that could affect oil and gas production in federal lands and waters.

The Act specifically requires sale of four offshore lease areas that were previously withdrawn by court order or executive action. It also implements new rules that tie offshore wind lease offerings to recent offshore oil and gas lease offerings and links renewable energy leasing and right-of-way issuances on public lands to recent onshore oil and gas lease offerings.

The Act simultaneously increases royalties and rental fees for fossil fuel production in federal lands and waters, which may put downward pressure on future production. The Act also establishes a new fee on methane emissions in the oil and gas supply chain and provides $1.55 billion in funding to assist companies in monitoring and reducing methane pollution.

Modeling the specific impact of these countervailing provisions is challenging, but their impact is expected to be much smaller than the variation in production spanned by our high and low oil and gas production scenarios…

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