Updated Inflation Reduction Act Modeling Using The Energy Policy Simulator
Megan Mahajan, Olivia Ashmoore, Jeffrey Rissman, Robbie Orvis, Anand Gopal, August 2022 (Energy Innovation)
On August 16, 2022, President Biden signed the Inflation Reduction Act (IRA) into law. The IRA’s $369 billion in funding for emissions-reducing climate and clean energy provisions run the gamut from clean energy and electric vehicle (EV) tax credits to large-scale investments in domestic clean technology manufacturing to advancing environmental justice. The IRA also requires auctions for oil and gas on federal lands and waters prior to auctions for renewable energy projects and requires completion ofseveral 2022 lease auctions that were previously canceled.
Energy Innovation Policy & Technology LLC® modeled the IRA’s impact on emissions reductions, job creation, and public health, using our free and open-source U.S. Energy Policy Simulator (EPS). 1
Our updated modeling finds that the IRA is the most significant federal climate and clean energy legislation in U.S. history, and its provisions could cut greenhouse gas (GHG) emissions 37 to 43 percent below 2005 levels. With additional executive and state actions, the U.S. can realistically achieve its nationally determined commitments (NDCs) under the Paris Agreement.
Further, for every ton of emissions generated by IRA oil and gas provisions, at least 28 tons of emissions are avoided by the other provisions. i
Under a business-as-usual (BAU) scenario (i.e., including all enacted federal and state policies to date) our modeling forecasts the U.S. would reduce emissions 25 percent compared to 2005 levels by 2030.
In other words, the IRA would enable the U.S. to close 49 to 71 percent of the emissions gap between BAU and the NDC in 2030.
In absolute terms, U.S. emissions in 2030 are projected to be 2,500 million metric tons (MMT) to 2,800 million metric tons lower than 2005 levels. The IRA provisions could also generate enormous public health and jobs benefits, preventing up to 4,500 premature deaths from air pollution in 2030 and creating up to 1.3 million jobs in 2030. Finally, the IRA could increase U.S. gross domestic product (GDP) by 0.65 to 0.77 percent in 2030.
The final IRA legislative text includes $369 billion in funding for climate and clean energy provisions. These emissions-reducing provisions include clean energy and EV tax credits, large-scale domestic clean technology manufacturing investments, and environmental justice measures. The IRA also requires several auctions for oil and gas on federal lands and waters prior to auctions for renewable energy projects and requires completion of several 2022 lease auctions that were previously canceled.
To help understand its net effect, Energy Innovation® modeled climate and energy provisions of the IRA using the U.S. EPS, an open-source and peer-reviewed climate policy model that estimates climate and energy policy impacts using publicly available data.
Our findings confirm that passing the IRA will reduce GHG emissions an estimated 820 to 1,200 MMTs of carbon dioxide equivalent (CO2e) in 2030 despite the oil and gas leasing requirements. Those reductions would reduce U.S. emissions 37 to 43 percent below 2005 levels and make significant progress towards achieving the 2030 U.S. NDC of 50 to 52 percent below 2005 GHG emissions.
The IRA could create up to 1.3 million new jobs in 2030 concentrated in the manufacturing, construction, and service industries. Through greater clean energy deployment, the bill could avoid up to 4,500 premature deaths and up to 119,000 asthma attacks annually by 2030.
While this analysis covers the vast majority of the IRA’s climate and energy provisions, including all those that could significantly affect GHG emissions, it is not entirely comprehensive. Some provisions or funding mechanisms were excluded from the modeling due to difficulty translating certain spending categories or incentives into emissions reductions. These programs could likely yield small additional GHG reductions beyond what we have modeled. They may also yield important public health benefits that are not captured here.
RESULTS AND KEY FINDINGS
The results in this updated research note include policy scenarios updates reflecting final text of the IRA, along with improvements to the methodologies and assumptions used in our earlier research note.ii
Our modeling includes four core scenarios: A Business-as-Usual (BAU) Scenario that holds current policy constant, along with Low, Moderate, and High Scenarios that make different assumptions about the efficacy of certain provisions within the IRA, such as the share of projects or sales that qualify for bonus credits, leverage ratios for private sector dollars, and the evolution of supply chains throughout the decade.
More information on data sources is available online at https://us.energypolicy.solutions/docs/. A full description of our provision-by-provision methodology is included in Appendix A, including how our assumptions varied across scenarios. A full description of our methodology for the oil and gas leasing calculations is included in Appendix B.
Our model results are discussed below, including emissions projections, changes in clean electricity and zero-emission vehicle (ZEV) deployment, and oil and gas supply changes, along with impacts on public health, jobs, and the economy.
Greenhouse Gas Emissions
Our modeling shows the IRA could help reduce 2030 U.S. GHG emissions 37 to 43 percent below 2005 levels, while emissions would fall only 25 percent below 2005 levels under a BAU Scenario. This means the IRA will enable the U.S. to close 49 to 71 percent of the emissions gap between BAU and the U.S. NDC to reduce emissions 50 to 52 percent in 2030—representing a major down payment on our Paris commitment…
The IRA includes many incentives and significant funding to deploy clean power and reduce emissions. Provisions include investment and production tax credits (which become technology neutral in later years), a tax credit for existing nuclear power points, a new U.S. Department of Energy (DOE) loan program (section 1706), and funding for rural utilities, among others. The tax credits also have bonus provisions that increase their value if certain project conditions are met, such as using unionized labor, meeting minimum domestic content requirements, and siting within certain communities.
To model the impacts of the clean energy tax credit provisions for clean electricity, we partnered with Energy Transitions AI, an external consultant group running the ReEDS capacity-expansion model. We coupled the results of these modeling runs with estimated impacts of funding programs to estimate the combined impact of the programs on clean electricity deployment. Table below highlights our findings. In our BAU Scenario, clean electricity represents 49 percent of electricity generation in 2030, corresponding to 413 gigawatts (GW) of cumulative renewable capacity. In our IRA scenarios, the share of clean electricity ranges from 72 to 85 percent, corresponding to a range of cumulative solar and wind capacity of 795 GW to 1,053 GW.
It is important to note these findings do not account for important barriers that could limit clean electricity deployment. In particular, the modeling assumes that necessary transmission will be built, interconnection delays are addressed, supply chains provide the necessary materials to deploy these levels of clean electricity, and a sufficient workforce can supply the labor.
Each of these represents a potential barrier to scaling electricity deployment at the rates our modeling envisions. However, each barrier is being actively addressed by federal and state policymakers. The Federal Energy Regulatory Commission (FERC) is addressing transmission planning and interconnection processes through several current rulemaking proceedings, likely to be concluded in late 2022 or early 2023. Infrastructure Investment and Jobs Act (IIJA) of 2021 provisions could strengthen DOE authority to site and financially support transmission lines, and could bolster manufacturing facilities and supply chains to support new transmission. President Biden has also invoked the Defense Production Act to ramp up domestic production of critical materials and clean energy manufacturing to address supply chain concerns.
More work is needed to understand how much each barrier might constrain deployment as well as the impact of current and future policy actions to address them.
The IRA also includes new tax credits for personal and commercial clean vehicles. The commercial clean vehicle tax credit provides an incentive of up to $7,500 for vehicles under 14,000 pounds, and up to $40,000 for vehicles 14,000 pounds and over, depending on the vehicle cost and comparative cost of a similar internal combustion engine vehicle.
The vehicle tax credit is much more complicated for personal vehicles, and includes the following elements:
• The credit is split into two pieces: a $3,750 credit for meeting increasingly stringent domestic battery assembly requirements and a $3,750 credit for meeting increasingly stringent critical minerals requirements.
• The credit contains a manufacturer’s suggested retail price (MSRP) cap of $55,000 for cars and $80,000 for all other vehicles, and all cars must be assembled in North America to qualify for the credit.
• An additional adjusted gross income (AGI) cap limits the tax credit to individuals earning less than $150,000 a year or households earning less than $300,000.
• Restrictions on which vehicles qualify as clean begin in 2024, notably removing vehicles that use materials from “entities of concern,” which includes Chinese companies, in the battery and for any of the mineral sourcing or processing starting in 2025. It remains to be seen how restrictive this language will be on limiting the ability of vehicle manufacturers, but it could significantly limit qualifying vehicles, at least until the industry has time to find alternative sources of materials and establish the relevant supply chains. However, IRA manufacturing incentives, especially when coupled with incentives in the IIJA and the Chips and Science Act, create a very strong incentive to grow the necessary minerals processing, battery, and semiconductor industries in the U.S.
Given the complexity of each requirement, our modeling of the personal vehicles evaluated a range of possibilities. In our Low Scenario, we assume no manufacturers qualify for the credits once new restrictions on the “entities of concern” kicks in. In our High Scenario, we assume a gradually increasing share of new vehicles qualify, such that by 2030 all new vehicles would qualify. Our Moderate Scenario falls between the Low and High Scenarios. We also account for the MSRP cap, AGI cap, the made in North America requirement, the ability of manufacturers to use batteries assembled in North America, and their ability to source the critical minerals from qualifying regions.
Our findings in Table 3 and Table 4 show changes in sales and stock in 2030 resulting from tax credits and other provisions affecting vehicle sales, and highlight the large range of uncertainty for the personal vehicle tax credits.
As is reflected in these tables, even higher sales shares drive a smaller change in the vehicle stock by 2030, which reflects limitations related to transportation sector stock turnover. Put another way, because only a fraction of the total stock of vehicles is replaced each year, it can take many years to realize deep sectoral reductions, even with high shares of clean vehicle deployment. This highlights the importance of strong ZEV incentives in the next decade, as waiting runs the risk of missing climate goals due to slow stock turnover. It is also worth noting that transportation emissions reductions in 2035 or 2040 will be significantly greater than in 2030 given the stock turnover dynamic.
Oil and Natural Gas Leasing Provisions
In oil and natural gas markets, demand drives prices, which in turn drive supply. Therefore, we expect changes in demand for oil and natural gas to be the primary driver of U.S. production changes. Considering significant natural gas demand reductions from the IRA and moderate decreases in petroleum product consumption, we would most likely see a decrease in production of oil and gas, as is suggested by modeling from the Rhodium Group, not an increase.2
Nevertheless, we choose a potential worst-case scenario because oil and gas infrastructure has a long life, and any production that might result from the IRA could continue to operate beyond 2030. We modeled upstream and downstream U.S., as well as rest-of-world emissions from the additional oil and gas production on federal lands and waters which could result from the IRA provisions, assuming those lands go into production.
Our methodology is as follows (see Appendix B for a full discussion of our methodology):
1) We developed two baseline cases of oil and gas lease auctions in the absence of the IRA. In our Low Case, we assume a leasing ban through the end of the decade without the IRA. In our High Case, we assume lease auctions continue based on the actions of the Biden administration to date.
2) Next, we develop our IRA Case. This reinstates the cancelled 2022 lease auctions as required under the IRA and assumes 60 million acres of offshore land and 2 million acres of onshore land offered at auction every year to the end of the decade.
3) To determine how much land is leased at auction, we used historical data covering multiple administrations. The share of land that is leased at offshore auctions is very low on average, around 2 percent. For onshore auctions, approximately 30 percent of acreage offered is leased.
4) From there, we then developed production profiles using historical data:
a. For offshore, we used Bureau of Ocean Energy Management data on the timeline of well completions for a given area of development. On average, an increasing number of wells are drilled for the first 15 to 20 years, followed by a decreasing number through years 30 to 35, resulting in a production profile of about 50 years.
b. For onshore, this data was not available, and we simply assumed land goes into production at average production to area values once the land is leased at auction.
5) For offshore, we then applied production profiles to the wells that reflect the varying amount of product produced over the lifetime of the well. For example, around 50 percent of a well’s total product is produced in the first year after it is drilled, with diminishing output after.
6) We then assumed that 30 percent of the new production on federal lands was offset by decreases on private lands, based on data from Brian Prest at Resources for the Future.3
7) Next, we developed price elasticities of supply using data from the U.S. Energy Information Administration (EIA) and we estimated the percent change in the U.S. price of natural gas, crude, and petroleum products using these values.
8) We fed the increased production and the changes in prices into the EPS, which captures the emissions associated with production, processing, transmission, and distribution and the subsequent change in downstream consumption and emissions from the price impacts. iii
9) Finally, we estimated the leakage of emissions internationally using values from Brian Prest’s paper.
Our estimates assume that decreases in natural gas consumption as well as incremental supply can be exported via liquified natural gas export terminals and international pipelines. Between our Low and High Scenarios, U.S. natural gas demand decreases by roughly 18 to 27 percent relative to the BAU Scenario, equivalent to 6.2 to 9.3 trillion cubic feet (TCF) of natural gas. Incremental natural gas domestic consumption from the oil and gas leasing provisions in 2030 totals 0.10 to 0.23 TCF. In our BAU Scenario, based on EIA data, the U.S. exports about 9 TCF of natural gas, 5.4 TCF of which is liquefied natural gas (LNG), in 2030. Based on the latest FERC data, under construction, approved, and proposed LNG terminals total 19.4 TCF of capacity, though many of these projects do not have an estimated completion date.4
Nevertheless, if a significant share of the under construction, approved, and proposed terminals are completed by 2030, they could create sufficient capacity to export gas from reduced domestic demand and incremental production. It is unclear whether sufficient demand for U.S. exported gas exists to support this much export capacity, as well as the likelihood that all these facilities will be completed by 2030, or completed at all.
Our revised approach to estimating lease auction impacts has several notable improvements on our prior approach and related estimates. First, it correctly accounts for switching between federal and non-federal lands, which was ignored in our earlier estimates. Second, it better estimates the time profile of when extraction occurs from a given piece of land by looking at empirical data rather than assuming all production starts in a single year. Finally, it correctly accounts for changes in U.S. prices and consumption relative to international consumption and allows us to distinguish between the two. For these reasons, the revised approach generates more accurate results.
The findings are still conservative, as they do not account for potential decreases in domestic demand for oil and gas resulting from the IRA that would likely reduce total U.S. production. The approach also assumes that developers are able to obtain necessary drilling permits.
The updated approach generates estimates that are lower than, but of the same magnitude as, our earlier estimates. As shown in Figure 4, we estimate the oil and gas lease provisions could add 17 to 29 MMT CO2e to global emissions, represented by the orange dots, the vast majority of which occurs outside the U.S. In our Moderate Scenario, we actually find emissions decreases domestically from changes in energy prices, which is why that scenario is lower than either the Low or High Scenarios
The global increase in 2030 is relative to U.S. reductions of 820 to 1,200 MMT reductions in 2030. In other words, based on the updated methodology, for every one ton of global emissions increases caused by oil and gas leasing provisions, at least 28 tons of emissions are avoided by other IRA provisions in the U.S. Thus, despite the potential for increased oil and gas extraction, the IRA overwhelmingly reduces emissions.
While increased extraction could occur on public lands, the vast majority of it would occur offshore, and would be associated with decreases in production on private lands, it is important to note that increased extraction could lead to an increased pollution burden in communities where oil and gas is processed and transported.
Methane Emissions Reduction Program…Carbon Capture, Utilization, and Storage…Public Health and Climate Impacts…Jobs and GDP…Deployment of Capital and Spending on Energy…