Today President Joe Biden signed the Inflation Reduction Act, a massive bill that represents the biggest investment in climate action in US history. It puts nearly $400 billion toward promoting domestic production of clean energy technology and generally retrofitting America to survive climate change. If all goes to plan, the act would slash US emissions by 40 percent by the year 2030.
In the immortal words of Uncle Sam, the bill screams: “I Want You” … to fight a war against climate change. The bill is packed with tax credits and rebates for Americans to buy electric vehicles (EVs), install heat pumps and better insulation, and slap solar panels on their roofs. We’re talking thousands upon thousands of dollars per household. In turn, all that extra investment in green technologies should juice the market, further accelerating the transition to a cleaner economy.
“It’s 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,” says Ben Evans, federal legislative director of the US Green Building Council, a nonprofit that promotes sustainability. “And we think that’s really going to change these markets. I don’t think it’s an overstatement to call this historic.”
It’s a stealthy way to encourage mass action on climate change: If homeowners across the US individually make their homes more efficient, collectively we’ll bring down carbon emissions, big time. A fifth of both national energy use and CO2 emissions come from homes. “What this bill does, in many ways, is at least as much psychology as economics,” says Gernot Wagner, a climate economist at Columbia Business School. “You have your average conversation with your contractor about: Wait, should I really be installing a gas boiler here, with gas prices pretty darn high?”
“The obvious thing to do,” Wagner adds, “is maybe spend a little extra today on stuff that literally pays for itself within months. So you can save 50 percent off your electricity bill if you insulate the place better.”
Having failed to legislate meaningful action on climate change with—heaven forbid—an actual phaseout of fossil fuels, the feds have turned to the tax code, using public money to fund the public good of mass decarbonization. Sure, taxes are no fun, and tax credits sound even more confounding. But it’s actually fairly straightforward for you to get your share of the Inflation Reduction Act.
First off, a tax credit isn’t the same as a tax deduction—it’s even better. With the latter you could reduce your taxable income, say, from $65,000 to $60,000. That means the government doesn’t take its cut of that $5,000. A tax credit, by contrast, would be you getting that full $5,000 back. So if you owe the government $10,000 after filing taxes, and you’ve got a credit for $5,000, you only end up paying $5,000.
The Inflation Reduction Act provides tax credits for energy-efficient home improvements: new windows, doors, insulation, water heaters. So when you file your taxes, you get discounts on what you owe the feds. “Let’s say you spend $1,000 on insulation—you would be able to get a tax credit of 30 percent of that,” says Evans. “So a $300 tax credit, which goes directly against what you owe in taxes. So at the end of the year, you owe $5,000 in taxes, you knock that $300 off, and you only owe $4,700.”
This is a significant bump from previous incentives for home improvements, Evans says, which credited 10 percent of expenses up to $500 for your whole darn lifetime. Now it’s 30 percent of purchases, a $1,200 tax credit maximum each year starting January 1, 2023 and running through 2032. So you could get credited for new windows next year, insulation the next, leakproof doors the next, and so on.
As for solar, the bill extends an existing federal tax credit, which covers 30 percent of the expenditure on residential solar, through 2032. That credit drops to 26 percent the following year, 22 percent in 2034, and expires at the end of that year.
A notable exception to the Inflation Reduction Act’s $1,200 annual limit on tax credits is with heat pumps, which you can get $2,000 for. These appliances are supremely powerful tools in fighting climate change: Instead of burning gas like a traditional furnace, they use electricity to extract heat from outdoor air and pump it inside, or extract heat from indoor air and pump it outside. “It’s a really efficient way of moving heat from one place to another,” says Lowell Ungar, director of federal policy at the American Council for an Energy-Efficient Economy. “It’s a reversible air conditioner, basically, for when you need to cool the home.”
You’d get an even bigger discount—$8,000—on a heat pump if you instead qualify for a rebate, the other way the bill hands out money to homeowners. This point-of-sale discount is aimed at lower- and middle-income households that can’t wait a year to get a tax credit, and may not even have a high enough tax liability to qualify for reductions in the first place.
The truth of the matter is that upgrading a home with better insulation or windows or electric appliances ain’t cheap. But if lower-income folks can get help from the Inflation Reduction Act, they can save on heating and cooling costs in the long run, easily recouping the costs of the investments and then some. Landlords, too, now have more incentive to climate-proof their properties. “You’re both offsetting some of these additional costs and helping people make a choice that is more environmental, and will in the end make them healthier and make their homes more affordable and more comfortable,” says Kara Saul-Rinaldi, president and CEO of AnnDyl Policy Group, an energy and environmental policy strategy firm. “These higher-end products, more efficient products, products that make the home cheaper to run, are now more accessible to people with lower incomes.”
We desperately need to make electric vehicles more affordable for everyone, especially lower-income folks already living in neighborhoods with poor air quality thanks to pollution-spewing gasoline cars. For new EVs there’s a maximum credit of $7,500 in the bill, an extension of a previous incentive. Then starting on January 1, 2024, consumers can elect to take that money as a point-of-sale rebate. For used EVs, the tax credit is either $4,000 or 30 percent of the sale price, but the vehicle can’t cost more than $25,000.
These credits extend all the way through 2032. “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,” says Katherine Stainken, vice president of policy at the Electrification Coalition, which promotes the adoption of EVs.
Where the Inflation Reduction Act gets tricky, though, is that to qualify for the tax credits, you may have to buy an EV that meets certain requirements. Its “final assembly,” or where it’s pieced together, has to be in North America, and a certain share of the minerals in the battery have to be extracted or processed in the US or a country with a free-trade agreement.
All this has led to some confusion among consumers as to whether the EV they buy will be eligible for a tax credit under the new law. “So for the consumer, that unfortunately will be a little tricky to figure out, but I’m confident that the automakers will provide the dealerships the right information,” says Stainken. “In fact, I’ve already seen emails go out from a couple of car companies to their consumers on waiting lists, just explaining the different policies.”
So, putting that all together: The Inflation Reduction Act nudges consumers toward a more climate-proof American home, which is first of all better insulated to keep heat or cold either in or out. That will in turn require less energy to keep indoor temperatures comfortable (especially as heat waves grow more intense), and will make it more likely that the power comes from a renewable source like rooftop solar panels. It will also push people away from gas-powered appliances like furnaces and toward electric heat pumps, which is good because burning gas indoors is terrible for human health. “Insulate, insulate, insulate—electrify, electrify, electrify,” says Wagner, the climate economist at Columbia Business School. “And once all of that is done, you definitely also want to decarbonize the grid.”
Switching to a heat pump makes your home much more efficient, but it’s still probably using electricity generated by a utility burning fossil fuels. “We need to live in a world where, when you turn on your light switch, you know that electricity is coming from carbon-free generation,” says Gregory Wetstone, president and chief executive officer of the nonprofit American Council on Renewable Energy. “We have the technology today to do that.”
Over the last decade, Wetstone says, the price of solar has plummeted 90 percent and wind by 70 percent. That’s made it increasingly economically viable to build wind farms and install solar panels all over the country. Now it’s just a matter of deploying more renewables and upgrading the ancient US power grid so that it can shuttle wind and solar power across vast distances. (And so it doesn’t collapse when extreme heat forces more people to use more air conditioning.) And as we get more EVs into garages, grid operators will be able to tap into those batteries for extra power if the wind doesn’t blow and the sun doesn’t shine.
The Inflation Reduction Act will both prepare American homes for this future and accelerate the market for decarbonization technologies, Rinaldi says. “This isn’t something that we have seen every day, where your average homeowner gets to make a choice that can help save the planet,” she says. “And I think that’s why it's particularly special.”
