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Hello from New York. This Friday, the US climate law known as the Inflation Reduction Act turns two.
In today’s edition, we look at how homeowners have been using IRA tax credits to implement clean energy and make energy efficiency improvements where they live. The Treasury department said last week that 3.4mn American families saved $8.4bn in 2023 through these credits.
The fate of the law is uncertain in the event of a Democratic defeat in November’s presidential election. But voter enthusiasm for these household tax credits could boost the chances of its survival.
Thanks for reading.
clean energy incentives
How US homeowners are using Biden’s signature climate law
Two years ago this week, President Joe Biden signed a landmark piece of US climate legislation, awkwardly named the Inflation Reduction Act. The $369bn spending package included an array of tax credits for industrial investment in sectors from biofuels to green hydrogen and nuclear power. Other provisions were aimed at incentivising households to invest in clean power and energy efficiency.
“It’s going to offer working families thousands of dollars in savings by providing them rebates to buy new and efficient appliances, weatherise their homes, get tax credit for purchasing heat pumps and rooftop solar, electric stoves, ovens, dryers,” Biden said at the time.
Last week, the Treasury department gave us a first look at what types of households are using the IRA’s clean energy and energy efficiency tax credits, and what expenses they’re putting them towards.
Democrats will be eager to highlight the IRA’s impact ahead of an electoral showdown in November with Donald Trump, who has vowed to “terminate” the law.
Taxpayers have claimed more than $6bn for the residential clean energy tax credits in 2023, the Treasury said. In this category, the rooftop solar credit has been the most widely adopted, data from the Internal Revenue Service show.
And it has been especially popular in southern states such as Florida, Arizona and Texas. While these states are not ones Harris is likely to win, the popularity of the IRA credits in these locales could lower the chances of a victorious Trump seeking to reduce or eliminate them.
Since the rooftop solar credit’s initial debut in 2006, when less than $1bn was claimed, the figure “has steadily and significantly increased every year since it has been around”, Lucas Davis, a professor at Berkeley told me. “It is impressive.” The IRA extended the credit until 2034 and added battery storage as an eligible expenditure
But there is a catch.
Davis has published research showing the residential energy tax credits (as well as electric vehicle tax credits) disproportionately go to higher-income households.
Higher-income households are more likely to own a home where they can install rooftop solar, he said. Also, these tax credits are not refundable, meaning they cannot be traded in for cash, and therefore are more useful to high-earning families with significant tax bills. “If you don’t have a tax liability you cannot claim a credit like this,” Davis said.
While the latest Treasury data focused on homeowners who are benefiting from the tax credit, companies are also enjoying a sales lift. Sunrun, a San Francisco-based solar provider, said this month that reducing or eliminating this tax credit “could reduce the number of customers who choose to purchase our solar energy systems”. Sunrun’s share price is up nearly 15 per cent over the past 12 months.
“The higher levels of tax credits should be a tailwind for customer economics [and] rooftop solar demand,” Brett Castelli, an equity analyst, at Morningstar told me.
The home energy efficiency credit, however, has been more widely used than the clean energy credit. More than 2.3mn families made home improvements to increase their efficiency, compared with about 1.2mn that installed clean energy sources such as solar panels or geothermal heat pumps.
The efficiency credits offer up to $1,200 annually for money spent on projects such as insulating windows and doors or having a home energy audit.
Almost 700,000 taxpayers claimed credits for insulation and air sealing in 2023. More than 250,000 families claimed investments in electric or natural gas heat pumps. And another 100,000 taxpayers claimed credits for heat pumps for their water heaters.
The north-east US has taken a particular liking to these energy efficiency credits, IRS data show. Maine has claimed the most as a percentage of total tax filings in the state.
As the IRA heads into its third year in existence, it also faces its first big political challenge. Although Trump has said he would gut the IRA, 18 Republican lawmakers this month signed a letter cautioning against repealing the law.
Prematurely repealing energy tax credits “would undermine private investments and stop development that is already ongoing”, they wrote. “A full repeal would create a worst-case scenario where we would have spent billions of taxpayer dollars and received next to nothing in return.”
The IRA was built to sprinkle money across the country in a variety of different political regions, Lucas said. “That is going to make it pretty hard to repeal, I think.”
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