Over the last few weeks, we’ve been closely tracking the federal Inflation Reduction Act of 2022 (IRA) – it marks the largest federal climate investment in U.S. history. For that we applaud it. The main elements of the IRA include: 1. funding for climate and clean energy investments, 2. prescription drug pricing reforms and an extension of enhanced health care premium tax credits, and 3. corporate tax changes for corporations and increased tax code enforcement. At Autocase, and for others deeply involved in the real estate, infrastructure, and climate sectors, it has the opportunity to be transformational given the roughly $369 billion investment in climate and energy policies. As a firm of independent economists leading the charge in the built environment developing carbon and social/environmental SaaS ESG business case analytics software for buildings, as well as through our active economic advisory practice serving all real estate and infrastructure sectors, these policies and funding mechanisms have important implications. The IRA provides tax incentives for investments in clean energy, electric vehicles, and nuclear power production; supports workforce development and permitting processes through the provision of additional funds to the Department of Energy, the Federal Energy Regulatory Commission, and the Interior Department; aligns the US more closely to other global climate leaders like the EU; and helps to mitigate supply chain challenges by incentivizing domestic manufacturing. It does a lot, but recently had existed in another, more impactful form that had us quite excited.
The IRA is a slimmed-down version of the Build Back Better Act (BBBA), which aimed to make historic investments in the nation’s social safety net and was a key element of the administrative agenda we – and many others in the architecture/engineering consulting (AEC) industry – have been tracking since 2020. We’ve spoken about the BBBA and its impacts and opportunities at a variety of conferences and have since been keenly watching the spectacle. The key differences – other than the $1.75 trillion total – includes the removal of the child tax credit, universal pre-kindergarten and broad-based tax hikes on the wealthy, as well as various investment tax credit (ITC) and production tax credit (PTC) changes around sunset dates for elements such as wind, solar, and other renewables technologies. Alas, we were optimistic for the possibility of greater change for the children’s care market, especially for disadvantaged children burdened with limited access to affordable, high-quality care and the mothers unable to work given care obligations and the ancillary effects on workforce participation and economic growth. For example, in our economic analysis of the Helen R Walton Centre Children’s Enrichment Center, our team valued incremental benefits such as improved health outcomes for children from a toxics and chemical free space, higher productivity for staff, and environmental savings from energy efficiencies and proved that greater investment is needed in high-quality daycare centers around the nation.
Given our business, we’ve been focused on the climate and energy areas of the IRA the most deeply. Combined with direct investments and tax credits to facilitate deep industrial decarbonization, the agreement has the potential to reduce over 200 million metric tonnes of carbon dioxide emissions annually by 2030. The goal of the bill is to put the country on a path to reduce greenhouse gasses by 40% below 2005 levels by 2030 – not quite the Paris Agreement 50% reduction target, but meaningful compared to the previous trajectory of a 25% reduction without it. We reviewed a number of projections on the implications of the IRA on the sectors implicated, and have leveraged Rhodium Group estimates which determine that the biggest emission reductions occur in the electric power sector, followed by carbon removal (i.e. air capture and agriculture/forest management practices, etc.), industry, and transportation. For example, clean generation as a share of total electric generation rises from roughly 40% in 2021 to 60-81% in 2030 due to the IRA, compared to 46-72% without it under these projections.
The legislation has the potential to be historic in its achievement, but success may be highly variable – it’s dependent on a number of complex underpinnings and long duration time horizons, as well as cooperation and investment from the federal government, state and local governments, private industry, and civil society. Many of these government entities are our clients, as are the AEC firms advising them on solutions to drive change – it’s complicated work.
Our experiences with governments around decarbonization projects and climate action policy transitioning are implicated from the package. For example, our recent engagement with New York State’s Energy Research and Development Authority (NYSERDA) in supporting their Climate Leadership and Community Protection Act evaluating building retrofit and new construction packages across various typologies, climate zones, and building vintages would likely have had different outcomes given the incentives and dynamically changing grid implications from the IRA, and may have led to other strategies ranking higher than others.
Similarly, we’d also see impacts to the economic business case valuations of multifaceted climate action and adaptation projects we’ve been part of, such as with the City of San Antonio TX (SA Climate Ready), Massachusetts Port Authority (Massport Net Zero Emissions Roadmap) and Clark County, NV (All-In Climate Plan). In these cases, a broader set of decarbonization strategies across sectors were evaluated; such as EV charging, solar PV requirements, deep energy retrofits, zero net energy new construction, urban agriculture, and waste reduction/diversion. In these cases, the ITC and PTC incentives would play more significant roles in lowering the implicit cost of certain technologies, and therefore cost to the government and the public. Again, many underlying variables, such as utility rates, capital costs with incentives and rebates, grid emissions factors, climate change forecasts, and project timelines would likely be implicated and affect the discounted cash flow economic metrics provided. Likely most of the alternatives would appear more cost effective due to the IRA. other recent large-scale energy system evaluations like an electric central utility plant at San Francisco International Airport, master utility plan mechanical systems at Seattle Tacoma International Airport, or a downtown core district energy system for the City of Rochester MN would look even more appealing to stakeholders. In certain cases, we’ve built in regulatory scenarios for future states, but welcome the clarity that the IRA provides. We’re eager to leverage and build these changes into our dynamic SaaS tools and advisory services to more deeply inform future outcomes.
We like the use of incentives in the provisions – by relying on incentives rather than regulations, companies will be able to use the best available future technology rather than being locked into existing technology. We also like the resiliency elements in the act – resilience not from a hazard mitigation standpoint (more to come on that later) – but from a geopolitical and operational standpoint. This package includes bolstering the domestic production of clean energy, which includes more than $60 billion to support on-shore clean energy manufacturing in the U.S. Like in previous work we’ve supported with the US Department of Defence (DOD) – evaluating design and technology investments to drive resilience in operations in major world class healthcare facilities such as Fort Bliss in TX and Fort Belvoir in VA – redundancy and reliability is an important aspect in the built environment and infrastructure. More recently, our work with aviation cargo facilities, port infrastructure, and logistics hubs has us thinking more deeply about critical supply chain importance. Recent events with COVID and geopolitical tensions from Russia’s invasion of Ukraine, and China’s assertion of dominance has us thinking about this more than ever (like you), in addition to the omnipresent inflation affecting all of us. Energy producing capacity is a key component of geopolitical power; the broader infrastructure elements, the more efficient buildings, the energy production/transmission capacity and the mechanisms within the IRA around expediting development are welcomed. The $10 billion in ITC’s for manufacturing EV’s and renewables will be impactful, as will the $500 million to speed manufacturing of energy efficient investments like heat pumps and critical minerals for renewables and EV’s through the Defense Production Act. Roughly $22 billion for vehicle production transition and EV production facilities will help to reduce costs to consumers and meet increasingly stringent emissions obligations in many jurisdictions.
Closer to our SaaS heart is the more than $5 billion allocated to incentivizing the low-carbon transition for the building materials sector. The US General Services Administration (GSA) has a key piece of this as well – as the de facto manager of federal agencies, it has the largest landowner of real estate in the US and the largest purchaser of goods and services in the world under its purview. $2.15 billion is allocated to install low-carbon materials in GSA buildings (1,500 across the country) and $4 billion to improve resiliency in affordable housing and low-carbon materials and net-zero energy projects. Some of these elements connect to the January 2021 Executive Order (EO) on Tackling the Climate Crisis at Home and Abroad – which calls for decarbonizing the electricity sector by 2035 and directs the government to buy clean and zero emission vehicles for federal, state, local and tribal government fleets.
From an environmental justice (EJ) perspective, an area that we’ve seen increasing content in government requests for proposals and AEC commitments, the IRA provides over $60 billion for EJ priorities for investments in disadvantaged communities. As our involvement on this topic deepens, we’ve come to recognize the essential elements to driving investment towards EJ solutions. We’re proud of our collaboration with the American Institute of Architects and their large firm roundtable group (Stantec, HOK, Jacobs, Quinn Evans, and DLR Group) and advisors from the National Organization of Minority Architects (NOMA) and the NAACP’s Sustainable Building Sector Group, in creating a free open-access EJ toolkit to support project development and stakeholder engagement (https://www.ejtoolkit.com/). For Environmental Justice and Community Block Grants, the bill provides $3 billion for projects in disadvantaged communities that address environmental and public health harms from climate change. This is in addition to the $3 billion allocated to the Neighborhood Access and Equity Grants and another $3 billion to address air pollution. The IRA would cut likely emissions of air pollutants like sulfur dioxide (SO2) and oxides of nitrogen (NOx) that exacerbate asthma attacks and cause premature deaths by 10-19% and 10-11% respectively below 2021 levels as compared to without. We use long-term integrated assessment models to value these pollutant health outcomes to projects/policies and can expect substantial benefits to come from these reductions, which typically disproportionately impact adjacent communities to power plants and industrial hubs.
Of course, one of the outcomes from this spending is limiting climate change – in our hazard mitigation project evaluations, such as a new wood pellet industry formation for Golden State Natural Resources (coalition of rural county governments in California) reducing major fire risks property damage and improving forest health, or for the City of Miami and Downtown Development Authority’s Biscayne Bay living shoreline and sea wall flood prevention project that would mitigate sea level rise impacts and wave attenuation from storm events, there would likely also be implications to our evaluations. Perhaps these projects would be less impactful if climate change decelerates. In these cases we used advanced geospatial technical forecasting models from government entities such as USFS and NOAA to support the pre-and-post intervention outcomes such as forest fire burn intensity/area or depth damage flooding projections which may also have to be adjusted to account for these additive impacts from the IRA underlying their projections. These aren’t the only organizations we’re connected to that will likely have to adjust – we have software integrations with leaders in their own space – incentive database IncentiFind, LCA materials carbon calculators Tally and One Click LCA, and time-of-use energy data software WattTime.
Finally, this is timely for our upcoming capital raise over the coming weeks through crowdfunding site StartEngine. Amongst other things, we’re building our next product – CarbonSight – to focus more narrowly on the carbon impact analysis for buildings and portfolios to support planning, benchmarking, monitoring, and reporting. In keeping track of the ClimateTech and PropTech spaces where we straddle both markets, the passage of the IRA will have an impact on the size of the market and the investment activities within it. There’s been increasing interest from the venture capital (VC) community in the climate and ESG space for the last few years, but this will give private investors more confidence in the space, and VC funds are expected to allocate more to the space. We encourage our peers to leverage this opportunity as well – start a new business, or invest in new technologies and take a leap to play a role in disrupting the real estate and infrastructure market. Breakthrough Energy Ventures, the Bill Gates founded climate fund, has estimated that 300 to 1,000 companies will exist because of the IRA.