How States and Cities Can Benefit From Climate Investments in the Inflation Reduction Act

This report contains a correction. 

The Inflation Reduction Act, which was recently signed into law, is poised to cut Americans’ energy costs, create good jobs, and transform the fight against the climate crisis. State and local leaders will play an outsize role in the law’s success. The act includes $369 billion¹ in clean energy and climate investments that will unlock unprecedented opportunity for state and local governments seeking to accelerate their own commitments to clean energy and carbon neutrality while providing direct benefits² to American families and seniors.

The law is the largest single step that Congress has taken to address the root cause of climate change. It includes investments that are forecasted to reduce critical emissions³ to between 31 percent and 44 percent below 2005 levels. Combined with renewed ambition from executive agencies, as well as states and cities, modeling⁴ suggests that the United States can fulfill President Joe Biden’s commitment to cut U.S. emissions in half by 2030 and, in doing so, help states strengthen their economies and return the United States to a position of global climate leadership.

The Inflation Reduction Act builds on the initial climate funding opportunities passed into law in the Infrastructure Investment and Jobs Act (IIJA)⁵ to support projects across electric vehicle (EV) charging, power infrastructure, and climate resilience. The legislation provides new funding to accelerate the growth of clean energy and support consumer rebates for home electrification and EVs, and it dedicates significant resources to American-made products to boost domestic manufacturing and regional economies.

As with the IIJA, the Inflation Reduction Act’s policies and investments will require states, local governments, and the federal government to collaborate in order to achieve the most transformative results. To maximize the act’s impact on emissions and to ensure frontline communities are centered in its implementation, state and local governments will need to partner with federal agencies as key funding streams and programs are launched. This issue brief provides descriptions of relevant programs, funding amounts, and key cost-sharing requirements for state and local governments where applicable.

The Inflation Reduction Act contains several provisions that allocate public resources for continued fossil fuel development on America’s public lands and waters. In particular, two provisions mandate oil and gas leasing. Such provisions will likely harm both the environment and U.S. communities. Federal regulators and state and local leaders should leverage their full authority to ensure that policymakers center affected communities in the implementation of this legislation and to minimize, wherever possible, the real harm of these provisions.

The foundation of the Inflation Reduction Act’s climate investments is the expansion of clean energy tax credits⁶ to drive the swift, scaled adoption of wind and solar power, as well as storage and other low-carbon emission technologies. Deployment of clean energy options will be further bolstered through a $250 billion expansion⁷ of financing authority in the U.S. Department of Energy’s (DOE) Loan Programs Office,⁸ additional resources through the U.S. Department of Agriculture, and a new Greenhouse Gas Reduction Fund.

While states and cities will not directly administer the tax credits and investments from the DOE loan program, jurisdictions will benefit from improved solar, wind, and storage economics as utilities and power providers within their borders ramp up clean generation. To date, 21 states, Puerto Rico, Washington, D.C.,⁹ and more than 180 American cities¹⁰ have taken legislative or executive action to move their jurisdictions toward a 100 percent clean energy future. Economic tailwinds will help states and cities meet their own clean energy goals and empower more jurisdictions to commit to ambitious action. Furthermore, the prevailing wage and apprenticeship standards included in the Inflation Reduction Act will create and encourage high-quality jobs.

State and local action will be crucial to realizing the full climate potential of the Inflation Reduction Act. States and cities play an important role in regulating the energy sector through planning, siting, and permitting projects, as well as rate setting. State, local, or tribal governments may also be eligible for a portion of $760 million in grants to facilitate the siting of interstate transmission lines¹⁵ that would support economic development. However, according to the Inflation Reduction Act, federal cost share cannot exceed 50 percent of any project’s total cost.

According to the Sabin Center for Climate Change Law, opposition to local siting of wind, solar, and storage projects is “widespread and growing.”¹⁶ It is therefore imperative that state and local governments work together to site, permit, plan, and execute renewable energy projects with input from environmental justice communities and organized labor.

Additionally, the Inflation Reduction Act supports technologies such as hydrogen, nuclear, and carbon capture. However, as these technologies are explored, it will be incumbent upon state agencies and utility regulators to encourage viable developments while protecting ratepayers and residents from projects that rely on unproven or more costly technologies.

Cities, meanwhile, can further accelerate local deployment of clean energy technologies by removing barriers to, encouraging, and even requiring the installation of solar and other renewable energy technologies in homes and buildings, such as Denver’s Green Building Ordinance¹⁷ and St. Louis’ Solar Ready Roofs requirements.¹⁸

The investments included in the Inflation Reduction Act will save families money. Under the act, the average family will save an estimated $1,800 per year¹⁹ if they install heat pumps to replace their furnace and water heater, buy an EV, and utilize rooftop solar. The Inflation Reduction Act provides households upfront incentives²⁰ for these conversions that could total as much as $28,500. Additionally, the act will provide funding for energy-efficient retrofits of homes, apartments, and affordable housing.

The funds provided through the Inflation Reduction Act will also help states and cities meet their own climate commitments. California, for example, has a new goal²⁶ to install 6 million heat pumps by 2030, and Boston²⁷ has instituted an ambitious building performance standard. Washington, D.C.,²⁸ and Seattle,²⁹ meanwhile, have new building electrification codes that will phase out fossil fuels from buildings.

Cities can help build the capacity of the local real estate, construction, and design sectors to take advantage of this funding. The New York City Building Energy Exchange³⁰ and the District of Columbia’s Building Innovation Hub,³¹ for example, provide networking, education, and programs to strengthen cross-sector partnerships in support of city net-zero goals.

In advancing these efforts, the Inflation Reduction Act will reduce costs and create economies of scale for clean appliances and empower a strengthened national workforce. The programs the act supports will help accelerate local pledges for building decarbonization, including electrification. To maximize the benefits of these programs, state and city governments can pass supportive local policies, create educational resources, champion workforce development, and direct funds to disadvantaged communities.

The Inflation Reduction Act is expected to create 1.5 million new jobs³² by 2030 in the construction, service, and manufacturing of clean energy technologies. States seeking to build a strong 21st century economy can leverage these funds to help strengthen their economic trajectories, workforce development approaches, and climate-smart manufacturing goals.

The bill makes significant investments in U.S. manufacturing by revitalizing and creating new industrial development. It also helps drive state and local revenue to support vital services while providing good jobs. These investments are anchored through a $30 billion³³ expansion of production tax credits for the manufacture of solar panels, wind turbines, batteries, and critical minerals processing. Within the bill’s $10 billion³⁴ investment tax credit for clean energy manufacturing, nearly $6 billion is allocated to help existing heavy manufacturing—such as steel and cement—significantly reduce emissions. The expansion of the DOE Loan Program Office will also support these economic tailwinds.

The Inflation Reduction Act devotes $20 billion to resilience and conservation solutions. The bill sets aside funds for programs that cut emissions from cows and livestock, as well as from agricultural soil and rice production. It also funds grants to support forest conservation, the development of fire-resilient forests and increased urban tree planting, and the conservation and restoration of coastal habitats.

States will be responsible for the success of resilience programs through their planning, grant-making, and implementation responsibilities. State and local governments should leverage these funds to achieve their resilience goals, such as moving forward with climate action plans or soil health plans. To support soil health improvements, states can create frameworks similar to Colorado’s⁵¹ for measuring, monitoring, and evaluating carbon in soil.

Where possible, states can steer landowner incentive programs toward priority geographies and practices that align with comprehensive planning, as well as build outreach and extension programs to ensure that disadvantaged communities can benefit from these funds.

The Inflation Reduction Act will reshape transportation, leading to cleaner air and healthier communities. State and local governments will be able to leverage investments in EVs and in clean heavy-duty vehicles, ports, and air to protect seniors, children, communities of color,⁵² and other vulnerable residents from pollution while saving families money on transportation.

The Inflation Reduction Act builds on the EV infrastructure investments within the IIJA by supporting families who choose to purchase an EV. By extending EV tax credits—for both new and used cars—the Inflation Reduction Act and infrastructure build-out within the IIJA will catalyze the EV market, moving EVs from 2 percent of all light-duty vehicles (LDVs) sold in 2020 to up to 52 percent of all LDVs sold by 2031, according to a Rhodium Group study.⁵³ Already, states are working closely with the federal government through the National Electric Vehicle Infrastructure⁵⁴ program to leverage significant IIJA funding⁵⁵ for EV infrastructure.

The Inflation Reduction Act offers renewed resources for municipalities seeking to invest in clean transportation, and cities and states will play a vital role in implementation via their planning, grant-making, and transit authorities.

The Inflation Reduction Act, with its policy priorities and the significant funding that it provides, is a game-changer for climate action in the United States. Additionally, because state and local governments are closely linked to their communities and constituents, they will play an outsize role in the implementation of the legislation.

Planning, siting, and permitting authorities at the state and local levels can help guide and shape development, protecting low-income communities from the effects of highways, bus depots, warehouses, and other transportation facilities. Partnerships with communities will be critical for realizing the full power of federal funding, especially when it comes to certain rebates that are not directly routed through state and city governments with established relationships with community partners. State and local governments should support education and technical assistance for low-income communities to ensure these dollars are fully utilized.

States and cities will play a critical role—perhaps the critical role—in delivering the full potential of this bill. The federal government should welcome the opportunity to fully empower state and local jurisdictions in the fight against climate change. By taking full advantage of the provisions within the legislation, states and cities will be able to raise the ambition of their own climate commitments and policies while providing tangible benefits for their constituents.

The Inflation Reduction Act is about to transform America. Governors, state legislators, mayors, and more must lead the way to help communities benefit from the tailwinds it provides.

The authors would like to thank Sally Hardin, Shannon Baker-Branstetter, Cathleen Kelly, Mike Williams, Ryan Richards, and Molly Freed for their contributions.

* Correction, August 25, 2022: This report has been updated to accurately reflect that the U.S. secretary of agriculture may waive nonfederal cost-sharing requirements for forestry conservation programs on a case-by-case basis.