The Inflation Reduction Act Reduces Emissions and Income Inequality

February marked the two-year anniversary of President Joe Biden’s commitment to act on climate and environmental justice¹—and specifically, to allocate federal resources to meet equity objectives. The passage of the 2021 bipartisan infrastructure law² and the 2022 Inflation Reduction Act³ provided opportunities to act on that commitment to equity. In fact, a key insight driving many of the Inflation Reduction Act’s investments is that federal dollars go a lot further in places that have experienced underinvestment in the private market—often due to historical and ongoing racial discrimination—including low-income and disadvantaged communities that face the greatest effects of climate change.⁴

Identifying and filling in the investment gaps with a targeted approach, rather than a universal one that blindly invests the same amount everywhere regardless of need or impact, is an effective use of federal funds to accelerate the deployment of zero-emission solutions and increase economic activity, especially in low-income or underserved communities. The climate programs described in this issue brief are examples of federal investments purposefully designed to serve the households and communities that need them most.

New programs incentivize low-cost solar for low-income communities

Targeted tax credits

For the first time, solar developers have a federal incentive to develop projects that serve low-income communities and households in the United States. The 48(e) bonus tax credit provides up to a 10–20 percent bonus for solar, wind, and storage facilities that are placed in “low-income communities” or on “Indian land,”⁵ or that benefit low-income residents.⁶ These projects can include community solar projects, which can help both homeowners and renters save money on their electric bills.

In addition to this bonus, renewable energy developers have an incentive to pay higher wages to workers on these projects, qualifying the developers for the prevailing wage bonus⁷ under the investment tax credit for solar and other renewable energy for projects larger than 1 megawatt. Qualified projects that pay prevailing wages and hire apprentices to do at least 15 percent of the work can get discounts five times higher than projects that do not—a 30 percent tax credit instead of the minimum 6 percent tax credit.⁸ Incentivizing higher wages and apprenticeships is an accelerant for economic mobility because apprenticeships are the training pathways into good jobs that pay a prevailing wage. Apprenticeships are more diverse⁹ than the overall workforce pool, including more women and workers of color, so their increased use can increase equity in the workforce as well. In summary, the Inflation Reduction Act’s new tax credit structure incentivizes well-paying jobs and decreases costs for developers and households benefiting from lower-cost renewable energy.

Although the prevailing wage incentive is not explicitly tied to hiring workers from low-income communities, the combined savings available through the prevailing wage incentive and low-income bonus can encourage developers to access both credits together, providing a double benefit of well-paying jobs and affordable clean energy in low-income communities. Communities interested in hosting or building community solar projects can work with solar developers to adopt community benefits agreements¹⁰ that include local hiring to gain community support, which can speed up the permitting process.

Greenhouse Gas Reduction Fund (Clean Energy Accelerator)

Another source of funding for community and rooftop solar is a new program known formally as the Greenhouse Gas Reduction Fund¹¹ and informally as the Clean Energy Accelerator. The Clean Energy Accelerator carves out a minimum of $15 billion for investments in low-income and disadvantaged communities, including at least $7 billion prioritized for residential and community solar projects.¹² This $7 billion could provide the capital to support the deployment of 10 gigawatts of solar and could directly benefit up to 2 million low-income and disadvantaged households.¹³ The actual number of households served will depend on a variety of factors, particularly the ability of states and other eligible entities to leverage other sources of funding, such as tax credits, electricity savings, or other state or local incentives. To the extent that other funding can reduce the amount of support this program needs, it is possible that far more than 2 million households could benefit.

Community and rooftop solar can provide the triple win of saving money on energy bills, creating local jobs, and decreasing pollution, and the new incentives in the Inflation Reduction Act can work to bring more of these benefits to low-income communities.

Weatherizing homes and upgrading to electric appliances will save households money and improve comfort and health

Low-income households are three times¹⁴ more likely to be at risk of a utility shut-off or finding their energy bills unaffordable than are wealthier households, and they are also more likely to face climate-related impacts. To address energy insecurity and pollution from home energy use, the Inflation Reduction Act provides $4.5 billion for grants to states and Tribes to use for upfront, point-of-sale rebates for home electrification for low- and moderate-income households.¹⁵ Qualified appliances and upgrades include purchase and installation of heat-pump heating, ventilation, and air conditioning (HVAC) systems, water heaters, and clothes dryers; electric stoves and cooktops; weatherization and insulation; and electric wiring and circuit panels. Households that make less than 80 percent of area median income¹⁶ can receive free electric appliances and upgrades up to $14,000. Households that make from 80 percent to 150 percent of area median income are eligible for 50 percent savings on covered appliances and upgrades, also up to $14,000. For owners of multifamily housing units, rebates are available if a majority of residents would qualify for them.¹⁷

Table 2 shows some of the rebates available.

Analysis from Rewiring America¹⁸ shows that “45.6 million (or 85.6 percent) of low-to-moderate income (LMI) households would save $17.2 billion on their energy bills each year, just by replacing their furnace and hot water heater with efficient, electric alternatives.” The 64.9 million households using electric resistance, fuel oil, or propane see average savings of $496 per year. When combined with weatherization and insulation, savings are even higher. In addition to lower energy bills, better-insulated and more efficient HVAC systems can improve homes’ comfort and indoor air quality. Electric heat pumps are a climate win too: Switching to electric heat pumps would reduce carbon emissions in every state.¹⁹ These rebates would enable progress on the United States’ carbon reduction goals while yielding energy savings, improving comfort, and reducing indoor air pollution in low-income households.

Inflation Reduction Act investments will help lower transportation costs

Discounts on preowned electric vehicles

Gasoline costs are a heavy financial burden for low-income households—especially those earning less than $20,800 per year, which spend an average of 18.3 percent of their income on gasoline, according to an analysis from the American Council for an Energy-Efficient Economy.²⁰ This disproportionate burden is due to several factors, including inefficient vehicles and longer driving distances. Most people, especially low-income drivers, buy used vehicles, and for the first time, the Inflation Reduction Act created a new tax credit to provide a discount of up to $4,000 on a qualifying preowned²¹ or used electric vehicle. This discount is reserved for low- and moderate-income households earning up to $150,000 for joint filers and $75,000 for single filers. Starting in 2024, the credit will be transferable, allowing buyers to benefit from it at the time of purchase rather than when filing their taxes; this will make the credit more accessible for low-income households with limited access to reasonably priced financing. Households able to take advantage of the tax credit will have access to double savings–both on their vehicle purchase and through the monthly and annual savings electric vehicles offer. Compared to equivalent gasoline-powered vehicles, electric vehicles can save between $900 and $3,000 per year²² on maintenance and fueling costs, depending on gas prices and the type of vehicle.

Neighborhood access and equity

The historical practice of building highways and major roadways that bisect low-income communities of color²³ has been disastrous for these communities, increasing their exposure to deadly vehicle exhaust through forced proximity and creating a built environment that systematically cuts off residents’ access to jobs, schools, and essential services. The lack of mobility and transportation access has far-reaching effects,²⁴ including harm to physical health and limited educational and employment opportunities. A recent study²⁵ mapping social vulnerability, walkability, and transit access found that although walkable and transit-accessible neighborhoods offer numerous health, social, and economic benefits, they are becoming increasingly exclusive and there is “significant variability in both the availability and equity in accessibility of these neighborhoods to [socially vulnerable] populations.” A growing shortage of affordable housing in transit-rich neighborhoods can force low-income families to travel farther to reach employment and services and face higher transportation costs.²⁶

To address these inequalities, the new neighborhood access and equity²⁷ program created by the Inflation Reduction Act provides $3 billion to increase access to mobility that is safe, affordable, and equitable, while also increasing resilience against flooding, extreme heat, and other pollution and climate-related impacts. It specifically provides $1.3 billion for grants to economically disadvantaged or underserved communities. Safe, walkable²⁸ neighborhoods with “complete streets”²⁹ and good transit options are in high demand. This demand often translates into higher rents and more market-rate housing, which can push out low-income and working families. State and local governments need to have plans in place and take an intentional approach³⁰ to avoid such displacement. With that goal in mind, the neighborhood access and equity grants require applicants to demonstrate an anti-displacement policy, a community land trust³¹ or community advisory board, a plan for employing local residents, and a community benefits agreement with representatives of the community. These grants can increase community wealth, health, and mobility in areas facing persistent low wages and isolation by lowering transportation costs³² and improving safety, making it easier for workers to access employment centers and services and helping small, local businesses grow.

Other targeted investments will improve public health and increase community resilience

In addition to considering income, many of the Inflation Reduction Act’s directed investments are logically tailored to reduce local air pollution³³ where environmental harms are most concentrated. Communities that have been historically underserved or that are currently in nonattainment with air pollution standards are eligible for competitive funding³⁴ to help replace school buses, port equipment, heavy-duty trucks, and other sources of harmful air pollution with cleaner, primarily electric technologies. In addition, Environmental and Climate Justice Block Grants³⁵ will be available to disadvantaged communities for community-led projects that monitor and reduce pollution and increase resilience in the face of health and other climate change risks.

The ‘Inequality’ Reduction Act?

The Inflation Reduction Act takes historic steps toward addressing the systemic inequities that have put low-income communities and communities of color at the forefront of environmental burden and harm. However, delivering benefits to households and communities that have been left behind is no easy feat. Implementing agencies must work closely with stakeholders to turn this legislation into tangible action and benefits for disadvantaged communities. Federal, state, and local agencies, as well as congressional appropriators, philanthropy, community groups, other nonprofits, and businesses, all have a critical role to play in successfully implementing the opportunities of the law.

For each of the programs highlighted above, federal agencies have already asked—or will ask—for information and feedback from the public and affected stakeholders, and they will continue to refine these programs as needed to improve efficacy. Success will depend on meaningful engagement with affected people and organizations closest to the communities served, and now is the time to learn from local insight and diverse stakeholders to support smooth and effective implementation. If implemented correctly, these programs will deliver renewable energy, weatherized homes, and zero-emission mobility, while realizing the benefits of well-paying jobs, economic development, and improved public health for communities that could benefit the most.

Maybe it is just as well that the Inflation Reduction Act is an obscure name³⁶ now; in 10 years, a more fitting name, one that matches the law’s impact, may be the Inequality Reduction Act. One piece of legislation with targeted investments is not going to rectify economic disparities in the United States single-handedly, but if the Inflation Reduction Act’s targeted incentives and rebates become part of a longer-term trend and are incorporated into business and government decision-making, there likely will be a shift in where the infrastructure of opportunity is built, and more families will have the economic freedom to thrive, save money, and build wealth.

Conclusion

Poverty and climate change are inextricably linked, and unless economic inequality and greenhouse gas emissions are simultaneously addressed, climate change impacts likely will deepen existing economic and health inequalities. Wealth inequality is part of a negative feedback loop wherein inequality has enabled wealthy nations and corporations to emit unsustainable levels of greenhouse gases and other pollution that hit the poorest communities and nations the hardest.³⁷ These disparities will only worsen as harms from climate change become more deadly and disastrous. Because income and race contribute to health disparities and climate vulnerability,³⁸ taking action to get the most vulnerable individuals to higher ground is both a figurative and a literal imperative. Fortunately, key elements of the Inflation Reduction Act that will take effect throughout 2023 provide hope that change is afoot to reduce the impacts of climate change, local pollution, and economic inequality in the United States.

The authors would like to thank Jarvis Holliday, Keenan Alexander, Leo Banks, and Jasia Smith for their contributions.