Catalyst with Shayle Kann - What the Inflation Reduction Act of 2022 would mean for climatetech

Episode Date: August 5, 2022

The $369 billion climate and tax bill from Sen. Joe Manchin III and Senate Majority Leader Chuck Schumer caught everyone by surprise. Democrats had abandoned their climate legislation last month after Manchin, a must-have vote for Democrats, signaled his opposition to it. But late last week Manchin and Schumer announced they had revived the deal under a new name – The Inflation Reduction Act of 2022. If passed, it would be the most ambitious climate action in U.S. history. And now with support from another key swing vote, Sen. Kyrsten Sinema, the bill is an important step closer to passage. So what would the bill do? In this episode, Shayle talks to Princeton professor Jesse Jenkins. Jesse leads the REPEAT Project, which analyzed the effects of the bill in a report released today. Overall, the bill would make clean energy cheaper and build up the capacity of climatetech industries in the U.S. and its allies across multiple sectors of the economy, including power, transportation, heavy industry and buildings.  Shayle and Jesse walk through the key provisions in the proposed legislation and their predicted impacts, including: Hundreds of new gigawatts of solar and wind capacity, plus new technology-neutral tax credits to support other technologies such as advanced nuclear Building up a North American supply chain for electric vehicles (EVs) Reducing the costs of EVs, sustainable aviation fuels, energy storage, hydrogen and more Increased energy security for medium- and low-income households, such as installing heat pumps and insulation Catalyst is supported by Antenna Group. For 25 years, Antenna has partnered with leading clean-economy innovators to build their brands and accelerate business growth. If you're a startup, investor, enterprise, or innovation ecosystem that's creating positive change, Antenna is ready to power your impact. Visit antennagroup.com to learn more. Solar Power International and Energy Storage International are returning in-person this year as part of RE+. Come join everyone in Anaheim for the largest, B2B clean energy event in North America. Catalyst listeners can receive 15% off a full conference, non-member pass using promo code CANARY15. Register here.

from the studios of PostScript Media and Canary Media. I'm Shale Khan, and this is Catalyst. So you're saying it's a net gigatone reduction relative to business as usual. So this is the net gigaton bill. We just coined this. I haven't seen anybody else say that. Yeah, that's right. Gigatone one.

Gigatone one. It's so good. The Inflation Reduction Act is by far, without question, the most important climate bill. ever to have come near passage in the United States. It's more than 700 pages of policy wonkery with wide-reaching market impacts across basically every sector we've ever talked about on this podcast. How could we possibly not talk about it?

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They're shaped by markets, by policy, by capital, and by the institutions that connect them. I'm Alfred Johnson, CEO of Crux, and host of a brand new podcast, Critical Capital. Each episode, I talk with people deploying capital, shaping policy and building the clean economy. Tune in as we unpack how progress is actually made. Listen to Critical Capital on Spotify, Apple, or wherever you get your podcasts. I'm Shale Khan. I'm a partner at the venture capital firm Energy Impact Partners. Welcome. So when the stimulus bill that emerged out of the weight, of the 2008 recession was passed, it was a seminal moment for climate tech in the United States,

that we didn't call it climate tech yet. I think it's pretty easy to make the case that most of what we see today in this space, certainly in the case of renewables at least, would not exist, at least not at the current scale, had that bill not deployed billions of dollars across an array of technologies and allowed billions more in tax credits for others. And there is absolutely no question in my mind that the Inflation Reduction Act, should it pass, noting that I am recording this before we know whether it will or not for sure, will be the same, but on steroids. There's just so much in there. Every time I look at it, I find something new. When the text of the bill was released last week, I spent the evening, that evening, control effing for basically all the things that I spend time on, and I found something in there for basically every search. It's kind of hard to fathom how transformative this bill would actually be, but let's, Try to fathom it. Or rather, let's let Jesse Jenkins of Princeton and the Repeat Project, whose team of rapid response wonks just published an analysis of the bill's impacts,

tell us how to fathom it. Here's Jesse. Jesse, welcome back to Catalyst. Hey, it's good to be here again. Happy to have you back. I'm sure this is an extremely busy week. I don't know, who knows how long it's been at this point for you. Yeah, I was supposed to be on vacation for the two previous weeks, and I left for the that vacation feeling an incredible sense of doom and despair at our total failure, and then came back from vacation, having helped rescue this thing from the jaws of death and feeling quite elated that we're still alive and close to the finish line. So it's been an eventful a few weeks.

Yeah, well, let's talk about how close to the finish line we are. So we're recording this in the afternoon Eastern time on Thursday, which is not normally something that I say when recording these episodes, but timeliness is important here. So we're recording Thursday afternoon. We'll probably release this on Friday. So just give us the 30 second here's where we are in the process and kind of what's left to be determined as of this moment. Yeah. So last Wednesday, I believe, so just over a week ago, Senator Manson and Leader Schumer announced a surprise deal that they had struck to revive the Senate Democrats' push for a budget reconciliation bill this year before.

the midterms and the August recess, and that that bill would include, as the previous Build Back Better Act that passed the House last November, had a substantial investment package for clean energy, clean energy supply chains and manufacturing and emissions reductions. And so in the last week, we've seen all of the members starting to pour over what's in the bill, along with analysts like myself and our repeat project, which has been assessing the impact of federal legislation in as close to real time as we can. And just this morning, we released our initial analysis of the impacts of that bill. I'm pretty proud of got that done in the course of one week.

But the bill is now basically being under review and challenge from the GOP on parliamentary procedural grounds. So it's, you know, this arcane process by which the Senate has effectively arbitrarily decided that the only thing that can proceed without subject to filibuster, is budgetary bills, which are focused on spending and tax revenue or revenues of some sort. And so the parliamentarian has to, which is the Senate ruleskeeper, has to review every line of the bill and make sure that it is all germane and consistent with the Budget Control Act of 1990 something, which is also known as the Bird Bath, because these provisions are written by Senator Bird of West Virginia, B-Y-R-D. So it's undergoing the Bird Bath at the moment. what that means is that the Republicans are challenging almost every provision in the bill in an effort to slow things down as much as possible and potentially strike some provisions that are part of the careful negotiations that led us to this point as being not germane to budgetary policy. I think that it's likely to survive that fairly well, hopefully unscathed. This bill from the beginning was designed to be a budget reconciliation bill.

The Senate Finance Committee and House Ways and Means and others have known that from the very beginning. and they've designed the policies with that in mind. And so I think it's just going to be a long, arduous, annoying, frustrating process that hopefully sometime on Saturday will conclude is what I'm hearing now, which means that that will commence 20 hours of scheduled debate. The debate is limited, time limited. That's part of the benefit of reconciliation is you don't have to vote to end debate. That's the part that Republicans or whoever's in the minority usually filibusters, which requires

60 votes to close debate. this budget reconciliation bills always have a fixed time period for debate, and so that it'll be 20 hours, and everybody will take to the floor over the weekend. And then there's a process called voterama, where a bunch of amendments are offered without debate, one after another, by Republicans, again, in an effort to make Democrats vote for things that they think will make them politically uncomfortable, and that, you know, they can put in messaging ads in the midterms or whatever else. And hopefully Senate Democrats walk to the floor, arm in arm, and set. there for a day and vote no over and over and over and over again, and then the bill will proceed to an up or down vote. Probably Monday or Tuesday next week, maybe Sunday night, if things go optimistically fast. So we're in the final days here for Senate passage, and then it'll go over to the House, and I don't know how quickly they're planning to vote.

Could be they vote later the same day on a simple up or down if the caucus is all with it. If there's further discussion to be had, it may take a few more days, hopefully done by the end of next week. I really hope this is done soon for everyone's sake. Yeah. So then the other thing you hear about happening and you see sort of news articles about this is sort of furious lobbying from various groups, some groups just saying to kill the bill, but others saying they want changes to it. So you've seen auto OEMs lobbying to make changes to some of the provisions we'll talk about later. You've heard about Kirsten Cinema, the senator from Arizona, talking about changes that she might want to make. Presumably, the second anything starts changing.

it delays that timeline. Is that not true? I don't know how exactly the procedure will work there. I assume that the parliamentary review will only have to occur for whatever changes are made, and those may be fairly straightforward when it comes to the parliamentarian. The question is, you know, what changes can be made while still holding together all 50 members of the Democratic Senate caucus? You know, they can't afford to lose a single one, so every change has to be unanimous amongst the Democratic caucus.

And so I think it's the careful negotiations that are going to be required there to get this done. You know, most members, I think, are fully on board and ready to get this passed. And, you know, Kristen Sinema is the sort of remaining holdout with, you know, the odd decision to try to go to bat for hedge fund managers and, you know, super wealthy to try to protect their carried interest loophole. That's your capitalist, by the way, also. I'll say I will happily trade away my carried interests in exchange for this bill for what is worth. Thank you. Just as I happily traded away my salt tax deduction increase in New Jersey, as I was glad Senator Menendez dropped his concerns there. So we're getting there. I think people are going to have to make some final deals. And the good news from the climate package perspective is

the cinema's concerns are entirely on the revenue side. She is supportive of the climate package. In fact, wants to see allegedly more money put in for drought relief for the southwest to try to address the impacts of climate change in the region. And so I don't think there will be any changes that she drives to the climate and clean energy investment package. It'll be a question of, you know, what does it do to the revenues? And if they need to add some alternative revenue raising, if she weakens the carried interest provision. Okay. So let's caveat, given all of that, that things may change in the bill by the time anybody listens to this. It may be dead. You know, hopefully that's not the case.

That could be true, too. But what we want to do right now is just let's assume that its current form is the final form and that this bill actually does pass. We want to talk about what we will speculate with some meaningful evidence that you and your team at the repeat project have put together around what this is actually going to do in various sectors of the economy because this is a broad-reaching bill. It has, I think, clearly massive impacts across a variety of different sectors. big impacts on emissions. So I want to dig into it. And there's my my my challenge is I've at least

skimmed through most of these 700 pages of the bill. There's too many things to talk about the time that we've got right now. So we're going to try to organize our thinking at least a little bit along the major sectors of the economy that are big contributors to green house gas emissions and then talk about how each of them might be transformed as a result of this bill. Before we do that, though, give us the headlines, just the bullet points of like, what is you? your analysis of what this will do to overall emissions in the United States and financially to the country? So our top line finding from the repeat project analysis of the bill is that it will cut annual U.S. greenhouse gas emissions in 2030 by an additional roughly one billion metric tons

below the current policy baseline. So an additional billion tons of emissions reductions in 2030, which is enough to close not all but about two-thirds of the remaining gap between where we project current policies will take us and where we need to be in 2030 to hit our national climate commitments to reduce emissions to at least 50% below our peak levels that were reached in 2005. So it gets about two-thirds of the work done on its own. And it does that work primarily by making clean energy cheap. It subsidizes through grants, rebates, loan programs, loan guarantees, and most importantly, a robust package of tax incentives that touch, basically every sector of the economy, every major emitting sector of the economy, and instantly

make all of the clean energy and climate solutions that we need much cheaper for businesses, households, industry, utilities, governments to adopt. And so that's really important to note because our modeling doesn't account for any of the follow-on action that this bill could spur and make much easier. But by making clean energy cheaper and driving down the cost of adopting clean energy and other climate solutions across the country, it wouldn't be too, you know, a betting person would probably predict that this is going to make it a lot easier for executive agencies, state and local governments, private sector leaders, whomever, to increase their ambitions at their level of action and help close that remaining half a billion ton gap that we need

to close through 2030. So it's going to big impact both itself on, you know, driving emissions reductions as our modeling indicates. And I also think driving dynamic follow-on action by directly reducing the cost with subsidies. And also, as we know, these policies are very effective at driving down the real cost of these technologies through innovation, manufacturing, scale up, economies of scale, and learning by doing over time. And so the bill is really structured around a set of tax credits that look a lot like the investment tax credit and production tax credit that helped, along with policies in other countries, drive the cost of solar power down by about nine 90% since 2009, and wind power down by about 70% since 2009. And so it's likely to have a

transformative impact on the pace of cost declines for a whole range of these solutions as well. That helps spill over to the rest of the world, making it cheaper for climate action everywhere, not just in the United States. And that's going to have a huge impact down the line as well. Yeah, my first reaction upon reading through most of the bill was basically what you just described, which is I was thinking through, you know, I spent all this time looking at different technologies that are trying to decarbonize something or other. And at the end of the day, most of the questions we have to ask are like, who needs to buy this thing? So who is it who needs to decarbonize and what are they going to have to spend to do it? And I was thinking through all

of those who need to decarbonize from individuals to businesses, to utilities, to corporates, to manufacturers. And kind of no matter who, to airlines, kind of no matter who you are, the clear result of this bill is that if you intend to decarbonize, it's going to be cheaper for you to do so. If you didn't intend to decarbonize, you may now want to anyway because it will be cheaper for you to do so depending on the situation. Also, I like that it's, this is, so you're saying it's a net gigaton reduction relative to business as usual. So this is the net gigaton bill. We just coined this. I haven't seen anybody else say that. Yeah, that's right. Gigatone one. Gigaton one. Oh, that's so good. Okay. So that's a high level. Let's talk through sectors and impacts.

So power sector to start, obviously still, you know, the second largest contributor to emissions in the United States recently surpassed by transportation. And the one that sort of most clearly gets transformed in part because, you know, a massive portion of the tax credits go toward things that are going to apply in the power sector. I don't even know where to start with the power sector, but tell me what your, what are the high-level conclusions on what's going to happen in the power sector over the next decade or so of this bill passes? Yeah, so you're right that our modeling finds that accelerating the deployment of clean electricity, a trend that, of course, is already well underway, but gets sort of supercharged by the incentives in this bill, will drive the largest chunk of the overall emissions reductions, just over a third of all of the emissions reductions that we model. About 360 million tons, you know, plus or minus 100 million tons. Don't read too much into the precision of these results.

But, you know, definitely order of magnitude the largest of the emissions reductions across sectors. The way it does that, as I mentioned, is primarily with a set of very robust tax incentives. And so, you know, your listeners are probably familiar with the wind production tax credit and the investment tax credit that has helped propel the solar industry on an often on again fashion over the last couple of decades, right? We have, you know, a year of extension, and then it expires at the last minute, and then it, you know, comes back and then it's, you know, last minute renewal. and it's just been this totally sporadic, really terrible way to do policy from a business investment perspective, right? You don't know what you can count on a year or two from now. That changes dramatically with this bill because it provides a long-term extension and renewal back to the full original value of those tax credits for the production tax credit and investment tax credit.

And after 2024, so starting in 2025, those credits give way to a simpler new, technology-neutral set of credits for all carbon-free electricity generation technologies. So you don't need to be on the specific list of technologies that are in the tax code under the existing PTC or ITC. And any carbon-free generation technology can choose to elect either the PTC or the ITC. So in the past, for example, solar has only had available the investment tax credit and not the production tax credit. Now, any technology can choose. whichever makes more financial sense for them. Do you want 30% of your investment cost taken up front by the investment tax credit,

or do you want a subsidy of $26 per megawatt hour in current dollars, and that's inflation adjusted, for the first 10 years of generation from your project? Both credits also have a bonus tax structure. I should say one note, that the full value of those credits, 30% and $26 per megawattar is contingent on meeting prevailing wage requirements. That's new in the bill as well. Which is also true of a few other of the tax credits that we'll talk about, and we talk about hydrogen, things like that. Let's just posit that we're going to be assuming prevailing wage for everything that we talk about.

So we'll talk about the full value of credits rather than having to over and over again say, well, it would be 6% if it's not prevailing wage. Yeah. So just in general, throughout all the tax credits, if you meet prevailing wage requirements in your region, which does have some paperwork and things required that developers will have to deal with, but does also help ensure that clean energy jobs, are truly good-paying jobs that we can, you know, see real economic opportunity in. And I think that has important political implications for the durability of this transition. So put the other side, if you meet prevailing wage, you get the full value. If you don't, you only get one-fifth of the value of all of these credits. So put that in the back of your mind.

We'll assume prevailing wage for the rest of it, as you said. There are, however, on top of that, bonus tax credits, two different options that increase the value of the production tax credit by 10% each. $2.60 of additional subsidy per megawatt hour, and 10 percentage points for the investment tax credit. So that takes it to 40 to 50 percent if you get one or both of the credits. And those credits are available for two things. One is meeting domestic content requirements. So if you source all of the steel and aluminum and cement from within the United States

and a majority of the manufactured product for your wind or solar or nuclear or other carbon-free project, thermal, whatever it is, from within the United States, you get that 10% or 10 percentage point increase in the PTC or ITC. So all of a sudden, you know, whatever higher cost there might have been, which is according to research that Aaron Mayfield and I have published last year, fairly small for solar and, you know, fairly negligible entirely for wind, given the high cost of transporting, you know, turbines around the world. Whatever premium there is for domestic production, the government's going to cover 10% a 10% premium. And so that, I think, is going to drive a lot of investment in U.S. supply chains.

And then the second bonus is for investment in energy communities. That's defined in the bill as communities that have traditionally had a high share of employment in fossil energy resource extraction, transport, or processing. Or specifically, census tracks or neighboring census tracks to these ones, where a coal plant has closed or a coal mine has closed in the last decade or two. So this is designed to, you know, do accelerate the sort of just transition to ensure that investments are made in the communities that have traditionally been producing energy for the country and that will now have a strong economic stake in the new energy economy. Our estimates are that that provision and a few others sprinkled throughout the bill that

will help drive investment into energy communities will support several hundred billion dollars, probably at least $200 billion of investment in energy communities across the United States between now and 2030. So that's a huge, huge, huge economic. economic driver for some of those communities. And so both of those credits are there really to help shape where clean energy investment and development occurs and what types of, you know, where they source their goods and materials from in the United States. So I want to just level set around the order of magnitude of the impact that you're describing here. So in 2020 in the U.S., we installed, I think, about a little under 30 gigawatts of total new capacity, electricity generating capacity,

of which the majority was wind and solar, like 15 gigawatts a wind, 10 gigawatts of solar, 30 gigawatts or so in total, the remainder being new natural gas, right? This is the peak years in what you guys are modeling, so this is the high end of it, but just to give a sense of what we're talking about, the projection for 2031 and 232, presumably this is two years combined, so divide this in half, is that we would add 129 gigawatts, of solar. Those are annual numbers. Those are annual numbers.

That's the average over those two years. Okay, the average. Great. Even more so. 129 gigawatts of solar, 31 gigawatts of wind, 13 gigawatts of new natural gas combustion with carbon capture attached to, which we'll come back to. Some additional new natural gas that does not have carbon capture, interestingly

enough, and then like a tiny little bit of coal with carbon capture, actually. So there's a bunch to unpack there. But first of all, the magnitude of the solar and wind capacity additions is like staggering. And so I guess to what extent do you think that is realistic in the bounds of reality with transmission, with land constraints, with intermittency, all that kind of stuff? Like, presumably this model accounts for a lot of that. Are we going to be building 130 gigawatts a year of solar in a decade? I mean, we certainly could be. you know, China is. We have the land for it. We have the financial capital for it. And so what our

modeling does is it really addresses all of the economic challenges there. So it is optimizing across the energy economy, electricity and other sectors. It includes all the intermittency challenges with hourly resolution for a number of, you know, 24-hour periods so we can capture the, you know, declining marginal value of wind and solar, which we've talked about before when I've appeared. and we can capture the sort of reliability implications of high shares of variable renewables. And we have done probably the most detailed analysis that anybody has yet for where you can build wind and solar potentially across the country, accounting for land use restrictions, geographic mountains and ranges and things like that that that make transmission routing challenging wetlands, things like that. And limiting the maximum density in inverse proportion to population,

across counties across the United States. And so we have costed out the transmission interconnection from each of those sites to demand centers that's implicitly included in the cost of new wind and solar in our model. And then we explicitly model the long distance in a regional transmission as well. So I think we're fairly well capturing

the availability of land, the cost of developing projects that are further and further out as you take on the best projects close to demand centers first and the intermittency in reliability-related challenges that go along with managing the grid. The things we can't capture well, and we have a big disclaimer in the report, slapped on the graphic on this,

which are important, are the sort of non-financial barriers to deployment of wind, solar, and supporting transmission at that pace and scale. And these are really important. So that can include things like permitting timelines for transmission lines in particular, but also wind and solar.

On the CO2 side, that can include things, like, again, permitting CO2 storage basins and building out the transportation network that goes along with that. And so what we, you know, the way I interpret what this model is telling us is that the Investment, sorry, the Inflation Reduction Act establishes strong financial incentives. It just makes it good business sense to build capacity at the modeled pace. So it makes the investment community want to get behind the pace and scale of clean energy deployment that we need. Now, that's necessary, but not sufficient.

And so a bunch of other non-cost-related barriers will also have to be addressed. That said, there is some progress being made in this bill and in the infrastructure bill that passed last year to address some of those, including reforms to transmission siting and funding for CO2 transport and storage in the infrastructure bill. There's funding to expedite the National Environmental Policy Act review process across all of the various permitting agencies in this. bill. And there are transmission investment and funding provisions in both bills, although the investment tax credit for transmission fell out of the bill from the House version to this version. So a lot of things that are underway as well as apparently a deal struck by Senator Manchin as part of securing his support for the bill, for the Senate to take up on a, well, have to be a bipartisan fashion in the fall, a separate permitting reform bill for energy infrastructure, all of it, including

fossil energy development, which is, of course, where Senator Mansion is focused, but also carbon capture, hydrogen pipelines, transmission lines, offshore wind sighting, all the kinds of things that we're looking at building in the energy transition as well. So, yeah, will we get there? I'm not sure, but the financial incentives are there. And I do think that that, whatever else happens, increases the demand across various constituencies to solve these problems, right? To bring down those barriers because there's billions of dollars of money to be made and billions of dollars of savings and cheaper electricity to be had if we can bring those barriers down. Virtual power plants are becoming a reliable way for utilities to manage capacity, but enrolling

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See what that looks like at energy hub.com. We're living through a profound economic shift, and energy sits at the center of all of it. Trillions of dollars are flowing into power plants, transmission lines, battery factories, data centers, but the future of energy isn't shaped by technology alone. It's shaped by markets, by policy, by capital, and by the institutions that connect them. I'm Alfred Johnson, CEO of Crux, the capital platform for the clean economy. Join me for my brand new show, Critical Capital, as I talk with people deploying capital, shaping policy and building projects.

Together, we unpack how risk is priced, how incentives are structured, and how progress is actually made. Listen to critical capital on Spotify, Apple, or wherever you get your podcasts. Right. The other component that's in the bill that I don't think you mentioned there with regard to sort of how do we manage intermittency of building that much wind and solar is that it provides pretty robust incentives for energy storage, for stationary energy storage. We'll talk more about electric vehicles in a second, but, you know, standalone ITC for energy storage, which did not exist before. So it has been true that if you were going to build stationary storage, the only way to get the investment tax credit was to attach it to solar or wind. Now you can build it on its own. Also, some fairly robust manufacturing tax incentives if you're going to build batteries here in the United States.

I mean, there's a bunch in there that supports energy storage as well. Yeah, solar and wind manufacturing also get production tax credit on the manufacturing. side, which goes along with the demand pull from that domestic content bonus incentive on the tax credit side. So, yeah, there's a lot of industrial policy in this bill as well. There are loan programs to retool manufacturing. There is an increase in authority at the DOE loan programs office to support nascent technologies, another $20 billion in loan authority there. There's a new loan program that's set up to specifically help drive investment and transition in energy communities in sort of conventional utilities and utility power generation and in

fossil energy production to retool and to reduce emissions. You know, just all kinds of stuff across this bill to accelerate the clean energy transition. Now, because it's a budgetary bill, most of that has to be about dollars and cents, right? Really. And so there is other work that needs to be done, again, that goes beyond aligning financial incentives and providing loan guarantees and things like that. But there's just as much work as they could do effectively on the, budgetary side in the bill to drive this. I also should add, you know, again, I mentioned that the

tax credit, in addition to being available, as you said now, the investment tax credit for storage, all kinds of storage, you know, because the tax credit transitions to a technology neutral, you know, tax credit for any zero emissions generation, all of the advanced nuclear startups that are moving their way through permitting and into first commercial demonstration will also have access to the production or investment tax credits. So you're a new nuclear project. You're repower a coal plant in an energy community and you source all of your steel from domestic production, et cetera, you know, meet that domestic content requirement, you can get a 50% investment tax credit for your first few projects, right? And that goes through at commence construction by the end of

2032. So we have 10 years of these credits on the books. And that alone is transformative. We've never had beyond the value of the credits. We've never had 10 years of stability in recent memory for any of these tax credits that businesses and industries can plan investments around with some certainty over a long time horizon. Okay, there's a lot more we could talk about the power sector, but in the interest of time, let's talk transportation per second. And let's focus in on the EV tax credits. So this has been much discussed, but there's a lot of nuance to what ultimately ended up in this bill, the tax credits for the purchase of electric vehicles. There's a lot in it, and there's actually a lot of debate around its efficacy, particularly in the near term going on right now.

Senator Stabenow, I think from Michigan, has been trying to make changes to the bill, largely because there's sort of a bunch of caveats around, we're going to get these big tax credits if you buy an EV. They will no longer be capped out by manufacturer as they are today when you hit a certain number of vehicles. They last longer. However, in order to qualify, there's a bunch of rules. So maybe give a quick overview of like how those tax credits are structured.

And let's talk a little bit about like what is it going to mean in terms of how and if people can take advantage of them. Yeah. So your listers probably know that right now there is a federal tax credit of $7,500 for the purchase of an electric vehicle or a plug-in hybrid with a large enough battery. And that is capped, as you said, at I think 200,000 vehicles sold per manufacturer. And so Tesla has already blown through that cap. Ford has as well, Toyota and Hyundai and GM are very close to it. Nissan maybe already passed it. So one by one, these manufacturers are running out of tax credit. And the current policy is that that's it. There's no more tax credit for EVs. So what does this bill do? Well, first of all, let's put aside the personal vehicle tax credit and look on the business side of things because here the bill provides a 30% investment tax

credit for purchase of clean vehicles that includes electric and fuel cell vehicles by any business. So any depreciable property gets a 30% investment tax credit for the purchase of an electric vehicle or a fuel cell vehicle up to $40,000 for medium and heavy-duty vehicles and up to $7,500 for light autos and trucks. So if you're Amazon and you're thinking about electrifying your delivery fleet or your enterprise or Avis and you're thinking about buying EVs for your rental fleet, they all just got way cheaper. And those are not at all tied to domestic content requirements. There is also a extension, a 10-year extension from 2023 through 2023 through 23 for the consumer or personal vehicle tax credit. It is worth up to $7,500 still. However, as you mentioned, it is tied to materials and batteries sourcing requirements now. It was a key concern for Senator Manchin. He said this over and over again in the news that we do not want to provide U.S. taxpayer funding to subsidize batteries made in China for, from Chinese materials or whatever else, you know, wherever else they're sourced from.

He wanted to build up the U.S. industry if we're going to subsidize these technologies. And that's exactly what the bill is trying to do here. You know, there is, I think, a lot of debate right now, as you mentioned in the news and from automakers and others, about how hard these standards are to meet. But directionally, what they do is they basically say half of the credit is tied to meeting a progressively increasing requirement to source a percentage of the value of the minerals. used in the batteries for the vehicle from a that are extracted or processed in a free trade agreement country

or recycled in North America. Can I say extracted and processed? Extracted or processed. Okay, so as an example, the way the lithium supply chain works, right? About half of the lithium in the world comes from hard rock mines

in Western Australia, which we do have a free trade agreement with, but is then sent to China for conversion to lithium chemicals that go into batteries, that would still count, you're saying, because the lithium itself was extracted in Australia. So it's a value-added percentage. So the value-added portion that was extracted of the material itself, extracted in Chile or Australia would count. The value added in the processing step would not.

So it depends on what the gap is between those two. However, starting in 2025, there is a provision that, so the requirement starts at 40% and ramps up to 80% by 2027 of the content of the value of the minerals. However, starting in 2025, and this is the part that I think has gotten a lot of people concerned about how quickly they can meet this, none of the battery, the materials content or the batteries can come from an entity of foreign concern, which is defined in some other bill as basically China, Russia, Iran, North Korea. So mostly China, right? Russia may matter for some of these materials as well.

But it's basically saying none of it can come from China if you want to claim these credits. And so that, I think, has sparked a lot of alarms since it will take some time to retool the supply chain. However, it is, and actually the other half of the credit is tied to the value of the battery components, so the electrode cells, you know, packs that also have to be manufactured or assembled in North America, starting at 50% content going up to 100% by 2029. So let's unpack that a little bit. You know, the ramp up is clearly fast, and the maximum percentage levels are very high, right? Eventually, 100% of the battery for North America, 80% of the materials content from free trade agreement countries or North American countries. That's going to be pretty

hard to meet in the near term. I think some manufacturers will meet it and others will not. And so what will happen in the near term is that some models will have access to this tax credit and others won't. And the way we address that in our modeling is we basically assumed that the industry is already supply constrained, right? It's not about the purchase or demand, right? There is more demand for these vehicles than they can produce. Everybody who's been out there trying to buy an EV knows that there's a huge wait list right now. You have to wait months or even years to get a vehicle right now. And so, you know, industry is, you know, the total volume of vehicles sold is not really going to be affected by whether or not they can claim this credit in the short term. So we just assumed

the trajectory in our modeling follows Bloomberg's Bloomberg New Energy Finances trajectory for the next three years. So no material impact of this bill on near-term sales volume. for EVs. And that over time, investment in the industry supply chain, which has to happen anyway, right, they're already supply constrained. They're already making hundreds of billions of dollars of investments over this next decade to expand EV production manufacturing, batteries, and critical mineral supply chains to support that. What this bill is going to do is make sure a vast majority of that investment is going to go into the United States, North America, and other free trade agreement countries. And so I think we're going to see a big reorientation

of the supply chain. And it's not just this carrot on the demand side in the form of the EV credits. It's also, as I mentioned, this robust industrial policy. So the bill has $30 billion of loan authority in the Advanced Vehicle Technology Manufacturing Program. That's the loan guarantee program that helped Tesla get off the ground back in 2009. That gets a new $30 billion in loan authority to help retool automotive facilities in the U.S. There's $2 billion specifically in grants to retool automotive manufacturing facilities and supply chain component manufacturers to make EV and battery components. And there is a new production tax credit. This was added in the Senate bill as part of this domestic content push with Senator Mansion, a new advanced

manufacturing production tax credit for specifically critical minerals processing. And there's a huge list of the periodic table that qualifies for a 10% production tax credit. So 10% of the cost, of critical minerals processing, and any electrode active materials, in addition, get a 10% manufacturing credit for the cost of manufactured products. And batteries get per kilowatt-hour subsidies for battery pack and cell manufacturing and assembly as well that are worth, according to Bloomberg, about 30% of the cost of an assembled battery pack. Right. It's like $35 a kilowatt hour for sells another $10 a kilowatt hour for modules. So $45 bucks on the order for an assembled pack plus the minerals cost decline. And I should also add, there's the 48C investment manufacturing tax credit,

which can also go into this sector. So a big package of incentives on the demand side and the manufacturing side to ensure that we can build out a robust supply chain for critical minerals processing, battery manufacturing, and EVEASC, assembly in the United States. And so while that may be challenging to meet those standards in the short term, I don't know, I'm pretty confident that when we look back 10 years from now at this bill, in addition to celebrating the emissions reductions, the billion tons or so that it has driven down emissions over that period, I think it's these transformative impacts on our economy and on the scope of employment in the new energy economy across the country that we're going to really look back at as a pivotal moment that this bill really sent us down a different direction as a country, you know, driving. all kinds of manufacturing investments across the U.S. in solar components, in wind components, in batteries and critical minerals, and other advanced manufacturing. Okay.

Let's move on from transportation. Let's talk about carbon management, which is another category where there's interesting stuff in this bill. It increases the 45Q tax credit that we already have in place for carbon capture. But that in and of itself is meaningful because it sort of takes a lot of projects, like, right over the line where they become economic. I want to hear your reaction to where we think that is going to result in carbon capture being the decarbonization solution as opposed to fuel switching. And then it also separates out direct air capture and gives it a much larger tax credit of $180 a ton as compared to, what is it, $85 a ton for point source.

So what does all of your analysis suggest that this does for the world of carbon capture, sequestration, utilization, et cetera? Yeah, I mean, at a high level, what I think that does is it makes carbon capture a truly viable. economic option for the first time outside of areas with very pure CO2 streams. So if you look at the $50 a ton credit and the kinds of investments that are going forward under the current $50 a ton tax credit for carbon capture, it's, you know, ethanol fermenting and gas processing units, ammonia facilities, things with very pure CO2 streams. If the alum cycle, you know, works as planned, you know, it'll also potentially work at $50 a ton. But that's, sort of it. So if you look across heavy industries, the most emitting industries, like cement,

steel blast furnaces, and chemicals refineries and petrochemical refineries, none of those really pencil out at $50 a ton. They do in many locations at $85 a ton. Not everywhere. Not every facility is laid out for this. Not every facility, you know, will this be the best option. Some will want to electrify or fuel switch or do other things. But in many locations across the country that are proximate to a good CO2 storage basin or a pipeline, this will be an economic option to retrofit heavy industry with carbon capture. And so analysis from Rhodium Group estimated that $85 a tonne $45Q credit would spur on the order of 110 million tons of carbon capture across industries by 2030 and even more by 2035. And so we included that in our modeling because we don't explicitly model heavy industries.

And then all the energy supply side stuff that we do optimize, we throw in the credit. And what the model ended up picking was largely a mix of gas and coal power plants with carbon capture. So it's about 6 gigawatts of coal retrofits and about 18 gigawatts of gas power plants, new plants with carbon capture by 2030. And those are because of the higher emitting nature of coal. That's about half and half the remaining, each are about 45 million tons of capture. Now, I wouldn't put too much faith in the split across sectors because we constrain the maximum amount of injection to 200 million tons per year by 2030. I just heard from an analyst that forwarded on a nice piece of analysis. About 85 million tons of CO2 storage projects in advanced development now in the U.S.

And we did some analysis for the Net Zero America study that estimated we could ramp up to no more than a couple hundred million tons in 2030. So we put that constraint on, and that really is constraining in our modeling. So what that says to me is that we don't know exactly who's going to get access first and lock up that injection capacity. But the development of CO2 injection and storage basins will be a rate limiting factor here. If there's more, our model wants to build more. If there's less, it can't build what it wants to here. And the exact split across industries is going to depend on who gets there first,

who's closer to the site, you know, has lower, transportation costs, you know, et cetera, et cetera. So again, on the order of a couple hundred million tons, and I think it's just at a raw level, it makes carbon capture an economic option in the right kinds of, you know, locations with favorable access to CO2 storage across power generation and heavy industry, which is just not the case today. Yeah, you know, one of the things, so my heuristic for heavy industry for things like steel and cement.

So in every one of those cases, you've got emerging competition for decarbonization solutions, one option being attached carbon capture, point source, second option be just pay for direct air capture some other place. But the third option be fuel switch, change your process, use hydrogen, electrified directly, et cetera, et cetera, use biofeed stocks, whatever it might be. And the thing that this bill does, and this is true of heavy industry, I think this is true of power, this is true of a bunch of these sectors, is like it makes all of it cheaper. right? So in the case of heavy industry, it may put carbon capture in the money, but it may also put

hydrogen in the money. It may also put direct electrification in the money. It just makes all of it look more attractive. And so I don't know that it fundamentally changes the equation about the split amongst those things. You could tell me if you feel differently, like something is disproportionately benefited relative to everything else. But it certainly makes choosing one of those options a lot easier. And then there's this complex, as you're alluding to, this complex optimization for a given site, which is, well, do I do carbon capture might be easier if I'm doing a retrofit, but then do I have pipelines and sequestration capacity nearby? Same goes for hydrogen. Like, how do I have access to the hydrogen? And where's it coming from?

Electrification is going to be, you know, site specific and depends on the cost of electricity where you are and your duty cycle and all that kind of stuff. So it's sort of, it's hard to make blanket statements, but it seems to me. that everything benefits. And now you're just still, you're in a better version of the same competition that you were going to be in otherwise. Well, I think this is true

across all the sectors. What it does is it says, look, the clean stuff is the economic stuff. Now fight amongst yourselves. Right. And that's great. That's where we want to be. We want to be in a world

where clean energy is privileged over dirty energy and a range of solutions are available for all of the sectors. And so the same thing is true in the electricity sector, right? Everything gets subsidized except conventional coal and gas plants,

right, you know, dirty polluting power plants. In industry, you're exactly right. There is also a very generous, I had argued in private, potentially a little too generous, honestly, credit for hydrogen production of $3 a kilogram for very low, almost zero emissions, hydrogen from a life cycle basis. So, you know, if you can do electrolysis with, you know, clean electricity, or you can capture nearly 100% of the emissions from another process or do biomass. gasification with CCS, you can get a $3 a kilogram credit.

And that credit is flat through 2032. And that's the part that I think is a little too generous. Because that might be what it takes to get hydrogen off the ground right now. But the cost of hydrogen production are going to go way down over the next decade, in part driven by that early investment in the U.S. and Europe and elsewhere, supported by those policies. And if it still takes $3 a kilogram to subsidize green hydrogen in 2032, we've done something very wrong.

So I think that's going to be a very ample, you know, we might have people selling hydrogen for free by the end of that period, or we may need to revisit the value of that credit to, you know, tighten it back a little bit in the long term. So that makes hydrogen, you know, in our modeling, there's not a lot of demand for it in the 2020 to 2030 period, but after 2030 it explodes. It takes off for liquid fuels and for some industrial processes. Why would that be, by the way? I noticed that. Like, why does the model not create a lot of demand? if the result of the tax credit is that it is quite cheap even today, perhaps not $0 today, but cheap today, why wouldn't the model suggest that there is a lot of demand for it? So the demand in the model is primarily going to be conventional demands in industry right now. And it's actually a good question. We don't see as much fuel switching as I would expect in say ammonia or refiners. I guess the refiners is probably split out.

It's really the only things that we can optimize in ours is ammonia production, and I think we do see some switching there. The refinery demands are set outside the model, and that could be that we get some switchovers from methane reforming to hydrogen in the near term. But we don't see a lot of fuel cell vehicle adoption, you know, given the economics here of EVs. And you don't need hydrogen for clean power or long duration, you know, energy storage in the short term. There isn't as much pressure to decarbonize heating fuel in the near term. as there would be in a net zero framework. So a lot of that, and this is true in the Net Zero America study, a lot of the demand for hydrogen shows up in the 2030s and 2040s.

And so what this tax credit needs to do in this decade isn't necessarily deliver, you know, tens of millions of tons of hydrogen supply. What it needs to do is take the technology down the cost curve so that it can do that in the 2030s. You also mentioned electrification of industrial processes. That's an area. I know we both looked at recently a lot. It's exciting.

I think there's a lot more opportunity out there than a lot of people realize. and the bill will also make that cheaper indirectly by making electricity cheaper, right? So if you can intermittently use wind or solar that is subsidized at $26 a megawatt hour, you know, the levelized cost of a long-term contract if it's non-firm delivery from a wind or solar facility is going to be really low. And that's true for hydrogen electrolysis as well, but it's also true for industrial processes that directly consume electricity in a flexible manner. And so, you know, you could probably get one cent a kilowatt hour contracts.

right, with that kind of environment. And as long as you don't need it 24-7, right, as long as you're okay using it intermittently when the wind or solar are available. And you can blend wind and solar together to create some kind of product that, you know. Or add long-duration battery. I mean, you know, if you don't need the 100% duty cycle,

but you need something close to it, you know, with all of the incentives that are available here. Yeah, you could put a package together. Yeah. Okay, we're short on time and we've covered, I don't know, like one-tenth of the sort. stuff that is in this bill probably. So like, maybe half. I guess let me, fine. What do you think are the most important, most impactful provisions we haven't talked about? Well, let's talk about buildings,

which is the other, you know, major emitting sector that we haven't touched on. And here there's, you know, that's the smallest of the emissions reductions that we see across the sectors between now and 2030. And it's also the one that took a pretty big hit from the House bill to the Senate bill in terms of the trimming down of a number of grant and rebate programs that were designed to facilitate building electrification. But there's still, again, everything gets cheaper. There's still tax credits in here for households and individuals to purchase heat pump water heaters, heat pump heaters, heating and cooling systems, upgrade circuit breakers to handle the higher electric loads, do home energy audits, you know, install energy efficient windows and insulation, all of that.

that is there's a tax credit that is increased from 10% to 30% and extended through 2032. There are annual caps on how much you can claim from that. So it's $1,800 per year for most things, although that goes up to $2,000 for a heat pump or heat pump water heater or a biomass boiler, if you want to do that. And then there's a similar commercial tax deduction, not credit, for efficient building upgrades in commercial buildings. And then for low-income and moderate-income households and communities that don't have a lot of tax liability and may not be able to take advantage of that tax credit, there's also $8.8 billion in direct rebate programs. These are block grants to states to set up programs that will provide rebates for low- and middle-income households to do the same kind of things, whole-house efficiency upgrades, and building electrification installations.

So there is a lot in there. There's some funding for the Defense Production Act, implementation, half a billion dollars for President Biden to make good on his commitment to use the Defense Production Act to boost heat pump manufacturing, as well as critical minerals and batteries. And there's also the Green Bank or Accelerator Program, the Greenhouse Gas Reduction Fund, which is $27 billion that will seed state, local nonprofit programs for green banks to provide financial assistance. Again, primarily over half of that's dedicated to low and medium income communities. communities, low-income communities and disadvantaged communities, that will be leveraged probably 10 or 20-fold, right, as financial equity to underwrite financial assistance for these same kinds of measures in communities. So pollution reduction, greenhouse gas reduction efforts, and deployment of clean generation like rooftop solar in low-income and disadvantaged communities. So that doesn't have a huge impact on emissions. It's about 60 million tons, I think, in our results. That's still meaningful, is 6% of the total. But it's one of those ones, again,

I think it's going to have a catalytic effect on the cost and availability of these kinds of electrification solutions. And it's going to make it much more accessible through those grants and low-income rebate programs to a broader swath of homeowners and renters and owners of low-income, multifamily buildings and other things like that that create a more equitable access to these solutions that not only reduce greenhouse gases, but also improve interior air quality and public health outcomes in environmentally burdened communities. Did your modeling incorporate electricity load, total load impact? I mean, what impact on load growth between vehicle electrification, all this home

building electrification stuff, do you estimate that this bill will have? Which also presumably is part of what's driving so much new electricity capacity expansion. All right. So electricity demand grows by about 29%. So just shy of 30% over the next decade in our modeling. driven primarily by electrification of vehicles and then the secondary effect from building electrification.

So 28, 29, 30% load growth over the next decade. Remember, that's a very big difference from what we've seen over the last couple of decades where electricity demand has effectively been flat. And many of the technology adoption trends that we're talking about are S-curves. So they're non-linear trends. And there's a lot of stock turnover

that slows down the immediate impact of these, you know, trends on total energy demand. So even if 100% of vehicles or heating systems were electrified tomorrow in terms of new sales, the stock turnover takes time to catch up. So beyond 2030, we would expect even more rapid demand growth for electricity. And so that's another game changer from this bill is it puts us on not quite electrify everything, but it certainly puts us on the electrification path in a way that we are not today. And we have to prepare for that too. And you're right, that's what drives a lot of the deployment of renewables.

It's not just there to meet increasing decarbonization needs. It's there to also meet increasing electricity demand. And anybody has heard my talks. That's a consistent theme that the electricity sector has to do double duty. It has to not only cut emissions faster and deeper than any other sector, but it also has to rapidly scale up in the provision of overall electricity to meet the electrification need. Well, it seems like if there was a way to put the industry in a position to do double duty, it would be all the things that are in this bill. We're out of time, have not covered a variety of additional things that are interesting and important in this bill.

We haven't talked about the methane fee, for example, a whole bunch of other things. I think what we'll do is we will have another conversation about it over a beer, maybe on a podcast, if and when it passes. But in the meantime, Jesse, thanks so much for a... walking through some of this early analysis with me. Thanks. I think drinking and podcasting is definitely an order after this thing passes. As only a true, a true nerd would do. Awesome. Thanks so much, Jesse. Jesse Jenkins is an assistant professor at the Andlinger Center at Princeton University, where he leads the Zero Lab. He's also part of the Repeat Project, who published the analysis that we were referring to today. There's just so much to cover on this one. We didn't get to everything,

So we welcome your feedback. What did we cover that we should have gone deeper on? What did we miss that's important and in the bill? We will be talking about this more, I'm sure, in the future. As always, you can find the show on Twitter at At CatalystPod. You can also find me there. If you like the show today, go over to Spotify or Apple Podcasts and leave us a rating and review. This show is a co-production of PostScript Media and Canary Media.

You can head over to canarymedia.com for lots of links to everything going on with the bill, including the analysis that Jesse, and the repeat project team put together. And as always, PostScript is supported by Prelude Ventures, a venture capital firm that partners with entrepreneurs to address climate change across a range of sectors, pretty much all of which will be affected by this bill, including advanced energy, food, and agriculture, transportation,

and logistics, advanced materials in manufacturing and advanced computing. This episode was produced by Daniel Waldorf and Delvin Abuaji, mixing by Greg Vilfrank and Sean Marquand, theme song by Sean Marquand. Our managing producer is Cecily Mesa Martinez. I'm Shail Khan, and this is Catalyst.