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

The recently enacted Inflation Reduction Act will:
  • Incentivize the deployment of American clean energy
  • Lower energy bills and costs for efficiency upgrades
  • Create good jobs through domestic manufacturing and clean procurement
  • Support climate-ready agriculture, forestation, and resilience
  • Advance clean air through clean transportation

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.

Incentivizing deployment of American clean energy

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.

Financing clean energy

In a big win for public power, cities, and states, the Inflation Reduction Act modifies the federal clean energy tax credit program to directly pay11 public and nonprofit entities, including those owned and managed by states and municipal governments. This will allow these entities to take advantage of tax treatment previously only available to investor-owned utilities and enables cities that own their own public utilities­­­—such as Cleveland, Columbia, and Tallahassee—to transfer tax credits for cash. Cities in competitive markets, such as Chicago,12 can utilize power purchase agreements to purchase 100 percent clean energy, taking advantage of lower costs and greater availability of renewable resources.

The Inflation Reduction Act also builds on successful models such as the Connecticut Green Bank13 by dedicating $27 billion to the Greenhouse Gas Reduction Fund—known as a clean energy technology accelerator—to create the country’s first national green bank. The fund will provide competitive financing to states, municipalities, and tribal governments for climate-smart development.14 The investment can also be used to help states and cities start their own green banks. The Greenhouse Gas Reduction Fund provides $7 billion to programs aimed at deploying clean energy, such as rooftop solar and pollution-reducing technologies in low-income and disadvantaged communities. In addition, it provides $8 billion to eligible institutions that provide financial assistance—in the form of direct investments and financing—to clean energy projects that benefit disadvantaged communities.

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

Lowering energy bills and costs for efficiency upgrades

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.

How the Inflation Reduction Act incentivizes energy efficiency and electrification

Through their energy agencies, states will be responsible for disbursing grant funds through rebates to support the retrofitting of climate-smart homes, including for induction stove tops, efficient and electric heat pumps for space heating, and heat pump water heaters. Importantly—particularly for jurisdictions with aging building stock—funding through the Inflation Reduction Act supports panel upgrades to home breaker boxes. It includes:

  • $4.3 billion for home energy performance-based, whole-house rebates21 in formula grants for home energy efficiency retrofits
  • $4.5 billion for the high-efficiency home electric rebate program22 in formula grants, including $4.275 billion to states and $225 million to tribes

The act also provides:

  • $145.5 million for tribal electrification23 through the U.S. Bureau of Indian Affairs, which may be used for repairs, retrofits, energy transition, and electrification of tribal homes into zero-emissions energy systems
  • $1 billion in grants for assistance24 to set ambitious building codes, including for adoption of a zero-energy code or other standards that meet or exceed standards, with no cost sharing required from states
  • $1 billion in U.S. Department of Housing and Urban Development loans25 to support efficiency and resilience upgrades to 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.

Creating good jobs through domestic manufacturing and clean procurement

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.

How the Inflation Reduction Act supports private incentives

To create a supportive ecosystem for these private incentives, the Inflation Reduction Act makes state and local governments eligible for a variety of planning, workforce development, and emissions reporting standards grants. States will also be eligible for workforce development assistance programs, including $200 million in state-based home energy efficiency contractor training grants35 that train workers in the installation of home energy efficiency and electrification improvements.

In addition, provisions of the Inflation Reduction Act support Buy Clean36 programs—which incorporate low-carbon construction materials in government purchasing—with $9 billion37 in federal procurement. State leadership has provided a blueprint for these efforts: Colorado, Oregon, Washington, California, and Minnesota have all instituted Buy Clean procurement policies. Cities are also engaged in efforts, such as those supported by the C40 Clean Construction Accelerator.38 To help standardize reporting requirements and accountability, the Inflation Reduction Act makes states, cities, and tribes eligible for $250 million for environmental product declaration assistance39 in the form of grants and technical assistance to implement their own procurement initiatives.

Investing in climate-ready agriculture, forest conservation, and resilience

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.

State and local funding opportunities for conservation and resiliency

State and local leaders understand that fostering resilience is key to navigating the climate crisis, and they will play a role in implementing many of these programs. The Inflation Reduction Act makes the following funding available:

  • It provides $2.6 billion40 through the National Oceanic and Atmospheric Administration for states that border oceans, the Gulf of Mexico, or the Great Lakes; tribal governments; and nonprofits to invest in coastal communities and climate resilience.
  • It sets aside $4 billion in U.S. Department of the Interior grants, contracts, or financial assistance for drought mitigation41 in reclamation states,42 with priority to the Colorado River Basin and other distressed basins.
  • It allocates $550 million to disadvantaged communities within reclamation states for domestic water supply projects that help provide reliable water access.43
  • It grants $2.2 billion for state and private forestry conservation programs,44 including $700 million in competitive grants for the Forest Legacy Program45 and $1.5 billion in competitive grants for the Urban and Community Forestry Assistance Program.46 Typical nonfederal cost-sharing requirements apply but may be waived by the U.S. secretary of the interior on a case-by-case basis.
  • It provides $550 million in competitive grants47 to state foresters or equivalent state officials to support nonfederal forest landowners and climate mitigation, carbon sequestration, and forest resilience. No cost sharing is required in disadvantaged or underserved communities, and in all other neighborhoods, the federal share of costs cannot exceed 80 percent.
  • It allocates $220 million for tribal climate resilience48 funding for tribes and tribal organizations to participate in climate resilience and adaption programs. This funding will be distributed by the director of the U.S. Bureau of Indian Affairs.
  • It sets aside $8 billion in additional funding for voluntary conservation efforts through the Conservation Stewardship Program49 and the Regional Conservation Partnership Program.50

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.

Advancing clean air through clean transportation

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.

State and local funding opportunities for clean air and clean transportation

To minimize heavy transportation pollution and clean up freight and air transportation, state and local governments can leverage a variety of funds from the Inflation Reduction Act:

  • The act provides $3 billion in grants to reduce air pollution at ports.56 This funding will be available to port authorities; state, regional, local, or tribal agencies with jurisdiction over ports; air pollution control agencies; and select private entities.
  • It provides $1 billion57 in grants and rebates for up to 100 percent of the cost of purchasing eligible zero-emission heavy-duty vehicles; infrastructure to charge, fuel, or maintain those vehicles; and workforce development. This funding is exclusively for zero-emission vehicles, which is an improvement over the programs that promote a variety of fuel types under the IIJA.
  • It grants $1.9 billion for Neighborhood Access and Equity Grants,58 including $1.2 billion through the Federal Highway Administration specifically for disadvantaged communities to improve community health, connectivity, walkability, and safety near major transportation corridors. Federal funds can make up no more than 80 percent of the total cost of the project but may cover up to 100 percent of the cost in disadvantaged or underserved communities.
  • The act provides $2 billion in low-carbon transportation materials grants59 to identify low embodied-carbon construction materials and products in accordance with review by the Federal Highway Administration. Funds may not be used for projects that result in additional through travel lanes for single-occupant passenger vehicles.
  • It provides $297 million in competitive grants for alternative fuel and low-emission aviation technology.60 Federal funds can make up no more than 75 percent of the total cost of the project for hub airports and up to 90 percent of the total cost for small-hub or nonhub airport projects.
  • It includes $100 million to provide technical assistance and build capacity61 for states to make the environmental review process for surface transportation projects more efficient.

Cities, states, tribal governments, and universities, alongside nonprofit partners, can also address air pollution by leveraging additional funds available through the Inflation Reduction Act. These include $5 billion for greenhouse gas air pollution plans and implementation grants,62 including $250 million to support planning in every state and $4.75 billion in competitive implementation grants awarded to states, air pollution control agencies, municipalities, or tribes to reduce overall air pollution. Preference should be given to projects that improve air quality in disadvantaged communities. In addition, the act offers $3 billion in environmental and climate justice block grants63 for community-led air pollution remediation initiatives. Funds may support the mitigation of health risks from urban heat islands, the reduction of indoor air pollution, and much more.

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.

Conclusion

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.

Acknowledgments

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

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