IRA slashes power sector CO2, but has smaller impact elsewhere: US EIA

The Inflation Reduction Act will significantly decrease carbon dioxide emissions from the electric power sector, but it will have a smaller impact on emissions from the energy sector as a whole and provide only a small boost in electric vehicle uptake by 2050, according to the Energy Information Administration.

Without the IRA, electric sector CO2 emissions are projected to be 57% below 2005 levels by 2050, EIA said. And with the IRA, CO2 emissions are projected to be 72% below 2005 levels by 2050, EIA said in an IRA-focused report released as part of its Annual Energy Outlook 2023.

EIA also considered additional scenarios with various degrees of economic growth, zero-carbon technology costs, uptake of IRA incentives, oil prices and oil and gas supplies.

Under the scenario with the biggest carbon reductions in 2050, electric sector CO2 emissions would be 89% lower than 2005 levels. Under the scenario with the least carbon reductions in 2050, electric sector CO2 emissions would be 53% below 2005 levels, according to EIA data.

Conservative assumptions

There are several assumptions that could make the EIA's outlook conservative, said Morris Greenberg, senior manager for North American power analytics at S&P Global Commodity Insights. For instance, EIA did not model the hydrogen production tax credit, which may have limited growth in renewables and limited declines in carbon emissions, he said.

EIA also appears to have assumed that solar and storage hybrid resources would elect the production tax credit, instead of assuming that such projects would get both the production tax credit for solar and the investment tax credit for storage, Greenberg said. "On the whole, I would characterize the outlook as overly conservative," he said.

The IRA also has an impact on overall energy-related CO2 emissions, but the reductions are smaller than in the electric sector. Without the IRA, energy-related CO2 emissions would fall 28% below 2005 levels by 2050, but with the IRA, emissions from the energy sector would drop 34% over that time, EIA said.

Bonus credit impact

EIA found that assumptions around the bonus credits had a substantial impact on the results of the outlook. Under the IRA, qualifying clean energy technologies receive a base-level production tax credit. Projects meeting labor requirements receive a tax credit five times higher than the base amount, EIA noted. Additional increases to the base tax credit are available for projects that meet domestic content requirements or are in energy communities, EIA said.

Low uptake of the tax credits produced results similar to the case without the IRA, EIA said. This indicates that "the IRA base credits alone are unlikely to have an appreciable impact on the US energy system," EIA said. The reference case and the high uptake case often produced significant differences compared with the case with no IRA, EIA said.

The emissions cuts in the overall energy sector are largely because carbon-free resources provide more electricity by 2050 than coal and natural gas, EIA said. "IRA provisions in the Reference case push wind and solar to 56% of electricity generation by 2050," EIA said. Without the IRA, wind and solar account for 39% of total generation in 2050, EIA said.

But projections for the transportation and industrial sectors tell a different story. Industrial sector CO2 emissions increase about 9% to 10% by 2050, because of growing hydrocarbon gas liquids consumption for bulk chemical feedstocks and rising natural gas demand for manufacturing, EIA said.

EV uptake

Between 2005 and 2050 transportation sector CO2 emissions decline 18% to 19% in all cases, due to increased fuel efficiency and increased use of electric and alternative fuel vehicles.

The IRA accelerates uptake of electric vehicles in the near term but has a small impact by 2050 compared to other cases, EIA said. With no IRA, the share EV sales in 2030 will be 12%, but with the IRA, that number is 15%, EIA said.

Still, EVs are projected to represent less than one in five light-duty vehicles sold by 2050, EIA said. "EVs reach cost and performance parity against gasoline-powered models in the luxury vehicle class but remain less competitive against conventional gasoline powered cars and light trucks serving the mass market," EIA said.

Some of the more stringent provisions in the IRA make qualifying for the clean vehicle tax credits difficult, EIA said. The provisions include domestic assemblage requirements, battery component and critical mineral sourcing requirements, limits on Manufacturer's Suggested Retail Price and income limits for vehicle buyers, EIA said.