In this episode, energy modeler and expert Jesse Jenkins is back yet again, completing our two-part discussion of the details of the Inflation Reduction Act. This time around, we get into the tax credits, the green bank, the methane fee, and much more.
Full transcript of Volts podcast featuring Jesse Jenkins, August 19, 2022
David Roberts:
As I said in the previous episode, even with all the discussion of the Inflation Reduction Act lately, there is still enormous appetite for more information. I had Princeton professor Jesse Jenkins back on the pod to dig deeper into the details and address some of the common questions and objections. We ended up talking for so long that I broke the resulting pod into two episodes.
In the first, we discussed fossil-fuel leases, CCS subsidies, and environmental justice. In this episode, we get into everything else: the EV and other tax credits, the green bank, the new money for DOE’s loan authority, the methane fee, and the enormous effects the bill is likely to have on US climate politics.
So let's get back into it!
David Roberts:
One of the things that was promising about the original Build Back Better is that it transitioned the renewable energy tax credits to direct pay. Let’s start by describing what Joe Manchin did to direct pay.
Jesse Jenkins:
We probably should start with how renewable energy projects get financed now and how they monetize these credits.
If you're a wind or solar developer, you're putting a lot of your equity at risk to develop these projects. You've spent money and time for your staff to work through the permitting process and get these projects developed and then try to sell them; you don't have a lot of revenue from those projects, you don't have a lot of tax appetite, and you often sell the projects to someone to operate them after you develop them.
The way renewable energy developers have successfully monetized credits in the past is through what's known as tax equity finance, where you find a big bank like Goldman Sachs or Wells Fargo or JP Morgan Chase to invest alongside you in the project as an equity owner, and in exchange they get the tax credits. So they claim all of the tax credits for themselves, and then you're effectively buying their equity in exchange for the tax credits.
Right now, that's a pretty bespoke market. There's a handful of banks and other financial entities that play in this market. There's a lot of demand for that kind of financing, the demand is growing, and the banks take a big chunk of the money for themselves. For every $100 we send in the production tax credit or investment tax credit for clean energy projects, the banks might take $15-$30 of that for themselves.
David Roberts:
Which is, logically, reducing the net impact of these tax credits.
Jesse Jenkins:
Exactly. Only 70-85 percent of that value goes through to actually support clean energy, which is the purpose that the taxpayers should be paying for. So that's dumb. It raises costs, it makes the programs less fiscally responsible, it just makes money for big banks. Nobody likes big banks (except for the political class that gets donations from them, I guess).
The real concern here in this bill is that there are a ton of tax credits and there simply won't be enough tax equity appetite to claim all of them. If there's only $20 billion a year of tax equity and you're trying to move $100 billion of tax credits, forget it, they're not going to get used.
David Roberts:
You’re going to effectively cap the amount of tax credits that can be taken advantage of.
Jesse Jenkins:
That was the scenario that we were trying to prevent and we did successfully prevent, which is good. The best way to have prevented that is what was in the House bill, which is called direct pay. Direct pay basically means if you claim the tax credit, you can treat it as if you directly paid that amount of tax even though you didn't owe it, and then you get a refund. Like when you pay too much in your withholding over the course of the year, you get a refund check in the mail after you file your taxes.
David Roberts:
That's 100 percent of the value of the credit in your pocket.
Jesse Jenkins:
There's a little bit of a delay because you have to file your taxes, so there's some time value to the money. But yes, basically you get 100 percent of the value in direct pay.
The original House bill had direct pay for all of the major business tax credits. The 45Q for CCS, the hydrogen tax credit, the advanced manufacturing tax credit, the clean electricity tax credit, all of them.
What Senator Manchin did was restrict the availability of direct pay to only nonprofits and publicly owned utilities. This is a big benefit. They had no tax equity appetite in the past, so they basically solely bought projects from independent power producers. They didn't own and rate base any of their own projects because they couldn't claim the tax credits if they did, so they'd be way more expensive than buying from a third party. Now they can all get the tax credits directly with full refundability even though they pay no taxes.
David Roberts:
Which is cool, but – why, Joe? Direct pay just means the amount of money you're setting aside for this is all going to the projects, rather than 30 percent of it going to the banks. Why oppose that?
Jesse Jenkins:
This is hearsay, but I heard that he spoke to a certain major banker that is involved in the tax equity market who told him that having banks involved in project finance is good for due diligence to make sure that projects are real and pass all the risk screens that a bank can bring to the table – which is self-interested advice from a large bank involved in tax equity finance. Every project has banks providing debt and equity, so it's a mendacious argument, and Joe Manchin seems to have bought it.
I think he was also uncomfortable creating the precedent for massive refundable tax credits that you don't actually even have to have any tax equity appetite to get. Because to be fair, we haven't ever done that in the past. There's not any precedent for direct pay like this in the tax code. For a couple of years during the financial crisis we offered grants in lieu of tax credits, but there's never been an exhaustive direct pay.
David Roberts:
So he nuked direct pay for normal commercial projects, but you can still get them if you're a nonprofit.
Jesse Jenkins:
Yes. There was a moment of panic where we thought that it was going to get capped out. That would have been the big poison pill; if Manchin did that it would have substantially undermined the strength of all of the credits. So folks that worked on this hard – there's a lot of credit here to Earl Blumenauer’s staff on the House Ways and Means Committee, who had developed and introduced a bill for this previously – were able to insert a new ability to transfer the credits to any third party. They don't have to be an equity investor in your project; you can just sell your tax credit to any other business with tax appetite.
That will make a much easier market to offload these credits to someone else than the current process, where somebody has to actually be an investor in your project – where they take on risk, and they have to do due diligence, they have to sign a whole bunch of stuff. There are a lot of transaction costs there and limited appetite for that.
Now, you just say, “I'm going to sell you the credit, will you give me 95 cents on the dollar for it? 98 cents? 92 cents?” I'll find the best price and I'll sell it to you. There will be a haircut there; nobody's going to want to pay 100 cents on the dollar because then they're not better off, but it'll be a lot smaller than the haircut that the banks take under tax equity finance.
David Roberts:
This doesn't restore the ability of entities to get 100 percent of the value of the tax credit, but it does substantially raise the amount of value they're able to get for it. This is obviously a judgment call, but how good of a world is this relative to a world of direct pay? How much are we losing?
Jesse Jenkins:
We modeled it as a 10 percent haircut, the idea being that the buyer would pay about 95 cents on the dollar, and that the market search transaction costs – lawyers, accountants – would take about 5 percent. That's probably accurate for the first couple of years, but my guess is that will go down as these markets develop, there's a more liquid competitive market for resale, and the process becomes less bespoke and more standardized, in which case it could drop to maybe 3-5 percent.
David Roberts:
So it's not as good as direct pay but within striking distance, and way better than the status quo.
Jesse Jenkins:
And uncapped in its availability, because there's plenty of federal tax appetite, so we don't face this maximum limit on how many tax credits can get out the door, which was the real doomsday scenario. We avoided that.
We improve the efficiency of the credits, we open the credits to any nonprofit and publicly owned utility that have never had access to them before – that includes nonprofit community solar developers and the community choice aggregators that are publicly owned or nonprofit entities. So that's all good relative to status quo. It's just not as good as direct pay.
The other thing Manchin did is, because he likes certain credits, they get to elect to do direct pay for five consecutive years out of the period that they are able to claim the credit. This is only available for 45Q for carbon capture, for the new tax credit for clean hydrogen production, and for the advanced manufacturing tax credits in the bill.
There is a logic behind this – that the ones most likely to get tax equity finance or be able to offload are the wind and solar projects that are more vanilla. People are used to these projects, there's a lot of them, they're smaller. The ones that will be harder are the riskier investments in manufacturing facilities and nascent technologies like hydrogen and CCS that don't have the track record. So if you're going to offer them to any of them, offer them to the less mature ones.
I guess that convinced him to at least allow five years. It has to be five consecutive years – once you turn it on, you can't turn it off. But the idea is that if you're a manufacturing facility getting up and running, you don't have a lot of profit at the beginning because you're spending a lot of money on capital, building your facility and taking losses, and then over time you start to become profitable. So for those first five years, you can go ahead and just get direct pay and have that improve your cash flow.
David Roberts:
This is another area where Manchin could have done enormous damage relatively easily, and instead he did a little damage but didn't cripple the thing. And that's just like, the last rich white guy he talked to on his yacht happened to say some of the right things.
Let's move on. The on-and-off or last-minute extension of these tax credits throughout our history has been a real impediment to growth in these markets. One of the great things about this bill is it puts a lot of tax credits in place for a long period of time – you get a lot of runway, a lot of predictability. So what are the time constraints on these tax credits?
Jesse Jenkins:
Most of the tax credits are available for the decade from 2023 to 2032. That's huge. This is the decade that we have to drive ourselves over the top of the mountain and down the other side. This is the pivotal decade to get on track to net-zero emissions, and we’ve bought ourselves the decade. There's more work to be done, but we just got all the federal financial incentives that we need for the next decade.
And it's better than that, because most of the supply-side credits, like the clean electricity and hydrogen and CCS, require commenced construction before the end of 2032, and then you can have three to five years to bring your project online. So in general, this means these tax credits will be paying out to projects coming online all the way through 2035 and maybe even a couple of years after.
David Roberts:
Do all these credits end after a decade?
Jesse Jenkins:
Most of them end after a decade. Some of them have sunset periods over the two years after 2032.
Interestingly, the clean electricity production and investment tax credits transition in 2025 from their current form. You have to be on the list of eligible technologies for the PTC or the ITC: solar is not on the PTC list, it can only do the ITC; wind is on both for some reason; geothermal has been on one and then the other. It's a very weird, specific list of technologies. That will be replaced in 2025 by a new tax credit environment where you can elect either the ITC or the PTC, whichever one's better for you, and it's eligible for all carbon-free electricity technologies. That was Ron Wyden’s staff.
The other thing that Ron Wyden did, and this actually survived through the bill, is that the clean electricity credit does not sunset in 2032; it sunsets in 2032 or the date when we reduce emissions from the power sector to 25 percent of current levels, whichever comes later. If we hit it in, say, 2030, which is possible on the outside, it’s still placed in service in 2032 and actually phases down in 2033 and 2034, and is only gone in 2035. So it'll power us in terms of clean electricity production through the mid-2030s and maybe even longer if it takes us longer to get there.
The reason there's so much uncertainty about when we get to that 75 percent reduction is that we're also going to be driving electrification over this time period, which will increase demand. We're going to go into the first period of sustained decline in oil and gas consumption in US history and the first period of sustained electricity consumption growth since the 1980s at the same time. So electricity growth is going to go up, and depending on how quickly, it may be harder or easier to hit that 75 percent target.
This is a great little addition. Thank you, Ron Wyden and your team. All credit in many cases to Bobby Andres, the key staffer.
David Roberts:
What about prevailing wage requirements? Did Manchin add those or were they always in there?
Jesse Jenkins:
The prevailing wage requirements were always in there and were a key priority for the labor movement, the BlueGreen Alliance, and other groups that are environmental and labor group coalitions.
We need millions of people to move into jobs in the clean energy economy, and those jobs should be good jobs, for both justice reasons and practical reasons – because if we want to get a bunch of people into these industries, we need to pay them well enough that they're going to come work. And we need to create pathways into those industries as well, which is where the apprenticeship requirements come from.
David Roberts:
Shout out to Washington State's recent legislation, which pioneered this.
Jesse Jenkins:
Yep. Evergreen Action and BlueGreen Alliance and other groups, which worked at the state level successfully in Washington and a few other states to implement that kind of requirement, succeeded in getting that into all of the supply-side tax credits. So 45Q, the PTC for existing nuclear projects, the new and existing clean electricity credits, the hydrogen credit – all of those credits are worth 20 percent of their full value if you don't meet those requirements.
That's going to add paperwork and some filing headache and risk for project developers. The PTC/ITC exempts all projects under one megawatt, so if you're a small solar developer, you don't have to meet this rule, although you should. But you don't have to file the paperwork.
So it's going to be bigger projects, and they should be able to grow up and take care of this. We want green jobs to be good jobs, because that's what's going to sustain the politics of this. It's what's going to drive the growth of the workforce that we need to power the clean energy economy. And it's the right thing to do.
David Roberts:
What about implementation? A lot of people still remember when the ACA was passed and included Medicaid expansion, and then Roberts’ Supreme Court screwed that and a lot of red states just didn't expand Medicaid. Say you were a red state governor and you had a reflexive opposition to anything any Democrat has ever done or said and you wanted to make this into a states rights issue and reject all these things – to what extent do all the benefits of this bill depend on decent implementation at the states, and to what extent could states screw it up on purpose?
Jesse Jenkins:
There are a handful of programs that are explicitly implemented by states. That includes the rebate programs for low- and moderate-income energy efficiency and electrification for folks that don't have tax appetite, that need a grant or rebate. Those are block grants to states to implement whole-home energy efficiency and electrification programs. So, like Medicare or Medicaid, if you're going to leave the money on the table, your state won't benefit from that money. And that would be bad.
There's also funding in here to support states to implement new building codes that meet the latest international standards for building efficiency. That's another provision we didn't model; that's one of those upside things where there's money here for DOE to provide technical assistance to states that want to improve their building codes. Again, that's up to the states and local entities, cities and metros, that set building codes. There's money on the table, but it will only go out if states decide to use the money.
Similarly, in the infrastructure law, there's a bunch of transportation funding that goes to states that they can use to do public transit and citywide bike networks, or they can use to widen highways and things like that.
Those are really the things that are directly in the hands of state and local policymakers.
Most of the policy is tax credits, so that's fairly self-implementing at the federal level. Some of these things have complicated rules – how do you set the prevailing wage requirements? How do you set the domestic content requirements? – but once the IRS works those out and issues their guidance, that goes out to all 50 states and the states don't have anything to do with distributing that money, and there's a strong financial interest for people all over the country to go get that money.
The things that they can do are slow down siting and permitting where that's in their authority. Where a lot of folks have been and remain particularly focused is on state utility commissions that have a lot of say, particularly in the West and the Southeast, where you have markets that are still vertically integrated and controlled by incumbent longtime monopoly utilities. There you have varying degrees of public participation and process and corruption that determine whether or not those utility commissions are actually acting in the best interests of their customers or in the best interest of the shareholders of the monopoly utility. That varies a lot.
So a lot of this will flow through the integrated resource planning and procurement processes and the quasi-administrative law processes at those commissions, and that's where a lot of advocates and developers and others are going to be on the frontlines of implementation and are going to need assistance.
David Roberts:
Let's talk about EV tax credits. In the original Build Back Better bill, they were basically $7,500 for new EVs. What did Manchin do to the EV tax credits and what effect do you think that's going to have?
Jesse Jenkins:
This is one of those areas where Manchin did some damage, but certainly didn't do his worst.
David Roberts:
Yeah, I thought he was going to eliminate them. He said publicly that he was going to.
Jesse Jenkins:
I was pretty prepared for there to be no support for EVs in the bill.
Before the bill came out, we had been read in on some of the details that were fairly solid, to start getting our model set up so we'd be ready to go. The ones that were most uncertain were the leasing provisions and the EV supports. So we did some bounding cases to see how much of a difference no support or all the support in the House bill made. That drove 100-150 million tons of difference, so it's a big chunk. It's like 10 percent of the bill if you lose that. That was all support, not just for consumer EV credits but also the charger credits and the business credits, which are also really important.
Initially the personal credits were $7,500, which is their current value, but they're capped currently to 200,000 vehicles per manufacturer. Tesla and GM and Nissan have already blown through that; Ford is expected to blow through that this quarter, I think Toyota too. Any of the successful dealers, other than bespoke Ferraris or whatever that don't sell very many models, will lose the credit.
The House bill had $7,500 without any vehicle per manufacturer cap. It was fully refundable, meaning you didn't have to have the tax appetite for it. The base amount was $4,000 and it went up to $7,500 if the battery was big enough, so basically it was $4,000 for plug-in hybrids and $7,500 for full EVs. Then, if you made it in a US factory under union labor, it went up to $12,000, and if you also bought a battery that used cells manufactured in the US, it was an additional $500. So it could be as high as $12,500 if you used union labor and a US battery.
David Roberts:
Manchin did not like the union part.
Jesse Jenkins:
Let's be clear, Toyota did not like the union part. And Toyota has a factory that assembles internal combustion engines in West Virginia and is a major donor to Joe Manchin; you detect the trend here. So yeah, they stripped the union requirement right away when it went over to the Senate. They stripped the bonus, so it can't be any bigger than $7,500, and Manchin substantially ramped up the requirements for domestic or North American content.
The credit now is part of a much broader industrial policy push to onshore the whole EV supply chain, or at least to source it from allied countries and not from China. First of all, immediately upon passage of the law, all vehicles eligible for the credit have to be assembled in North America.
David Roberts:
Are there big categories that that immediately rules out?
Jesse Jenkins:
At the moment, Hyundai, Audi, Porsche, and other expensive ones that I don't care about are all assembled overseas.
David Roberts:
So they would literally have to build factories in the US.
Jesse Jenkins:
Hyundai is already planning to do that. It'll come online in 2025 in Georgia. Any mass market manufacturer wanted to set up shop in the US anyway, because it's just cheaper to produce in North America.
So they're building factories. Again, it's a North America requirement – you can do it in Mexico, you can do it in Canada. So Volkswagen, for example, next year begins production of the ID.4 SUV in the US. Ford assembles the Mach-E in Mexico. Most of the popular models will meet that requirement, if not immediately, then within the next year or two.
David Roberts:
So that particular requirement is not that much of a pinhole to pass through.
Jesse Jenkins:
No, the only annoying piece is that it should have phased in in a year or two, not immediately upon passage. The other domestic requirements will probably go into effect next year, so at least we have through the end of the calendar year, but that's still not much time.
Going forward, now the credit is split into two parts. Half of it is tied to North American sourcing of battery components – again, not US but North America. You can get $3,750 if 50 percent of the battery’s value comes from assembly of components in North America in 2023, and that rises over time until it gets to 100 percent in 2029.
David Roberts:
Does that include raw metal mining and processing?
Jesse Jenkins:
No. That’s the other half. This is for the manufacturing of electrodes and cells and packs. That’s the monetary value added of the manufacturing side.
The other piece is the materials. The other $3,750 is tied to meeting certain percentages of critical minerals value either extracted or processed (it can be a combination of the value of extraction and processing) in a free trade agreement country (not just North America, but any other free trade agreement country) or made from recycled material in North America. That starts at 40 percent in 2023 and goes up to 80 percent from 2027 onwards.
Both of those are fairly fast. The battery side I haven't heard a lot of concern about; analysts note that there's a couple hundred billion dollars of investment coming in US supply chains even without this bill. It makes sense from an economic perspective because of shipment cost and logistics.
David Roberts:
So we think batteries will be assembled here regardless.
Jesse Jenkins:
At least in North America, somewhere near where the plant is.
The minerals part is harder. The big hard part, which I haven't gotten to yet, is that for both of those provisions, starting in 2024 – so that's just a year from now, basically – any of the material can't be extracted or processed by an entity of foreign concern, which is mainly China, but also Russia, North Korea, and Iran. So starting in 2024, none of the battery manufacturing assembly can be made in China, and in 2025, none of the critical mineral content can come from China.
David Roberts:
That's crazy. So we’re not just trying to shift this; the bill explicitly cuts China out of any credit. That seems borderline aggressive in a way that might irritate China and irritate the WTO.
Jesse Jenkins:
I have no idea how any of this is WTO legal. It probably is not and will probably be met with some kind of counter-tariff at some point in the future when it works its way through that process. I don't know, I'm not a trade lawyer, but it doesn't seem like this is consistent with the WTO. Maybe the way they get around this is it's restricted to countries with free trade agreements generally, and if you don't have a free trade agreement with us, then you can't complain. I don't know.
David Roberts:
Let's touch briefly on this notion that there's something uniquely dangerous about buying these things from China. When I try to follow that thread, it just doesn't seem to lead anywhere. We depend on other countries to manufacture most of our clothes, our phones; we're surrounded by supply chains in which we’re “dependent on China.” But that also means they're dependent on us to buy it all – that's how trade works. What is the danger that Joe Manchin thinks he is forestalling by cutting China out of our supply chains?
Jesse Jenkins:
Well, I can't speak for Joe Manchin, but I think this reflects growing geopolitical rivalry between the US and China, which is not a great trend from a peace and security perspective, and also reflects the observation of the war in Ukraine and its impact on Europe. The theory of the last decade and beyond was that integration of trade would lead to lack of conflict, because, yes, Germany is dependent on Russia for oil and gas, but Russia is dependent on Europe to sell that oil and gas, so they can never go to war with one another or their allies and risk conflict because it'll mutually destroy their economies.
David Roberts:
I have to say, Russia seems like a special case. Russia is ruled by a goofball willing to punch himself in the face repeatedly because of his ego. None of that seems to apply to China. Whatever else you say about China, they're pretty rational in their market behavior. They want to grow their economy.
Jesse Jenkins:
I'm not a geopolitical scholar or China scholar, so I'll defer on that one. But the base of the concern, and this is also reflected in the CHIPS Act around semiconductors, is that there are certain industries that are of strategic importance – our energy supply, our vehicles, our semiconductors that go into everything, the critical minerals that go in all kinds of stuff – and we should have some degree of physical security around the sourcing of those materials from allied countries or domestically so that if there is a global conflict, or a global disaster, or a global pandemic that disrupts those supply chains, we're not totally hosed. That's the operating theory. I'm not endorsing it or disagreeing with it.
David Roberts:
So we have these domestic requirements, half for assembly and manufacturing of batteries, half for the materials, either sourced in North America or sourced in a country we have a free trade agreement with. This seems to be quite strict, quite rapidly. There's concern that for who knows how many years, zero EVs will be eligible for the tax credit. Is that going to impede EV growth? Is it going to impede the EV market? How big of a problem or barrier do you think this is?
Jesse Jenkins:
Again, it's worth remembering what the counterfactual is, which is that the tax credits for EVs effectively go away for everything but luxury vehicles in the next 12 months. That's where we were without this bill. So against the backdrop of that, I don't think it slows anything down, even if nobody qualifies for it in 2023.
Demand for EVs is already outstripping supply and they're already selling at a markup. So I don't think that the near term will be all that influenced by whether this credit exists or not. Individual people may or may not buy the car or truck because they can't afford it, and having the tax rate in the near term makes it more equitable and available for a wider number of people.
The other thing that Manchin added was a stricter cap on income to claim the credits. It's still high enough that 91 percent of all American families meet it; it's $300,000 a year for a married family filing jointly and $150,000 for an individual filing singly. So if you're above that limit, good for you, go buy your Porsche Taycan and don't worry about it. But 91 percent of American households are below that limit.
There's a $150,000 family filing limit for the purchase of a used EV, which now has a $4,000 credit in the bill. Again, 80-something percent of households fall below $150,000 in income.
I don't think those are too bad, and I think they reflect the fact that Manchin didn't want to be subsidizing himself or others like him who buy Maseratis and Porsches and whatever.
David Roberts:
What will the consumer experience be like?
Jesse Jenkins:
It’s going to be confusing for the next couple of years. I don't think you'll have much paperwork to do other than maybe signing an income attestation form that you don't make more than $300,000 as a household. What will be confusing for consumers is that there will be a shifting list of vehicle models that qualify, and some may be on it one year and then fall off another year when the sourcing changes or whatever.
David Roberts:
Dealers are already so ignorant about EVs and so bad at educating customers. This seems like a massive dose of complication to an already relatively uninformed dealership community.
Jesse Jenkins:
The next six to 24 months or so are going to be pretty frustrating. Again, I don't know that that's worse than the status quo except for for particular models, like Hyundais.
But the medium-term outlook is much better, because not only does this bill have these requirements, but it also directly subsidizes production of critical materials – cathodes, anodes, cells, and packs – in the United States. That’s in conjunction with a whole bunch of other policies, grants, and loan guarantees that DOE has access to under the infrastructure law and this bill that are there to support retooling of US auto manufacturing supply chains and the buildout of critical minerals and battery recycling in the United States.
David Roberts:
So we can expect, in the next few years, a huge burst of activity around this.
Jesse Jenkins:
It's going to be hundreds of billions of dollars of investment driven into the United States in critical minerals, battery assembly, battery manufacturing, cathodes, anodes, EV assembly – and that's going to be great for US employment.
The typical pushback against domestic content is that it raises costs for consumers relative to whatever the competitive foreign product is. The bill doesn't just require domestic content, it also covers all of that cost – and then some in the case of batteries, probably – with subsidies. So there will be no higher cost for consumers. There will be a lower cost, if anything.
And the jobs and economic growth and vested self-interest that will join our coalition politically that come with that will materialize over the next several years in the US and our allied countries. If you go out to 2025 or 2026, by that point, a lot of these facilities are going to be coming online, the supply chains globally are going to reorient away from China to allied countries – remember, we can sign new free trade agreements with other countries if we need to in the next few years, to expand the list of mineral suppliers.
The other thing to keep in mind is that China doesn't produce a lot of raw minerals, except for graphite. It doesn't produce cobalt, it doesn't produce lithium in large quantities. What it does is process them and build the packs and modules and cathodes and anodes. The reason it does that is because it's had a decade of robust industrial policy support for the whole supply chain and the world's largest market by far for electric vehicles.
David Roberts:
The mining and initial processing of these minerals is dirty, nasty, gross stuff. It's pretty low on the value chain in terms of industrial activity. It's not super clear to me why we want to bring that into the US. Do we really want a bunch of metals mines in the US? Do we really want a bunch of filthy processing facilities? This is a little mercenary to let it happen somewhere else and enjoy the fruits, but that's kind of what trade is. So what is the case for having these very dirty industries imported into the US?
Jesse Jenkins:
The environmental impact of the processing varies a lot across techniques and across minerals. What one does in China or, even worse, in the Democratic Republic of Congo with no rule of law is very different than what one would do in North America. I don't know what the scale of environmental impact will be, but it'll certainly be less if it's under the environmental rules of the US or Canada than it is if it's in the DRC.
David Roberts:
I'm just not sure people know what they're asking for when they're asking for these things to come to the US.
Jesse Jenkins:
Yeah, I’m not sure, either. If you're Joe Manchin and you represent a state that is used to digging stuff out of the ground, maybe that's what you're thinking – that this is an area where West Virginia could have continued economic activity. I'm not really sure what the minerals deposits look like there.
But the case for battery assembly and materials is very clear. And again, it's not a US requirement for sourcing of critical minerals, although there are US subsidies for processing and recycling – and recycling is going to be a big one as well, that will grow a lot as we have lots of big batteries coming out of vehicles.
Last note on EVs: there's a lot of talk about the consumer-facing credit, which is important – that's the one we all interface with. But there's also a 30 percent business credit for any business purchase of an electric vehicle: up to $7,500 for a light vehicle, auto or truck or SUV or van, and up to $40,000 for a medium-duty or heavy-duty vehicle like a bus, trash pickup truck, fire truck, port drayage truck, or long- and medium-haul delivery vehicle. They face none of the domestic content requirements. Neither does the $4,000 used EV credit, which is now available for the first time ever as well, and the vast majority of people don't buy new cars.
David Roberts:
What does your modeling show for the EV market and penetration in the US as a result of the bill?
Jesse Jenkins:
In the near term, it will have basically no impact because the market will be supply constrained. Not demand constrained; there's more demand for EVs than we can make already.
David Roberts:
But a lot of furious activity to overcome that; a lot of manufacturing facilities being built.
Jesse Jenkins:
That'll probably play itself out around 2025 or 2026, and then we'll have a lot of models with ample supply. Then the question is the level of demand.
What the subsidies will effectively do, if they can be met in progressively higher levels, is that in combination with declining costs for EV components and batteries, by 2028 to 2030 (maybe even sooner) it will basically be cheaper the minute you get to the lot to buy an EV over a conventional vehicle. The current tradeoff, of pay more up front, pay less over time – several thousand dollars more for the equivalent car, but save a bunch on fuel costs (it only costs you $1.50 a gallon equivalent to charge your car) and it costs half as much for maintenance, you don't do oil changes, your brake pads don't wear out as fast – will be gone. It'll just be pay less upfront and pay less over time.
Our model actually kind of breaks when you put that in because it is based on an economic payback period. We distribute across the consumer population a range of payback times that they require for these upfront investments, and the shortest one is, I think, one year.
David Roberts:
The economically rational behavior would be that everyone buys an EV at that point.
Jesse Jenkins:
In our model, by 2030, everyone buys an EV.
Now, I don't think everyone will buy an EV in 2030. We're going to fix that in our next round; we'll probably cap it out at somewhere between 40 and 80 percent market share across our pessimistic to optimistic cases. But I would wager it's going to be closer to 80 than 40 percent because they're just better cars to drive, so once people start to get into them and they are available, your neighbors all have them, you've ridden in them … and then the fact that they're cheaper and they cost less and you don't have to get an oil change and you don't have to go to the gas station …
David Roberts:
Jesse, I’m a car hater, and I’m in love with my Bolt. It's the econobox of EVs, and it's so fun.
Jesse Jenkins:
The market’s going to go gangbusters. That's the upshot. And as with wind and solar, as with carbon dioxide storage and networks, as with transmission lines, the big question this bill leaves is – how fast can we scale up these industries? That's a good place to be.
David Roberts:
Are any tax credits outside the EVs means tested?
Jesse Jenkins:
No, I don't think so. The rebate programs for home energy efficiency and electrification are means tested. I don't think any of the credits are.
David Roberts:
When do the consumer credits go into effect?
Jesse Jenkins:
In some cases where credits were expiring, they extend them through 2023. The home energy efficiency upgrade credit and the residential clean energy credit for rooftop solar or geothermal heat pumps start in 2023, so you have to wait until next year if you want to claim the new credit. You can claim the existing credit for those, which is at a lower value, in 2022.
David Roberts:
So if I were contemplating switching out my natural gas furnace for a heat pump, which I am in fact contemplating, financially I'm best waiting until January.
Jesse Jenkins:
Yes. If you wait until January and you buy a new heat pump for your space heating and cooling or a heat pump water heater, you can get up to either $2,000 or 30 percent of the cost, whichever is lower.
That will be the only credit that you are eligible for under the 25C energy efficiency home improvement credit for that year – it is capped at either $1,800 If you don't buy a heat pump, biomass stove, or boiler, or $2,000 if you buy one of those for the year.
But it's now a yearly credit, not a lifetime limit. It used to have a lifetime limit that once you hit it, you could never claim it again. So this is every year.
So maybe you do the heat pump this year; next year you do a panel upgrade; and you install your EV charger, which has a separate tax credit that starts next year, although is only available in rural and non-wealthy urban areas, so if you're in a high-income, urban area, you may not be able to claim that charger credit.
There are a bunch of other things – efficient windows, lighting improvements – that you can get up to $600 per item and no more than $1,800 per year.
I guess the way to think about this is, there's a list of improvements that you should look at, and if you want to do three of those in one year, do that and get your $1,800. If you want to do a heat pump or heat pump water heater, try to do that in a separate year if you're able to, because you'll get $2,000 for that in the next year, but don't try to do them at the same time or you can't get more than $2,000.
One more thing – there is a separate credit for home solar systems. That's solar electric, solar hot water, if you want to install a fuel cell, go for it, that's included. Small wind systems and geothermal heat pumps, that's 30 percent with no cap, and that's a separate credit. So if you want to install a solar system or solar hot water or a ground source heat pump, you can just get 30 percent of the value of that. That's up from 10 percent currently; that's a big bump. That's available through 2032, steps down in 2034, and then it's gone in 2035.
David Roberts:
Several more questions. The methane fee – how big of a deal is it? How worried should we be about measurement and verification?
Jesse Jenkins:
The methane fee increases to $1,500 per ton of methane, which, at the EPA’s official conversion rate of 25 tons of carbon dioxide per ton of methane, is about $50 a ton of carbon dioxide. That's enough to capture a lot of cost-effective mitigation opportunities, so that's good. It will make it much more cost-effective for firms to go after leaks and malfunctioning compressors and things like that.
It only applies, and this is the key, to entities that are subject to the GHG reporting protocol that the EPA administers. As we looked it up, that's about 40 percent of the overall reported methane inventory. So it doesn't apply universally to all oil and gas methane emissions; it only applies to the ones that are part of the GHG reporting protocol.
The change that was made in the Senate version – because when the House version came out, the EPA rule hadn't been introduced – is that if you comply with the newly proposed but not yet final EPA methane regulations, you are not subject to the price. Those are going to have to be carefully coordinated so that the methane regulations are not weaker than what the price would drive, otherwise entities will comply with the regulation and be exempt from the price and not do as much.
I think that EPA knows that. The Biden administration is certainly motivated to do this. So I would expect that the EPA final rule will be well calibrated to work hand in hand with the methane fee.
The big opportunity – and I don't know what legal authority they have to do this, per se – would be to expand the reporting requirements to the GHG reporting protocol as part of the methane rules or some other EPA action that basically said, we're going to go from 40 percent of people participating in the reporting program to a much wider share. It's possible that could be done as part of the EPA methane regs, or it could be possible that's a separate administrative action that can be taken, but if so, that would increase the impact of the methane fee.
The other thing to address is, this is based on the 100 year global warming potential, not the near-term, much greater impact of methane. And, it's at the older 25:1 ratio in the Fourth Assessment Report, which is what EPA continues to use in its official inventories and reporting and our nationally determined contribution at the UN, rather than the more recent one, which even at the 100 year is already up to 30, I think, not 25.
This is all arising from the fact that methane has a very big impact on warming in the near term, but it degrades in the atmosphere and over time is oxidized into carbon dioxide. So its impact wanes over time, as opposed to carbon dioxide, which lasts in the atmosphere for hundreds of years and has a very consistent warming impact.
In some ways, between the fact that we're not considering the much greater near-term impact of methane and the fact that we know the EPA inventory is underreporting total emissions, that means our baseline emissions are higher, and it means the emissions impact in the near term of methane is higher. So when we report the 2030 emissions in our modeling results, that's in some ways underreporting the aggregate impact, because we're basing that on the EPA inventory and on the AR4 conversion ratio. That's bad.
On the other hand, anything that reduces methane emissions has an even larger impact than we show in our modeling if you consider the 20-year global warming potential and the fact that there are a lot more leaks out there to go get with good regulation and good pricing. The downside of having a higher baseline is that the upside of reducing from that baseline has a bigger impact on near-term global warming. So there's a potential that we can really go after methane through good EPA regulation – with support from, but not exclusively, this methane fee – that would actually deliver greater emissions reductions and greater impact on near-term warming than we and others are reporting in our modeling based on EPA inventories.
David Roberts:
There are at least two big policies in this bill that are not modelable in their impact on emissions but that we have reason to believe will have substantial effect bringing emissions down. I'm thinking about the green bank and the massive pot of money for the Loan Programs Office. Tell us quickly how those are going to work and why we should be optimistic about what they'll do to emissions.
Jesse Jenkins:
There's $27 billion via the EPA to establish or support funding at state or local or nonprofit green banks, or technology accelerators, or whatever you want to call them. These are financial entities that help underwrite and provide preferential financing for deployment of clean energy and efficiency programs at the local level. There are a number of states that already have them; many more could set them up with this $27 billion pot of money.
The money is highly leveraged because it's used as the bank's collateral for a bunch of loans. So if you have $5 billion, you might be able to make $50 billion in loans, or $15 billion, depending on how aggressive they are and how much risk they take.
At least $15 billion of it has to specifically go to benefit low-income and disadvantaged communities. So this is one of many programs, $60 billion in total, in the bill that are specifically designed to benefit environmentally overburdened communities.
David Roberts:
If each dollar of green bank money leverages $5, $10, or $50 of private capital, $27 billion could draw in a giant pool of private capital. That's not a small thing.
Jesse Jenkins:
We tried to model that one. In our modeling, we assumed a fairly conservative leverage ratio of only three to one, and we assumed that it acted a little bit more like a grant, which means it has a more additional impact than just a concessionary loan.
The hard thing is, what's additional? The higher the leverage, the less likely it's actually having impact, to be honest, because you need them to take on some risk and do some things that the private sector wouldn't finance. So we assumed it was a little more conservative. Big uncertainty there; that's one of the things we’ll vary in our refresh, from higher levels of leverage to lower levels. But we did try to model the impact of that in terms of its support for solar deployment and energy efficiency and EV charger networks in urban areas and things like that. The impact could be a lot larger than we did model.
David Roberts:
Listeners will remember my pod with Jigar Shah and all the exciting stuff they're doing at the Loan Programs Office. How much new money is the Loan Programs Office getting, and how much private capital can be leveraged with this money?
Jesse Jenkins:
The Loan Programs Office is going to be the place to be if you are interested in financing the clean energy transition. The infrastructure law allowed the loan programs to start supporting supply chains as well as final assembly, for both vehicles and clean energy technology. That means they can now support things like critical minerals or battery recycling.
The Inflation Reduction Act provides $40 billion in new loan authority for the 1703 Loan Program, which is used to support commercialization of clean energy technologies. That includes $3.6 billion in appropriations to cover the costs of some of those loan guarantees, which means they can take on riskier projects and better, favorable rates for earlier stage technologies, like a first-of-a-kind or nth-of-a-kind nuclear power plant, or an advanced geothermal power plant.
There's $3 billion in new appropriations for the Advanced Technology Vehicle Manufacturing Loan Program to support retooling and expanding the US automotive manufacturing sector. They eliminated the previous $25 billion loan cap. And that's likely to be enough funding to support on the order of $30 billion or more in loans to the automotive sector.
Then there's a new $5 billion of funding and up to $250 billion of loan authority, so a massive new program, for Energy Infrastructure Reinvestment financing. This is funding to help retool, repower, repurpose, or replace energy infrastructure that has ceased operations, including remediation of environmental damages associated with that infrastructure; or enable operating energy infrastructure to avoid, reduce, utilize, or sequester air pollutants or anthropogenic emissions of greenhouse gases – in other words, for existing polluting fossil fuel facilities to install emissions controls or carbon capture.
I spoke recently to Jigar about this, because I'm trying to figure out how we can model it next time around. We didn't model it at all. There's also a similar program at USDA that's available for their rural electrification authority to do similar work, $9.7 billion there to support rural electric co-ops doing the same kind of transition. Again, can be leveraged many times.
What this funding will let you do is, say you have a coal plant on your books as a utility, and you're paying 4 percent a year commercial debt on that coal plant. You can refinance that with the DOE at maybe 3.5 percent, and then you can shut it down. So you pay less now on your remaining debt, and you can get loan guarantees or other financial support for the replacement power – whether it's a new nuclear plant repowering that same site, or wind or solar using that interconnection, or whatever.
The loan guarantee will help you go from maybe a 50 percent equity, 50 percent debt split in financing – which is probably typical for a commercial project; that equity is at 10-11 percent per year payback and the debt is maybe 4 percent – to a project that's maybe 20 percent equity and 80 percent debt with a federal loan guarantee. Now you’re only paying that 11 percent equity on 20 percent of your project instead of 50 percent, and you can maybe pay only 3.5 percent on your debt because it's backed up by the government and you don't pay as much to the bank.
So that's a big shift in the financing costs for some of these projects, if people take advantage of this money. Unlike the tax credits, it's less self-executing – you have to go to DOE and talk to Jigar and his team and unlock this money. But it's a big tool. And $250 billion is a lot. It can underwrite a lot of investment, and that's at one time. So as loans are repaid, that authority is reclaimed and can be reused.
David Roberts:
Everybody's always talking about what to do about communities that are dependent on fossil fuel infrastructure and fossil fuel facilities. This is in part an answer to that question – there's going to be an enormous amount of capital, or loan authority, available to them to transition out of that.
Jesse Jenkins:
And this is in addition to, again, USDA programs for rural co-ops and programs for tribal loan guarantees for tribal entities. Then there is a bonus tax credit for clean electricity generation that boosts the value of the clean energy production tax credit by 10 percent, and 10 percentage points for the investment tax credit if you build in an energy community. So there's the financing side, but there's also the demand pull for investment from the tax credits.
There's also a separate 48C manufacturing tax credit that covers 30 percent of the investment in a new manufacturing facility. For some reason that's capped at $10 billion in total tax credits; I think it’s the only tax credit that has a financial cap to it. But $4 billion of that is explicitly set aside for energy communities as well. So that's going to drive at least $13 billion in investment in advanced clean energy manufacturing in energy communities, also.
David Roberts:
Communities which tend red.
Jesse Jenkins:
The states do, although to be fair, think about manufacturing activities in Georgia or Alabama or Mississippi, where you've got primarily African American communities in more urban areas that work in manufacturing, too. So it's a broad suite, and it will also improve environmental justice, because these programs will help take more coal plants out of operation.
The DOE Program is not just power generation. It's also oil refineries, petrochemical feedstocks, production, processing, storage, delivery – all those facilities on the oil side of things. This is there to help accelerate the turnover of capital from the dirty economy to the clean economy, and to reduce the environmental impacts and remediate the prior damages of those facilities.
Again, we don't model either the USDA program or this energy community investment financing at DOE in our current modeling. I expect that when we include it, which we're going to try to do in our optimistic case next time, it'll drive down that 7 or 8 percent coal generation share that I talked about a long time ago on this podcast much, much lower. And we might see much more rapid coal retirement over the next decade when you factor in the impact of these two financing programs.
David Roberts:
Final two questions. You say in your modeling that this does not get the US all the way to its 2030 Paris target, which is 50 percent reduction by 2030, but it gets us within striking distance, such that supplementary activity from states and cities could get us the rest of the way.
If we wanted states and cities to fill that gap, would we need them to ramp up their activity at a similar pace that the federal government will be ramping up its activity? Are they going to have to scramble and mobilize in the same sort of crazy way that the feds are going to as a result of this bill, or is it more just like a topper?
Jesse Jenkins:
Unfortunately I don't have a good quantitative sense of that right now. They definitely have to increase their ambition, or expand it to more jurisdictions. And the bill does make that much more likely by making it cheaper across the board to reach more aggressive clean energy goals at the state, local, and institutional levels.
For university systems, for corporate leaders that are trying to figure out how to improve their emissions impact – things get cheaper for them. When things get cheaper, people tend to be more aggressive and do more of it. So I do think it makes it easier for state, local, institutional, and corporate actors to increase their ambition and do more.
I don't have a good sense of how much more is required at the moment to close the gap. It's a great research question that we should try to figure out. But it does make it much more likely that those actions occur. And that's not accidental; that's part of the philosophy of the bill.
It's not just making it cheaper. It's also the economic opportunity that the bill drives. Same kind of thing – yes, you could have a governor that wants to bite off their nose to spite their face and not do any of this, but there's going to be trillions of dollars of investment over the next decade going not only into clean energy generation and facilities, but also manufacturing and supply chains all over the country. And the only way you're going to get that is if you compete with your neighboring states and neighboring towns to try to draw that investment.
There are a lot of examples of local governments and states competing actively to site investment and business opportunities. I do think that that will kick off a lot of additional state action. In addition to the fact that it's cheaper to build this stuff and meet your climate goals, it also establishes your state as a clear market for these technologies and a friendly place for them. Jobs, jobs, jobs.
David Roberts:
Final question: how durable are these policies? In the nightmare scenario that Republicans get a trifecta in 2024, which ones of these will be easy to knock out and which ones do you think could endure regardless? And then, more broadly, how do you think the implementation of the policies in the bill is going to affect the politics of climate and clean energy over the next decade?
Jesse Jenkins:
Honestly, I think you need to have a whole other podcast on that question, because there is a very specific, very well thought out, very explicit strategy here around exactly those things. I'll try to summarize it briefly. But there is a reason that this approach worked in the first place, and I am much more optimistic will last in the long run. It’s in contrast to a carbon tax or cap and trade policy where you're making fossil energy more expensive for everyone and using a single instrument to do it all across the economy, uniting opposition against that instrument.
David Roberts:
You make enemies of everyone and give them all a single target.
Jesse Jenkins:
Exactly. We’ve seen this in Australia and Ontario and other places where you've had big backlashes to these kinds of policies; you've seen some of them survive those, but we failed in the US to do this in the past.
This set of policies is not a single policy – it's 50 policies. Each one drives emissions reductions and does part of the work. And each one has a clear constituency that it benefits, so it's easier to rally support for specific policies, and they're narrower and less expensive and less visible.
Overall, the bill is designed to make clean energy cheaper, which means make energy and energy technologies cheaper for everyone, which is a benefit that any future rescission will be taking away instead of a perceived damage that they would be eliminating.
And it's designed to drive very clear, salient, near-term benefits. Maybe not by November 2022, but over the next decade, there will be hundreds of billions of dollars of new local tax revenue tied to these kinds of products; dozens and dozens of new factories; more than a million new jobs in manufacturing; a million more in installation and construction and maintenance of these facilities. They will be spread all over the country, and they will be driven specifically into energy communities that have traditionally been tied to the fossil energy economy. Their affiliation with and self-interested ties to the fossil energy economy may not be eliminated, but it will certainly be complicated over time. It will deliver very near-term, salient, environmental health benefits particularly for environmental justice communities all over the country, and for other fenceline communities right around these infrastructures.
So it's designed to make clean energy cheaper and deliver salient economic interests and air pollution benefits that are felt in the short term way before we can see any signal in the climate chaos that is unfolding around us. There are 50 targets that you need to hit to upend this entire bill. It is really designed to be much more politically durable and, instead of having a high risk of getting a backlash that then has to be defended just to stay where we are, of actually driving positive feedback loops that make further action much more likely and politically supported over time. That was all on purpose. There's a philosophy behind this.
David Roberts:
Unlike reversing a carbon tax, which is vaguely invisible to most people, or even something like Obama's Clean Power Plan that hardly meant anything to any normal people, now reversing this is literally like “you're getting a bunch of money to build cool stuff. I'm going to take that away from you.”
Jesse Jenkins:
You're raising energy prices, you're hurting investments in manufacturing and energy security. You're going to have billion dollar companies lined up to fight you because they're making money off of this. You're going to have local elected officials pissed off because you're jeopardizing investment in their districts. It's just not a good idea.
David Roberts:
With every dollar you spend, you're creating constituents everywhere. This bill is like a constituent creation machine, shooting money out every which way and creating constituents in all 50 states.
Jesse Jenkins:
It's not what an economist would consider elegant, but it is what someone who has fought in the clean energy trenches for 15 years considers quite elegant, actually, because it is a political strategy designed to succeed and to accelerate over time.
David Roberts:
Nothing more elegant than a bill that passes.
This interview is us panting at the finish line and high fiving. We can relax a little bit about this until the next round of horrible things we have to fight comes along. So thank you so much for taking all this time, and I hope in the coming days and weeks you get lots and lots of rest.
Jesse Jenkins:
I hung up the hammock in the backyard yesterday and took a nap, and I hope to do more of that soon.
David Roberts:
Beautiful. Thanks so much, Jesse.
Jesse Jenkins:
Thanks, Dave.
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