Bridging the Gap How to Finance the Net Zero Transition 2025

The Inflation Reduction Act (IRA), passed into US law in 2022, represents an ambitious effort to accelerate the US’s transition to a low-carbon economy, targeting critical sectors with substantial financial and policy support and incentives. According to the US’s Congressional Research Service, the measures in the IRA are projected to reduce US GHG emissions by approximately 33% to 40% below 2005 levels by 2030. Consistent with the EU’s approach, the IRA constitutes a mixture of means to scale-up transition finance: –Regulatory policies: such as tax credits for renewable energy generation –Market-based instruments: such as methane emission charges –Hybrid mechanisms: such as PPPs and EV grants and subsidies Specifically, it includes the Production Tax Credit (PTC) and Investment Tax Credit (ITC) to bolster renewable energy generation and infrastructure investment. For transportation, it introduces Clean Vehicle Tax Credits to accelerate the adoption of EVs and funds alternative fuel infrastructure development to foster a sustainable transportation network. Additionally, it allocates $1 billion for clean heavy-duty vehicles and $3 billion for reducing air pollution at ports.168 In connection with this, restrictions on fossil fuel resourcing are imposed, such as methane emission charges on specific petroleum and natural gas facilities. The manufacturing sector receives approximately $41 billion in tax credits for advanced energy production, underscoring the focus on domestic clean energy manufacturing. For buildings and energy efficiency, the IRA offers Energy Efficiency Tax Credits to encourage retrofitting homes and businesses, reducing energy consumption while also supporting the use of low-carbon building materials.169 With respect to environmental and climate justice, funding is made available for ensuring that disadvantaged communities gain equitable access to the benefits of climate initiatives, thus seeking to address long-standing environmental disparities. Agriculture, forestry and land conservation are also key components, with the Act promoting sustainable agricultural practices and funding forestry programmes focused on carbon sequestration, which are crucial for mitigating climate change. Furthermore, the IRA invests in climate research to enhance understanding and inform future policy decisions, ensuring that climate strategies are data-driven and effective. Cross-cutting provisions support interagency collaboration to ensure that climate considerations are integrated across various sectors for cohesive and effective policy implementation.170 This approach potentially positions the IRA as a pivotal framework for achieving the US’s climate goals. However, in light of the November 2024 US elections, the Act faces an uncertain future. The new Republican administration with the support of a Republican- controlled legislature may, at a minimum, be inclined to undermine its continued implementation.3.4 US Inflation Reduction Act (IRA) The IRA – contending with its internal inconsistencies and other concerns BOX 3 The IRA has faced several criticisms, primarily concerning its potential economic and environmental shortcomings. Critics argue that the Act could inadvertently drive up energy prices and inflation, especially as the demand for clean energy increases, without immediately mitigating the higher costs of fossil fuels during the transition.171 Concerns have been raised about the effectiveness of its environmental justice provisions, which some believe may not adequately address the needs of the most disadvantaged communities.172 The provisions tying renewable energy development to continued fossil fuel extraction – a political necessity in a highly polarized policy-making environment – have been criticized as counterproductive and perpetuating fossil fuel dependence.173 Challenges in implementation and regulatory coordination also pose significant risks to its success, with doubts about whether the current infrastructure and supply chains can meet the ambitious targets of its framers.174 Partners, such as the EU, have protested at its domestic production provisions, contending that they constitute a potential violation of trade rules and distort the market. There are also European concerns regarding the subsidies offered by the IRA and the potential growth of the US market for low-carbon innovation and technologies enticing European companies to the US at the EU’s expense. The measures in the IRA are projected to reduce US GHG emissions by approximately 33% to 40% below 2005 levels by 2030. Bridging the Gap: How to Finance the Net-Zero Transition 25