Here’s how the new U.S. climate deal could make energy bills cheaper

A surprise congressional budget deal announced Wednesday night boasts $370 billion in new spending for tackling climate change, including oodles of tax credits and rebates that could make it cheaper for people looking to drive and live more sustainably. 

“This bill is going to open up a lot of avenues for Americans to contribute to the fight against climate change on an individual level,” said Senator Sheldon Whitehouse, a Democrat from Rhode Island, in an emailed statement. “Through a mix of rebates for electric appliances and efficiency retrofits and tax credits for technologies like heat pumps … it’s going to become a lot more affordable to do your part.” 

Called the Inflation Reduction Act of 2022, the proposed tax, health and climate package was negotiated by Senate Majority Leader Chuck Schumer and Senator Joe Manchin. Just two weeks ago, the prospect of such a deal seemed doomed when Manchin, a West Virginia Democrat, said he wouldn’t support the climate provisions amid rising inflation. But the two senators quietly reengaged, and then shocked the climate world with news of the deal. “Holy s---,” tweeted Senator Tina Smith, a Democrat from Minnesota. “Stunned, but in a good way.” 

Jeenah Moon/Bloomberg

The spending package is still far from final. The Senate needs to vote on the legislation, which could happen as early as next week. The House would then need to agree to the bill before President Joe Biden could sign it into law. 

But as it is currently written, the bill would be a huge step toward the U.S. meeting its Paris climate agreement goals, and would funnel record funding into clean energy technologies and programs to combat climate change. Some of this money would go directly into the pockets of consumers, to incentivize adoption of electric vehicles, heat pumps, and home energy-efficiency upgrades.

Here’s a breakdown of the most significant implications for  people trying to decarbonize their lives:

Electric vehicles

The proposal includes consumer tax credits for both new and used “clean cars,” defined as vehicles with a battery at least partly manufactured or assembled in North America and built with materials that are extracted or processed in a country that is in a free-trade agreement with the U.S.

That means you could get $7,500 for qualifying new electric vehicles, for example, if you make less than $150,000 a year or have a combined family income below $300,000 and file taxes jointly. Critically, the money would be applied for the first time at the point of sale, lowering monthly payments rather than reducing a tax bill months later. 

The existing federal tax credit for EVs excludes models from manufacturers that have already sold at least 200,000 of them — a cap that Tesla, GM and Toyota have already hit. This bill scraps that. Instead, it would impose a price threshold per vehicle. Bigger rigs — electric SUVs, pickup trucks and vans — need to cost less than $80,000 to qualify for the credits, while the cap on smaller vehicles is set at $55,000. Under those restrictions, some of the sportiest EVs and the Tesla Model 3 Long Range, one of its top sellers, are too pricey. But a rash of new models, including the Chevrolet Blazer EV expected next summer, fall under the price threshold. (You can find the prices of various popular electric vehicles on Bloomberg’s EV Tracker.)

Additionally, you could get $4,000 off a used electric vehicle that’s priced at $25,000 or below and sold by a dealer. This credit is only for people who individually make up to $75,000 annually or $150,000 a year in jointly filed taxes.

EV advocates are particularly excited about the used-car credit, considering that nearly three in four cars bought in the U.S. are used. “This is something we’ve always said is a sleeper issue,” said Andres Hoyos, vice president of the Zero Emission Transportation Association. “It’s going to be a game-changer for mass adoption.” 

But not electric bikes

Less excited are ​​electric bike makers, who were disappointed to find that the bill does not include tax credits or other incentives for e-bikes, a possibility floated in last year’s Build Back Better spending bill. E-bike sales have been booming in the U.S. without the help of federal incentives, but in the eyes of bike advocates, focusing transportation incentives exclusively on electric cars is an inefficient way to reach climate goals.

“It just continues to support auto-centricity and doesn’t help with mode shift,” said Noa Banayan, director of federal affairs at People for Bikes, a trade association that lobbies on behalf of bike makers.

Still, Banayan said the bill is an important breakthrough on broader climate action and includes potential benefits for riders, such as $3 billion in funding for neighborhood access and equity grants that can be used to build and repair bike lanes, trails and sidewalks.   

Heat pumps and home electrification

The legislation provides significant incentives for low- and moderate-income households to electrify their homes, replacing fossil-fuel furnaces, boilers, water heaters and stoves with high-efficiency electric devices that can be powered by renewable energy. 

The $4.28 billion High-Efficiency Electric Home Rebate Program would provide a rebate up to $8,000 to install heat pumps that can both heat and cool homes, and a rebate up to $1,750 for a heat-pump water heater. Homeowners can also obtain up to $840 to offset the cost of a heat-pump clothes dryer or an electric stove, such as a high-efficiency induction range. 

Many homes will need their electrical panels upgraded before these appliances can be installed, and the program offers up to a $4,000 rebate for such improvements. To make homes more energy-efficient, a rebate up to $1,600 will be available to insulate and seal a house, and a rebate of up to $2,500 is offered for improvements to electrical wiring. 

The program, to be administered by the states, would run through Sept. 30, 2031, and homeowners would be able to collect a maximum of $14,000 in rebates. To qualify, household income cannot exceed 150% of the area median income. 

“The impact of this program is huge, as it will help over a million low- and moderate-income households make the switch to electric,” Sam Calisch, head of special projects for Rewiring America, a national nonprofit that promotes home electrification, said in an email. “This looks like a slam dunk win for electrification.”

“We estimate at current prices, households that get heat pumps for space and water heating, an EV, and put solar on their roof stand to save $1,800 per year on energy bills,” he added. “Not only that, but these households will be getting off the roller-coaster ride of fossil-fueled inflation, with stable bills into the future.”

For homeowners who do not qualify for the rebates, the IRA provides for a tax credit of up to $2,000 to install heat pumps. Other energy-efficiency measures, such as installing an induction stove or new windows and doors, qualify for tax credits up to $1,200 a year.

Last but not least, solar

The legislation revives a 30% tax credit for installing residential solar panels and extends the program until Dec. 31, 2034. The tax credit would decline to 26% for solar panels put into service after Dec. 31, 2032 and before Jan. 1, 2034. Homeowners who install solar battery systems with at least 3 kilowatt-hours of capacity would also qualify for the tax credit.