Since the Inflation Reduction Act passed the Senate, Democrats have been calling the bill a gamechanger for climate adaptation and emissions reductions. And they are right. The bill will transform entire sectors to be more energy efficient and rely less on fossil fuels than ever before. But perhaps the most exciting provisions of the IRA, the subsidies for low-income households and disadvantaged communities, have gotten very little coverage.
Up to now, federal incentives to help families switch from gasoline to electric vehicles and retrofit their homes were accessible primarily to upper income families. This is because the incentives usually came in the form of tax breaks, which many low-income households cannot benefit from because they do not make enough money to owe income tax, or as credits that only covered a portion of the costs of the measure.
The Inflation Reduction Act of 2022 provides funding for more than 100 programs to help the nation meet its climate goals and transition to a clean energy economy. An important subset of these programs provides $60 billion in grants, tax credits and other subsidies to meet the administration’s environmental justice goals. These programs will help lower-income families transition to a clean energy economy and adapt to rising temperatures by increasing the energy efficiency of their homes, cars, and communities.
On average, families with incomes of less than $38,500, representing the lowest 40 percent of income, pay 25.7 percent of their household income for home energy and gasoline. As incomes increase, the share of income spent on home energy and gasoline declines. Households in the top 20 percent of income, more than $240,500 a year, only spend 4.8 percent of their income on these expenses. The IRA recognizes that lower income families have limited resources to pay for climate-friendly measures and that the government needs to step up if we are going to meet the nation’s climate goals.
First, the IRA provides $4.5 billion to provide rebates of up to 100 percent for lower income families to purchase and install new energy efficiency appliances including heat pumps, water heaters, stoves, and clothes dryers. Families with incomes of up to 80 percent of area median income (AMI) will receive a 100 percent rebate of purchases up to $14,000 and those between 100 percent and 150 percent of AMI will receive a rebate of 50 percent. In addition, if required, subject to the $14,000 price cap, households can also receive a rebate to purchase an upgraded breaker box, electrical wiring, and insulation, ventilation and air sealing.
Second, the IRA provides $4.3 billion for rebates to cover a portion of the upfront costs of installing energy saving measures throughout families’ homes when the projected savings of the measures is expected to offset the purchase price. The program provides specific language that would allow states to increase the percentage of the grant covering the installations for families with incomes of less than 80 percent of AMI. For example, in the case of a retrofit that achieves modeled energy systems savings of 35 percent, the family would receive the lesser of $4,000 or 50 percent of the project costs. However, the bill includes language that would allow states to raise the matching rate to up to 100 percent for lower income families.
Third, the price of new electric vehicles is out of reach for most lower-income families and the current tax credit is only applied to the purchase of new electric vehicles. The bill would provide a reduced credit of $4,000 for used electric vehicles, increasing the accessibility of electric cars for lower-income families. The credit would only be available to individuals with incomes of up to $75,000 and $150,000 for those who are filing jointly.
The savings for lower-income families will be significant. The combined benefits from electrifying their homes with an electric heat pump for heating and cooling, purchasing an electric vehicle and installing solar panels according to a recent report by Rewiring America, would save $1,800 a year. For lower income households these savings will be transformative, reducing their energy bill by about 30 percent.
What the IRA gets right is acknowledging that low-income families will need help in order to participate in the national effort to address rising temperatures and climate change. The included programs will help to reduce the crushing burden lower income families face in transitioning to a green economy. However, the bill is only a first step. Close to 32 million households currently receiving energy bill assistance will also need help retrofitting their homes. The IRA provides the conceptual framework and initial funding to get this done. The challenge will be to make sure investments in these households continue, and funds are added to these new programs as necessary so that all families are able to get the help they need.
Mark Wolfe is an energy economist and serves as the executive director of the National Energy Assistance Directors’ Association (NEADA) and the Energy Programs Consortium, representing the state directors of the Low Income Home Energy Assistance Program. He specializes in energy and housing affordability and related finance issues.
Cassandra Lovejoy serves as the Policy Director for NEADA and the Energy Programs Consortium. She specializes in energy and water access and affordability.
The opinions expressed in this article are their own.