The Inflation Reduction Act (IRA) aims to transform the U.S. economy and has far-reaching implications for the construction industry. It addresses embodied carbon, incentivizes green building practices, and paves the way for a more sustainable built environment.
As global discussions about climate change and sustainability gain momentum, it is no surprise that the building industry, an integral part of the modern world, finds itself at the center.
There is a growing sense of urgency among governments around the world and some are responding through the creation of initiatives, policies, and regulations that address climate change. Among the myriad of legislations and policies, the United States' (U.S.) Inflation Reduction Act of 2022 commands the attention of the Architecture, Engineering, and Construction (AEC) industry.
In this article, we delve into an Inflation Reduction Act summary, discussing its significance, its relevance to embodied carbon, and its potential to shape the built environment.
Inflation Reduction Act Explained
At its core, the Inflation Reduction Act (IRA) is not solely about buildings or construction. Introduced as part of the modified Biden administration’s Build Back Better plan, the Act is fundamentally an economic legislation aimed at curbing rising inflation levels by reducing the federal deficit1. Spanning various domains, it touches upon climate change, clean energy solutions, prescription drug reforms, and tax revisions.
Yet, why does the AEC industry need to pay attention? President Biden hailed the Inflation Reduction Act legislation as “one of the most significant laws in our history,” emphasizing its transformative potential and with an estimated >$400 billion climate and energy-related provisions, funded through new taxes and increased IRS enforcement, its breadth is undeniable1.
Estimated breakdown of climate and energy-related provisions - Congressional Budget Office Estimates (Credit Suisse)
The IRA and Embodied Carbon
Embodied carbon has rapidly ascended the global environmental agenda. As buildings become more energy-efficient, the industry’s focus has shifted from operational emissions to the emissions associated with the materials and construction methods used in buildings and one of the Inflation Reduction Act key points that the AEC industry cannot afford to overlook is its commitment towards reducing embodied carbon. The Inflation Reduction Act bill allocates billions of dollars for federal procurement and industry support of low-carbon building products3. Such a substantial financial commitment, backed by the force of law, sends a clear signal: the future is low-carbon, and the industry must adapt or risk obsolescence2.
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How the IRA Affects the Built Environment
The IRA’s encouragement of investments into profitable growth sectors by offering tax relief for profits over a defined period has implications for the built environment as it can stimulate investments in sustainable infrastructure, green technologies, and eco-friendly construction methods.
In short, the act offers a multi-pronged approach to influencing the built environment:
Promotion of Cleaner Materials: Concrete and steel, fundamental materials in modern construction, are significant contributors to embodied carbon, accounting for around 50% of total material emissions in commercial projects3. Therefore, these hefty contributors are now under the spotlight and the Inflation Reduction Act passed funding provisions that are set to stimulate the production and adoption of cleaner alternatives or more sustainable production methods2.
Incentive-Led Sustainability: The legislation earmarks almost $250 billion in tax credits to bolster clean electricity, encourage the purchase of electric vehicles, and incentivize homeowners to enhance their home's energy efficiency1. Such incentives are likely to drive a wave of sustainable retrofits and green construction projects.
Regulatory Signals: While the IRA itself does not regulate embodied carbon, the Inflation Reduction Act climate provisions place significant financial commitments in this direction and provide a clear hint towards the industry’s expected trajectory. With federal procurement now geared towards low-carbon products, manufacturers will experience a shift in demand, prompting them to prioritize sustainable solutions.
Stimulating Innovation: With the IRA allocating $350 million to support a product carbon labeling program and Environmental Product Declaration (EPD) development support for manufacturers, there's a clear thrust towards transparency and innovation3.
The IRA and the Future Treatment of Carbon Emissions in the Built Environment
The question remains: how might the Inflation Reduction Act of 2022 reshape the industry's treatment of carbon emissions? The answer lies in its multidimensional approach:
Setting a Precedent: One of the pivotal Inflation Reduction Act key points is its emphasis on reducing embodied carbon. By placing embodied carbon on the federal agenda, the IRA has set the tone for future legislation and industry standards. It underscores the importance of looking beyond operational emissions and diving deeper into the construction process itself3
Market Reorientation: By directing federal funds towards low-carbon building products and supporting product carbon labeling, the IRA is not just regulating; it's actively shaping market demand3.
Global Leadership: As the industry evolves worldwide, the U.S., through the IRA, positions itself well in the drive for low-embodied carbon materials and procurement. In doing so, it can influence global standards and practices, ensuring a collective move towards sustainability.
The IRA’s aim to decarbonize the built environment by 2040 through infrastructural changes and incentives, however, is not a solely American initiative. Europe, a leader in the climate action space with its own green ambitions, has responded to the U.S.’s IRA. European Commission President Ursula von der Leyen presented the Green Deal Industrial Plan and announced the Net-Zero Industry Act, aimed at increasing European manufacturing capacity in key green technologies4. The EU is concerned with maintaining its competitiveness in the global green industry and sees its own efforts as complementary, rather than in competition, with those of the U.S.
While the EU approach involves a broader range of tools such as state aid and a proposed "European Sovereignty Fund," it aims to achieve similar objectives: accelerating the transition to a net-zero emissions economy4. By setting clear targets and emphasizing the scaling up of green technologies, Europe underscores the significance of collaborative global efforts in combating climate change.
Both the U.S. and EU initiatives, although distinct in their specifics, offer complementary frameworks that could potentially create synergy in the global march towards a sustainable future. The global built environment will undoubtedly be shaped by these monumental policy shifts, underscoring the role of international cooperation in addressing climate change.
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