Implementation Strategies for Climate Action and Sustainability Plans, Part 2
In March 2023, MRSC published Implementation Strategies for Climate Action and Sustainability Plans, Part 1. In the first blog, we looked at strategies local governments are using to implement their climate action plans — including working with community partners and engaging residents through incentives and educational programs. Part 2 of this blog series will focus on the funding mechanism available to local governments for the implementation of their climate action and sustainability plans.
This blog will focus on the significant federal funding opportunities available under the Inflation Reduction Act (IRA).
Inflation Reduction Act (IRA)
The IRA was passed in 2022 as one of three major pieces of federal infrastructure legislation spearheaded by the Biden administration, prioritizing environmental justice and disadvantaged communities.
The IRA complements the Bipartisan Infrastructure Law (BIL) and supports infrastructure projects focused on clean energy and climate resilience. Where the BIL focuses on providing infrastructure project funding through grants, the IRA focuses on the use of tax credits as a funding source. The majority of the IRA funding is available through tax credits, including for individuals, businesses, non-profits, and public entities. Funding dashboards and IRA guidebooks offer additional insight into these funding mechanisms.
The overall amount the IRA provides in assistance to local governments is $47 billion. In broad terms, a big chunk of IRA money will go toward making energy cleaner and more sustainable. The expansion of tax credits is being used as a tool to encourage the use of renewable electricity and to incentivize the production of clean hydrogen and/or electric-powered vehicles, buildings, and industries. Due to the scale of the bill, even the smaller parts of the funding are significant.
Five target areas of IRA funding available to local governments include Clean Energy and Efficiency, Air Pollution and Reduction, Housing and Commercial Buildings, Agriculture, Forestry, and Rural Development, and Workforce Development.
Tax Credits for Local Governments
Most local governments pay very little in taxes, so what value is there in tax credits? To properly distribute the funds available through the IRA, the U.S. Department of Treasury (Treasury) and the Internal Revenue Service (IRS) created a novel mechanism for “elective pay distribution” that includes clean energy tax credits, business tax credits, rebates and grants, and low-interest loans. Elective or “direct pay” allows tax-exempt government entities to monetize tax credits that would otherwise not be useable due to the public entity’s tax-exempt status.
If a local government places a project in service that would qualify for a tax credit under the IRA, it will receive direct cash payment up to the full value of the tax credit. The National League of Cities has written about the new and expanded tax credits that are eligible for the direct pay option and how to take advantage of them. Direct pay provides an option for local leaders to fund agency-owned clean energy projects and will make projects more affordable for local governments.
The amount of direct payment that an entity may be able to receive can be increased through bonuses. Bonuses may be obtained by meeting prevailing wage and apprenticeship requirements, and targets related to domestic content, energy communities, and low-income communities. Treasury recently released guidance on the key labor provisions under the IRA that allow for the enhanced clean energy and climate tax incentives.
A pre-filing registration process must be completed to take advantage of the elective or direct pay provisions. The IRS has released temporary guidance governing this process. In addition to the tax credits available for eligible products, the IRA allows for the combination of other funding sources providing additional avenues for agencies to seek funding.
Funding Search Tips
Here are a few tips for local governments interested in pursuing an IRA-related grant:
- Utilizing federal government funds must be done through www.grants.gov. Create a profile early and become familiar with the site.
- Guidebooks can greatly assist in staying organized and understanding the different provisions set out in the IRA and how they may be advantageous to your community.
- Sign up with agency websites to stay connected and receive updates. Funding directories and dashboards provide the latest information to help the organization.
- During the planning stages of projects don’t forget to completely read the Notice of Funding Opportunities (NOFOs) to understand funding programs and their details. This will allow a project to be properly designed and take advantage of funding opportunities as much as possible. Local governments can track open federal grant programs through the Government Finance Officers Association’s (GFOA’s) NOFO Tracker
- Be sure you can define the underserved communities in your jurisdiction, including their needs and concerns, as this will assist with your funding search. The various federal agencies have different definitions of what qualifies as an underserved community, and the funding offered may be restricted in its use based on program requirements.
- Integrate funding requests with the goals established in your Climate Action Plan.
- Look for partnership opportunities. Some programs under the IRA may prioritize or require local agencies to partner with other public agencies, nonprofits, or businesses to qualify for the grant award.
- Contact the appropriate funding agency staff directly. They can be a great resource and are generally motivated and interested in seeing communities utilize available resources.
Conclusion and Additional Resources
Because most of the IRA funding is going into financial perks like tax credits, how much this helps depends on who can get these perks and how they use them. In addition to taking direct advantage of funding opportunities under the IRA, local governments should help spread the word about these incentives so business owners, individuals, and other entities may take advantage of the assistance.
Here are some IRA-related guidebooks from the White House:
- A Guidebook to the Inflation Reduction Act's Investments in Clean Energy and Climate Action
- A Guidebook to the Bipartisan Infrastructure Law
- BIL Rural Playbook
- Consumer guide to clean energy tax credits and rebates, which local leaders can share with their communities
Here are federal agency webpages tied to IRA funding opportunities:
- Environmental Protection Agency
- Department of Energy: Clean Energy Infrastructure Program and Funding Announcements
- Department of Transportation: Key Notices of Funding Opportunity
- Treasury: Guidance on Provisions to Expand Reach of Clean Energy Tax Credits Through President Biden’s Investing in America Agenda
MRSC is a private nonprofit organization serving local governments in Washington State. Eligible government agencies in Washington State may use our free, one-on-one Ask MRSC service to get answers to legal, policy, or financial questions.