Inflation Reduction Act

The Act

On 16 August 2022, the US took an important step in the history of clean energy and climate change with the adoption of the Act. The Act establishes energy communities and offer production and investment tax credits for clean electricity, bonus credits for projects located in an energy community to ensure workers and communities are included in sustainable growth and prosperity.

The Act, often deemed as the most significant climate legislation in the US history, provides financing, programmes and incentives to enable significant deployment of new sources of clean electricity, accelerating the transition to a clean energy economy. The incentives set forth in the Act reduce the cost of renewable energy for non-profit and educational institutions, state, local and tribal organisations. The use of legislative incentives, such as tax credits, is serves as a financial vehicle to reduce greenhouse gas emissions. Accordingly, the Act introduces substantial supportive grant and loan programmes namely;

1. Clean Energy Production and Investment Tax Credits: The new programmes replaced the Production Tax Credit (PTC) and Investment Tax Credit (ITC) in favour of emission-based credits namely the Clean Power PTC and Clean Power ITC.
2. $27 billion for the Greenhouse Gas Reduction Fund: The Act offers $27 billion to competitive financing for the purpose of leverage funding and attracting private capital for clean energy and climate-related projects, particularly to those aims reducing greenhouse gas emissions; and
3. a $40 billion in loan authority to guarantee loans for innovative clean energy projects, including renewable energy systems, carbon capture, nuclear energy and critical minerals processing, manufacturing and recycling.

The Act’s Influence on Climate Policies Globally

Recognising the Act as a game-changer and a magnet for foreign green investment, the European Union (the “EU”) responded to the Act by launching its own Green Deal Industrial Plan for the Net Zero Age. The European Green Deal Industrial Plan aims to prevent the relocation of clean energy companies from the EU to the US. The plan focuses on a greater relaxation of state aid rules and provides for increased national support, including tax breaks, for the development of clean energy industries. The Green Deal Industrial Plan, announced by the EU Commission on 1 February 2023, aims to strengthen the competitiveness of Europe’s net-zero industry and facilitate a rapid transition to climate neutrality and aims to create a more favourable environment for the expansion of the EU’s production capacity for net zero technologies and products, which are essential for Europe to meet its ambitious climate goals.

This unified US and EU commitment to decarbonisation underpinned calls for China and others to increase and accelerate their decarbonisation commitments. In fact, with a record-breaking attendance of over 65,000 people, including business leaders, energy company representatives, various non-governmental organisations and financial experts, COP28 made its mark on the global agenda.

One of the most significant developments at COP28 was the adoption of Global Acceleration for Decarbonisation Initiative (“Initiative”). The Initiative commits to tripling the renewable energy capacity and doubling the rate of progress in energy efficiency by 2030 to reduce the share of fossil fuels in global energy production. The execution of the Initiative by the US has served to accelerate the existing market dynamics rather than imposing new obligations as, through the Act, the US aims to reduce economy-wide CO2 emissions, including electricity generation and use, by 35% to 43% below 2005 levels by 2030.

We’ve summarised our takeaways on COP28 where we’ve acted as one of the legal service providers here.

The Act’s Influence over Türkiye’s Climate Actions

The Act, although local, has significant influence over the Turkish market, as Türkiye aligns its domestic legislation with its key trading partners, particularly the EU and the US. Türkiye aims to actively engage in global issues of green transition, sustainability, and climate change in order to maintain its position in international trade.

In line with such approach and the Act, certain Turkish companies, especially those active in the energy sector, accelerated investments and projects in the US. In this context, Kontrolmatik Technologies, a Turkish conglomerate leading Türkiye in fields of energy, mining, and processed industry, built a lithium-ion battery plant in the US with lithium-iron-phosphate batteries in 280-305Ah range, with an aim to start operations in 2024. Bearing in mind the adoption of the Act, Kontrolmatik increased the output of its planned energy storage-focused gigafactory in the US by 50%. Similarly, other Turkish companies operating in the energy sector in the US are expected to shape their investment policies in line with the Act and accelerate the transformation of their investments.

Furthermore, Türkiye is closely monitoring changes in the international arena on clean energy and climate change. As a result, Türkiye is taking action at the national level and aims to protect its place in international trade, both politically and commercially. In this regard, in October 2021, Türkiye formally ratified the Paris Agreement, committing to achieve net zero carbon emissions by 2053. To support Türkiye’s climate initiatives, a Memorandum of Understanding (“MoU”) was established, signed by Türkiye, the World Bank, France, Germany, the UN, the IFC and the EBRD. The MoU is designed to facilitate the mobilisation of private finance and ultimately work towards achieving carbon neutrality by 2053 in Türkiye. Considering the above, it is clear that both the innovations introduced under the Act and the EU developments have had and will continue to have an impact on the Turkish economy and legislation.

Conclusion

The United States passed the Act on 16 August 2022, a milestone in the field of clean energy and climate change. With a focus on long-term economic and industrial growth, the Act establishes energy communities and provides tax incentives for clean energy projects to engage society in the clean energy economy. The Act also contributes to adoption of ESG principles by providing tangible financial benefits to companies that prioritise environmental and sustainable management practices, making them more appealing to investors.

Across the Atlantic, the European Green Deal Industrial Plan was adopted as a strategic response to the US law and relaxed state aid rules and increased national support, including tax breaks, to boost clean energy industries, increasing Europe’s net-zero industrial competitiveness. Such identical approach of the US and the EU towards facilitating a rapid transition to climate neutrality paid off in COP28 by the adoption of the Initiative which accelerated the existing market dynamics in the US by supporting the Act with similar provisions. 

All these developments attracted Türkiye, which recognises the importance of harmonising its domestic legislation with the regulations of its major trading partners, namely the EU and the US, to ensure a strong position in global trade. In line with this proactive approach, Türkiye ratified the Paris Agreement and established a MoU to facilitate the mobilisation of private finance, committing to achieve net zero carbon emissions by 2053. The innovations introduced under the Act, coupled with EU developments and the outcome of the COP28, are shaping the Turkish economy and legislation and will serve as an important roadmap to follow in future.

For more information on the Act and its impact on your company or business, please contact your CMS partner or your local CMS expert: Dr. Döne Yalçın.