Climate Policy (In)Equity: Investigating Private Incentives Under the Inflation Reduction Act for Investments in Marginalized Communities

Background and Purpose

Since 2020, the United States has experienced 23 climate disasters annually, on average, each resulting over $1 billion in losses. Marginalized populations are disproportionally vulnerable as they have fewer resources to prepare for and recover from disasters. These inequities have prompted a “just transition” to shift into sustainable economies that is fair for all populations. The U.S. Inflation Reduction Act of 2022 (IRA) marked the first steps of this shift. Research has yet to examine how incentives influence distribution of IRA funds. The largest provision was over $200 billion for clean energy investments in communities through incentives, including the pre-existing New Market Tax Credit program (NMTC), which issues tax credits for low-income community investment. A just transition implies marginalized communities would receive equitable benefits in clean investments that reduce polluting emissions and provide capacity for disaster response. This study addresses a critical gap by investigating whether the IRA was structured to incentivize socially equitable investments in census tract communities. This study addresses two questions of whether disparities exist among: 1) tracts likely to receive investments?; and 2) funding amounts invested in those tracts?

Methods

This study collected publicly available census tract-level data. The study used NMTC program data of investment eligibility and expenditure from 2020-2022, representing when the bill was introduced and revised in Congress. We merged the NMTC program data with socio-demographics from the American Community Survey 5-year estimates (2016-2020) and state information from the University of Kentucky’s National Welfare Data. We developed a probit model predicting likelihood of a tract receiving funding and then an OLS model predicting the amount of funding for tracts that received funding. Models included independent variables for NMTC tract characteristics – including area median income (as a percentage of state median income) and unemployment rate, socio-demographics – including class (poverty rate), race, and age –, macroeconomic and political controls, state-fixed effects, and robust clustered standard errors. Models were analyzed for significant predictors for receiving funding and amount received.

Results

Initial models demonstrate that the likelihood of tracts receiving investments were equitable among tract area median income (negatively associated), and roughly equal, but inequitable among tract poverty rate and tracts with larger racial and ethnic minorities (virtually no change in likelihood). Tracts with larger dependent populations (ages under 18 and over 65) were significantly less likely to receive investments. Investment amount received only showed tract equity for unemployment rate (positively associated), but continued inequity among tract poverty rate, Black and Hispanic populations, and dependent populations (all nonsignificant).

Conclusions and Implications

Results suggest the IRA’s structure only incentivizes equitable benefits for narrow economic characteristics, while investments are inequitable for communities with higher poverty rates, larger ethnic and racial minorities, and more dependents, all which are disproportionally vulnerable to climate disasters. Future climate policies need to limit investor discretion in choosing funding recipients, move beyond one-size-fits-all provisions to benefit different vulnerable communities, and include community voices in policy development decisions. These policy shifts can create more equitable social change and a just transition.