Colorado Just Uncorked Billions in Free Climate Money

No one really knows how big the United States’ signature climate legislation could become. The Congressional Budget Office projects the incentives in the Inflation Reduction Act add up to about $369 billion. But many of those incentives are uncapped, meaning the government will keep shelling out tax credits and rebates as long as there’s demand for them. Some outside analysts think the law could ultimately total $800 billion, or even more than $1 trillion.

State policy will be a deciding factor. And Colorado just wrote a playbook for how to bring as much of that money into its economy as possible while steering the IRA’s programs to better fit its own climate agenda. I call it: The Inflation Reduction Act 2.0.

Last week, the state passed a series of bills that replicate much of the federal climate act, including tax credits and rebates that double down on some IRA programs while building on others.

One of the biggest bills expands the state’s incentives for consumers to electrify their heating systems and purchase electric vehicles. Will Toor, the executive director of the Colorado Energy Office, told me the idea was basically for the state to spend money to make money.

“The philosophy was creating state incentives that would encourage businesses and consumers to act in ways that will then draw down federal tax credits and bring more federal funding into the state,” he said.

Heat pump installations can be complicated, and costs can quickly balloon into the tens of thousands of dollars. While the federal incentives in the IRA help, they may not be big enough for many interested customers. Toor said that a state analysis revealed that additional state-level incentives for heat pumps would significantly increase uptake of related federal programs.

The idea behind a $5,000 tax credit for electric vehicles was slightly different. Toor told me that because of the domestic content requirements for the federal tax credits, there won’t be many models that are eligible in the next three to five years. “Given the momentum that we have in growing the EV market share in Colorado, we wanted to make sure that we were able to maintain that during that period,” he said.

Colorado’s EV tax credit also bumps up to $7,500 for vehicles that are under $35,000. As Toor said, not many EV models are eligible for the federal tax credit yet, but the Chevy Bolt, which retails for less than $30,000 is one. That means Coloradans have a limited chance (RIP Chevy Bolt) to pick up the 2023 model for $15,000 or less.

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They’ll also have access to the first state-run rebate in the country for e-bikes, which was included in the same bill, and will complement cities like Denver’s plans to expand bike lanes. An e-bike rebate was in an earlier version of the IRA, back when it was called the Build Back Better Act, but it was ultimately cut from the final draft.

The other big thing Colorado did was set the stage to solve long-term climate challenges by expanding the IRA’s incentives for emerging technologies. It basically made the pot a little sweeter for some climate-solutions companies to set up shop in Colorado. For example, the federal government now offers tax credits for the production of sustainable aviation fuel, a lower-carbon version of jet fuel. Colorado will try and lure that industry with a new tax credit for the construction of the production facilities.

Similarly, the IRA created a tax credit for clean hydrogen production. But it’s still unclear whether industries that don’t already use hydrogen in their operations will adopt the fuel. Colorado will make it more attractive by offering a new tax credit for the use of the fuel — a first-in-the-nation program. The goal was not only to attract the federal tax credit funding, but also to support Colorado’s application to become one of the Department of Energy’s “hydrogen hubs.”

Here, lawmakers went a step further, showing how states can really determine how some of these riskier solutions supported by the IRA, like clean hydrogen, take shape in the U.S. Hydrogen is a flexible fuel with many potential applications, but it’s very energy intensive to produce. Many climate advocates recommend using it in limited, hard-to-decarbonize industries, rather than, for example, as a replacement for natural gas in home heating. But thus far, Congress has funded programs that encourage its use in almost every conceivable way. With its new tax credit, Colorado is the first state to prioritize the fuel in a few select industries, like aviation and heavy-duty trucking.

Notably, lawmakers also took a stand in a contentious debate over how to define clean hydrogen, adopting very strict rules for what will qualify for its tax credit. Climate advocates hope the decision will influence the U.S. Treasury Department’s guidance for the federal tax credit, which has yet to be published.

“The IRA and the Infrastructure Act create new opportunities,” Toor told me. “So I do think it's very important for states to consider those opportunities and think through how to design state policies that complement the IRA.”