The US Inflation Reduction Act of 2022 is a USD700 billion climate, health and tax bill signed into law by President Joe Biden on 16 August 2022, USD370 billion of which is earmarked for climate and energy spending, tax credits and other incentives.
Its climate-related incentives are expected to spur a wide range of new investment across various green economic activities.
Key highlights include:
Many of the incentives are valid until end-2032 or beyond, offering longer term visibility to encourage businesses and households to invest in green technologies to curb harmful emissions. The bulk of the climate-related spending is to be funded by other tax provisions, including a new 15% minimum tax on corporate book income for corporations with over USD1 billion in profits.
Seeds of a Green Future
Overall, the new climate package is expected to reduce US net greenhouse gas emissions to 32-42% below 2005 levels by 2030. This is compared to a 24-35% reduction without it, according to analysis by research firm Rhodium Group. Most of the additional emissions reductions are expected to come from accelerating the deployment of clean energy.
Preliminary modelling by the REPEAT Project research team led by Princeton University’s ZERO Lab found that the climate package would likely cut annual US greenhouse gas emissions by an additional 1 billion tonnes below current policy by 2030.
Exhibit 1: New climate initiatives expected to set US on path to halve its emissions by 2030 from 2005 levels
Source: Preliminary Report: The Climate and Energy Impacts of the Inflation Reduction Act of 2022, REPEAT Project, Princeton, August 2022.
Investment in hydrogen production could rise to USD3 billion a year by 2030, 3x the level projected under current policy to encourage the deployment of carbon capture technologies at power plants.
Overall, the climate package would likely drive nearly USD3.5 trillion in cumulative capital investment in new US energy supply infrastructure in 2023-2032, the team said.
That would help put the US on course to slash its greenhouse gas emissions by 50% from 2005 levels by 2030, and to reach net zero emissions by 2050.
A Global Greenification
The US Inflation Reduction Act of 2022 follows similar large spending initiatives by the European Union and China on clean energy and related technologies. Large remaining emissions gaps point to more aggressive policy shifts ahead to decarbonise the world economy, creating new risks and opportunities.
Without increased government action, the world is expected to emit twice the greenhouse gas emissions in 2030 than is consistent with the 1.5°C limit of the Paris Agreement. Rather than 1.5°C of warming, the world is heading towards 2.4°C or more of warming by the end of the century on its current trajectory.
In Europe, the REPowerEU plan aims to increase the share of renewables in the European Union’s energy mix to 45% by 2030, and decrease their reliance on Russian fossil fuels.
China continues to pour billions into expanding its renewable energy capacity, and it remains by far the biggest spender on energy transition technologies, outpacing the US and other major economies. This underpins our ongoing preference within China for businesses with exposure to renewables as well as the new energy vehicle infrastructure and supply chain, among other policy beneficiaries.
Worldwide spending on the deployment of energy transition initiatives has risen steadily in recent years; last year, a record USD755 billion was invested, driven by surging investments in wind and solar installations and electric vehicle sales, according to the latest estimates by BloombergNEF.
Globally, installed renewable energy capacity reached 3,064 GW in 2021, four times the capacity in 2001, according to the International Renewable Energy Agency. As technologies improve further, we expect declines in the cost of renewable energy to drive even more widespread adoption of clean technologies globally.
Exhibit 2: US climate spending plans likely to accelerate deployment of renewable energy capacity worldwide
Source: International Renewable Energy Agency
The path ahead
Looking ahead to the rest of this decade, we see global efforts to strengthen climate ambition and pursue sustainable, climate-resilient development paths will continue to drive profound structural changes to the global economy.
While rising interest rates remain a key headwind for the utilities sector and for companies exploring new, still-unprofitable ventures positioned for the low-carbon transition, the current macro environment is challenging for equities overall.
Soaring energy prices from the Russia-Ukraine war are a preview to the struggles businesses and households worldwide would face during the transition towards climate-friendly economic growth. However, the US Inflation Reduction Act and its massive package of climate and clean-energy related incentives are the latest indication that the longer-term global policy trajectory is clearly heading inexorably towards a low-carbon economy.
New opportunities are emerging for a wide range of businesses across multiple sectors in the global transition towards a carbon neutral economy, given the broad reach of decarbonisation efforts worldwide.
Businesses that reduce emissions and waste, re-use natural resources and deliver products and services that support the overall decarbonisation of human activity are likely to be better positioned to adapt to the fast-evolving regulations and incentives being rolled out by governments worldwide, as well as shifting investor and consumer preferences.
Suppliers of critical components used in clean-air systems that reduce emissions, battery technology material, and clean energy technologies are well placed to reap the benefits of the change. From specialised chemicals providers to chip manufacturers, there are multiple industries that are lifted with the rising tide of climate spending.
