PSF Insights: Biden's Inflation Reduction Act And Its Impact On Climate Tech

By Aidan Brennan, Senior Analyst

What is the Inflation Reduction Act?

The Inflation Reduction Act was signed into law on August 15th 2022 by President Joe Biden on the grounds of reducing the US’ carbon emissions by approximately 40% by 2030. The Act secures around $370 billion of funding towards the promotion of green technology in the form of various tax credit provisions on technologies such as carbon capture and clean hydrogen. The Act also increases the number of federal leases for wind and solar energy farms and introduces new tax credits on the investment of clean energy solutions in a bid to curb the nation’s greenhouse gas emissions.

According to the Rhodium Group, the package drives US net GHG emissions down to 32-42% below 2005 levels in 2030, as compared to 24-35% without it, whilst also saving US households between $717 and $1146 in 2030, relative to 2021 levels. Therefore, using a conservative estimate, the act will indirectly decrease US GHG emissions by 750 million tonnes per year by 2030, equivalent to the carbon footprint of 53 million Americans on an annual basis. The Act splits the majority of its capital allocation among 5 main sectors, these include: energy, manufacturing, environment, transport and agriculture. As the second 2nd largest emitter of CO2 globally with 4 731 million metric tonnes of carbon dioxide produced in 2020 alone, mainly from areas such as transport and power generation, the IRA is certainly a step in the right direction.

To fund all of this, large corporations and wealthy, high-income taxpayers will pay more taxes. Most significantly, $313 billion over 10 years in revenues will come from a new 15% minimum tax on book income for large companies that report large profits to investors but have little or no taxable profits. According to Moody’s Analytics, the act will not appreciably hurt economic growth while modestly reducing inflation by some 3.3 basis points per year over the next decade.

How do these Tax Credits actually work?

In short, Tax Credits reduce the amount of tax a company will owe to the government. Of the $370 billion included within the Inflation Reduction Act, $270 billion will come in the form of these tax credits. According to the US Treasury, the incentive scheme aims to mobilize capital for critical climate-related investments in low-income and under-invested communities, expand the clean energy economy for businesses and workers in these communities and lower costs for working families. So, how is this seen in practice?

The Inflation Reduction Act modifies and extends previous legislation on investment tax credits by providing a 30% credit for investments into wind, solar, energy storage and other renewable energy projects. It also provides an additional investment credit for investment into low income communities and an additional tax credit on energy usage for the production of renewable energy sources.

According to the Biden administration, a bi product of these aforementioned investment incentives will be the creation of more than one million jobs in energy and related manufacturing sectors over the next decade. This combined with further tax incentives that promote an increased living wage gives evidence to the idea that the bill puts more money in the hands of working people, which can only be a good thing.

A third benefit of the Inflation Reduction Act will be a decrease in the production and installation costs of renewable energy solutions. As of 2021, only 12.4% of the US’ total energy consumption and 19.8% of their total energy generation came from renewable sources. This reliance on oil and gas and the volatile prices that come with it are eating into small businesses profits as well as millions of families savings. When the price of renewable energy is at an all time low with sources such as solar costing less than 10 cents per kWh, the Inflation Reduction Act will provide an incentive for millions of Americans to make this switch away from fossil fuel related energy and into a net zero future.

Not only does the bill provide tax credit opportunities for businesses but consumers are also able to see some direct benefits. Clean vehicle credits allow taxpayers to claim back up to $7500 per vehicle each year. When the typical taxpayer in the US emits over 4.5 metric tonnes of CO2 per year from driving alone, incentives like these are key to a net zero transition.