On the surface, the Inflation Reduction Act that President Biden signed into law on Tuesday may sound like a massive government spending program. Indeed, it promises to put nearly $370 billion in federal funding behind the energy transition.
But, if you dig deeper, the IRA is less about the power of government spending and more about the power of the private sector. The tax incentives, loans, and grants at its center are all intended to nudge the private sector to go faster in deploying existing technologies like wind and solar while also advancing future technologies. “The path they went down is 100% the ‘sweeten the deal path,’” says Karen Karniol-Tambour, chief investment officer for sustainability at Bridgewater. “Let’s just give lots of incentives to make the green stuff really competitive.”
It’s early days, but it’s safe to say that this landmark investment will create a new ecosystem as companies—from large multinationals to feisty startups—chase the opportunities embedded in the IRA.
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To understand the revolution underway, let’s start with the biggest line items: green tax incentives. The law includes tens of billions in tax credits for a range of clean technologies, from electricity production to more efficient consumer appliances. Beyond boosting popular wind and solar, it will also advance technologies that have struggled to win mainstream acceptance. Think: nuclear, hydrogen, and fossil fuels where carbon dioxide emissions are captured.
These credits will change corporate behavior. Most obviously, power companies will be encouraged to produce clean energy over more polluting options. But the implications for industry go much further as firms—particularly carbon intensive ones—consider new, financially-rewarding ways to cut emissions. As tax consultancy PWC advised in the wake of the IRA, companies should “consider potential changes to their manufacturing or operating models” to take advantage of the benefits of the new law. In total, $3.5 trillion is expected to be invested in new, primarily clean energy infrastructure in the U.S. between 2023 and 2035, according to an analysis of the IRA’s impacts by Princeton University’s REPEAT Project.
Tax credits for people to retrofit their homes and purchase new energy efficient appliances creates another market incentive for companies to expand their product offerings. And new companies will spring up to do the same thing.
The IRA also has a few ways to more directly help the private sector beyond tax credits. An analysis from the Environmental Defense Fund shows that $11.7 billion in new federal funding will allow the Department of Energy to loan more than $312 billion to private companies. These loans will help companies get groundbreaking technology, programs, and infrastructure off the ground. (This same program helped Tesla expand its manufacturing more than a decade ago).
All of this is likely to lead to a new ecosystem in the private sector as big companies evolve and a new generation of climate tech companies alike chase newfound opportunities. The head of investment at Bill Gates’ climate fund estimated this week that the IRA would lead to the creation of 1,000 new companies.
But while investors are generally good at allocating capital to make better technology (and turn a profit) they are less good at addressing the social ramifications. To address this, the IRA includes guardrails to promote domestic manufacturing, union labor, and environmental justice concerns. But many activists remain unconvinced. Shaping the new climate ecosystem may be the topic for the next big climate legislation.
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