The US Prioritizes Climate Change
US President Joe Biden inked the Inflation Reduction Act (IRA) into law on August 16. Contrary to the bill’s name, we expect minimal impact on near-term inflation, which we see as peaking soon but slower to normalize. We see this bill as a colossal step for the United States in the battle against climate change. As an aside, we also view this as an incremental win for human capital. In one large survey designed to measure climate anxiety in young people, 45% of respondents (aged 16-25 years) said their lives and functioning were negatively impacted by their feelings of climate change on a daily basis.1 As COVID-19 risks diminish and life returns to a new normal, this climate legislation may be a morale boost, specifically in the growing group that ranks climate change as a top concern. In this note, we focus on the renewable energy aspects of the IRA, resulting investment opportunities, and our outlook on long-term growth, valuations and risk.
This legislation will likely be transformative over the long term as it is the largest government-led investment in clean energy in US history. Overall, there will be US$369 billion spending allocated toward climate and energy programs, with significant investment implications.2
The US goal is to achieve a 50%-52% reduction in greenhouse gas emissions (from 2005 levels) by 2030. The disparity between our current emissions and the end-goal is significant, but the latest forecasts show the IRA could help close this gap by nearly two thirds, cutting annual emissions by an additional one billion metric tons.3,4
This legislation incentivizes the transition to renewable energy with longer-lasting tax and manufacturing credits that could change how companies and consumers make capital allocation decisions. In general, we see the following as likely winners: