Climate law that offers bushels of carrots, few sticks and a lot of promise 

Climate Finance

Climate law that offers bushels of carrots, few sticks and a lot of promise 

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The Inflation Reduction Act takes a positive approach – a rarity in these relentlessly cynical times.

What’s the bottom line in the Inflation Reduction Act for investors who direct their funds toward climate change? The bill’s title, created as a more politically palatable description for the remains of the defunct Build Back Better program, doesn’t tell you much about financing climate-related initiatives. So, here’s the important news below the headline: It includes between $365 and $385 billion (depending on various projections) for the climate over the next 10 years. That’s a major chunk of the bill’s total $437 billion and by far the biggest investment in climate ever made by the U.S. government. This is a very big deal in climate financing.

How exactly does the government intend to execute this unprecedented national energy strategy? Would you believe it is taking a positive approach – a rarity in these relentlessly cynical times? The IRA is almost all carrots in its many incentives and very little stick in the way of penalties or taxes. Especially notable by its absence is any mention of a carbon tax, much touted by many economists as the best vehicle for reducing emissions. The carbon tax has been embraced in the European Union but almost universally rejected by the American business community. Instead, the IRA speaks a language of grants, loans, tax credits and investments rather than fines. 

Throughout the IRA, there’s a positive, forward-looking approach in its veritable buffet of incentives.

True, the IRA includes a methane “fee” to be levied against oil and gas companies if their gas leakage rate reaches specified levels. But the largest companies are already working to install the technology needed to reduce methane emissions, and the IRA grants the EPA $1.5 billion to help speed up the adoption of these solutions. Companies can avoid paying the methane fee by complying with future regulations, so it’s as much a heads-up warning as it is a punishment. It wouldn’t be much of a surprise if few companies ended up paying these fees.

Throughout the IRA, there’s a positive, forward-looking approach in its veritable buffet of incentives.

Significantly, tax credits for wind and solar power are extended and expanded for 10 years. While these credits have been issued before, they have been started and stopped and re-started and reset, causing uncertainty from policy shifts and the apparent lack of any long-term national energy strategy. For example, the previous production tax credit for wind has expired, and the current investment tax credit for solar is being wound down. The 10-year timeline put forth in the IRA ensures long-term planning to relieve funders’ concerns about the boom-and-bust cycles that have hampered the growth of investment in renewables in recent years. The importance of long-term commitment seems like so much common sense, but it has taken decades to get to this moment, with the IRA now encoding the idea into law. 

The IRA provides $60 billion in investments to communities heavily impacted by pollution – most often, those experiencing poverty with significant populations of people of color in an effort to promote climate justice.

The IRA provides a big boost for the transition to clean cars by offering rebates of $7,500 to people buying new EVs and a $4,500 tax credit for those purchasing used ones. It also includes financing and credits to ramp up EV manufacturing. Grants of $2 billion are awarded for converting existing factories to make EVs; loans to build new EV factories are supported to the tune of $22 billion. A $60 billion production tax credit directs payments to companies engaged in clean energy manufacturing. Another $10 billion is set aside for building clean tech manufacturing facilities. These commitments could vastly accelerate the transition from combustion-engine and fossil-fuel power to clean energy.

In one notable area, the IRA provides $60 billion in investments to communities heavily impacted by pollution – most often, those experiencing poverty with significant populations of people of color in an effort to promote climate justice.

With such sweeping goals and big numbers at stake, the IRA creates an entity along the lines of a “green bank,” a $27 billion clean energy accelerator to turbocharge the development and deployment of emission-reduction technologies. 

To the dismay of some activists, the legislation also includes provisions that favor the oil and gas industry, designed to win the vote of West Virginia Democrat Senator Joe Manchin needed to create the majority to pass the bill. It gives the green light to offshore lease sales that were stayed by a court last year and opens the way for more such lease sales that President Biden had previously canceled. As an offset to this concession, IRA would substantially increase royalty rates that oil and gas companies would be required to pay to the government. The supermajors also get extensive tax credits for carbon capture, hydrogen and biofuels to help underwrite their green transition strategies, giving them a significant role in driving that shift – like it or not.

The IRA has been hailed as a “breakthrough” by clean energy manufacturers and a “generational opportunity” by energy executives.

The concept of “don’t let the perfect be the enemy of the good” could be called into play here. With Manchin’s political base in a state steeped in coal, his vote was always going to include that acceptable legislation that would throw a bone or two to the fossil fuel industry.

There are some creative innovations, such as invoking the Defense Production Act to produce heat pumps and support processing projects for critical minerals needed in new technology. This proposal gets $500 million in funding, and its goal is so proactive, so sensible that it almost seems an anomaly in today’s weaponized energy debates, even if the method to achieve it is unusual. 

The IRA is a huge tailwind for investors looking to direct funds toward climate-friendly assets. Investments are encouraged, supported, and ensured by a long-term, clean energy strategy. The payoff promises to be big in every way, from profits to climate change mitigation. According to analysts, this unprecedented financial and philosophical commitment could reduce emissions by 40% by 2030, compared to the current projections of 30%. The IRA has been hailed as a “breakthrough” by clean energy manufacturers and a “generational opportunity” by energy executives. Now it remains to be seen just how fast its ambitious goals and hefty largesse can be put into effective action. 

Written by

John Howell

John Howell is a writer, editor, and broadcaster who oversees the Climate Finance Weekly newsletter and advises on communications and media strategy. He was co-founder, editorial director, and chief of thought leadership for 3BL Media, for which he managed all original editorial content, wrote, and edited newsletters, and created the Brands Taking Stands initiative. He has worked as an editor and contributor for Elle, Artforum, and High Times magazines, developed new media for Hearst Magazines, and created communications for Calvin Klein, Polo/Ralph Lauren, and The Body Shop. He lives and works in New Hampshire and Maine.