On August 16, President Biden signed the Inflation Reduction Act. The act contains $369 billion in spending to reduce greenhouse gas emissions (GHGs) and to adapt to the irreversible effects of climate change.
The Inflation Reduction Act does this through a multitude of tax incentives, as well as through direct investment in renewable and clean energy projects, including energy production, manufacturing clean energy technology domestically, supporting electric vehicle (EV) transportation, funding for clean tech innovation, etc. This funding is in addition to the $296 billion already allocated to be available to address climate change and other initiatives in the 2021 Infrastructure Bill. Together, at almost $669 billion, this is the largest investment that the US federal government has ever made in climate action and interrelated infrastructure projects.
Whether you’re in the energy or transportation industry, there are many industrywide implications worth noting about the new act. We recommend the following:
- Marketers, anticipate and adjust to a much faster shift to green consumerism. Today, 36% of US online adults would rather purchase products from a company/brand that takes action on climate change, even if the price of the product is higher. And there is a segment of consumers who want to be more green-conscious, but they’re often stymied by price or convenience or both. The bill includes incentives for consumers to invest in green technology. For example, there is a home improvement credit, which allows households to deduct 30% of the cost of improvements, such as installing heat pumps and solar panels or insulation, from their taxes. It also provides consumers with tax credits for both new and used EVs. Significant investments are also earmarked for low-income consumers to incentivize them to electrify or retrofit energy-efficient home appliances. These initiatives will push consumers to not only be more aware of their options but also make them more likely to make other green purchase decisions.
- Tech leaders, look for opportunities to ride a wave of tech innovation in the coming years. Among other initiatives, the Inflation Reduction Act includes $1.3 billion for farmers and ranchers to access tools and information to implement climate-smart measures, $236 million to monitor air pollution, and $25 million for EPA enforcement technology such as software. It also includes almost $15 billion in various loan and grant programs under the Department of Energy to invest in the development of innovative clean energy technology. There’s another $40 billion in new loan authority for the DoE’s Loan Programs Office (LPO) that it can use to fund a wide variety of technology not yet commercially viable. There will be huge opportunities here, not just for companies that directly support agriculture, transportation, manufacturing, energy, batteries, etc., but for an ecosystem of software and services to forecast, model, enable, manage, and measure it all.
- Insights leaders and product managers, prepare your firms to thrive through impending industry disruption. The fossil fuel industry will also benefit from the climate components in the bill. Specifically, the bill includes billions of dollars in new tax breaks and subsidies for the fossil fuel industry over the next 10 years while still allowing the US to achieve 40% GHG reduction. These incentives give the energy sector more time to develop technology such as carbon capture, utilization, and storage (CCUS) that could extend the lives of fossil fuels as well as give the industry more time to adjust to a decarbonized economy. This includes not only investments in CCUS but new products and services in support of renewable energy and in green hydrogen.
- The Inflation Reduction Act will also completely transform the transportation sector. New EV sales will slow down in the short term, but domestic manufacturing will increase and create a new market for used EVs. This is because the act extends consumer tax credits for EVs, but it also phases in stricter supply chain requirements that require assembly in North America, which will take time to adjust. The act includes $2 billion to help the conversion and $3 billion for the US Postal Service and others to purchase clean vehicles, from delivery trucks to school buses and garbage trucks. More importantly, the act also introduces a credit of up to $4,000 for used EVs when certain requirements are met. While the credits will be harder to receive, it will reshape where EVs are built and spur the growth of the used EV market.
Remember, this is just the investment by the US federal government. Expect US states, cities, and towns to also take action and spur investment ─ Massachusetts passed a new climate bill recently. Companies can expect this massive injection to be a turning point in decarbonization, and they should expect ripple effects across the economy as businesses sense the momentum and clearly see a green market revolution underway.
Researchers Scott Bartley and Alex Soley also contributed to this blog.