BNP AM

The sustainable investor for a changing world

Search for

Filter by

Asset class

Economics

Geography

Investing

PODCASTS
EQUITIES
Currencies
FRONT OF MIND | – 4 Min

Skies clear for billion-dollar US climate spending bill

By EDWARD LEES, ULRIK FUGMANN 09.08.2022

In this article:

    A game-changing bill has been passed by the US Senate, paving the way for billions of US dollars of spending to fight climate change and reinstating the US as a credible key player in the effort to keep global warming under control, write Edward Lees and Ulrik Fugmann of the Environmental Strategies Group. [1]

    The USD 430 billion Inflation Reduction Act (IRA) seeks to tackle climate change, as well as lower drug prices and raise corporate taxes. A vote in the Democratic-controlled House of Representatives is viewed as a formality before the bill is passed to President Joe Biden to be signed into law this week.

    Last week’s Senate compromise on the package of measures had come as a surprise to markets. The proposals were seen as the ‘most ambitious climate action ever taken by the US’ (New York Times) and include tax incentives to ramp up wind, solar, geothermal and other clean energy industries over the next decade.

    The bill is called the ‘Inflation Reduction Act of 2022’, to distinguish it from the ambitious multitrillion-dollar Build Back Better plan that Democrats in Congress spent most of last year toiling to pass. The name underscores the deflationary effect that clean energy technology is expected to have in the medium to longer term. [2]

    We had long held the contrarian view that after the failure of the Build Back Better plan, we would see a significant US climate bill voted through during the summer.

    This was based on our assessment that clean energy investments are ultimately deflationary. They also help address the hot topic of energy security in the face of the war in Ukraine. We also believe that US power infrastructure is in a dire condition [3] and needs cheap, greener and reliable power.

    What IRA means: Clean energy

    Here are some examples:

    • A 90% increase in utility-scale solar installations in 2024
    • A 60% increase in onshore wind installations every year to 2030
    • Leading green hydrogen producers potentially now being paid to produce clean hydrogen
    • Electrochromic glass now on price parity with traditional windows.

    What IRA means: Climate

    This legislation is a significant breakthrough for three reasons:

    • It turbocharges US clean energy investment with USD 369 billion in incentives, and dramatically reduces the long-term expected price of electricity in the US as a result
    • It puts the US back on the front foot when negotiating global climate agreements; this could drive further sympathetic policy from other countries
    • It could allow the US to cut its greenhouse gas emissions by 40% from 2005 levels by the end of the decade.

    What IRA means: Clean tech

    The bill looks set to reshape investment in the US renewable industry for the rest of the decade.

    Specifically, the policies include efforts to:

    • Lower consumer energy costs
    • Enhance energy security and promote domestic manufacturing
    • Drive decarbonisation
    • Enhance environmental justice
    • Help farmers and rural areas.

    Significant policies include:

    • Long-term extension of Investment Tax Credits and Product Tax Credits: As such, this gives visibility to renewable companies seeking to invest in the space, which could drive significant investment. There is a potential 10% ITC credit for projects that meet domestic content hurdles for components and a further 10% for systems installed in low-income communities.
    • PTCs will be re-established for wind, nuclear, biomass, hydro, and, for the first time since 2006, solar. This is a benefit for existing US manufacturers and we would expect to see significant investment in US capacity as a result over the coming years.
    • For solar, the extended longevity of the tax credit will just give more visibility to consumers and installers looking to grow. A Princeton study expects solar deployment to increase 5x from 2020 under the Inflation Reduction Act.
    • For wind, we are seeing forecasts for a 60%+ increase in annual wind installations over the next eight years.
    • For the first time, there is a tax credit for low-carbon hydrogen. We view this as game-changing legislation for market-leading green hydrogen producers in the US.
    • The inclusion of energy storage in the bill should supercharge the adoption of residential storage and lead to significant growth for residential solar financing and solar companies. We view this as a major tailwind for energy storage manufacturers and installers.

    What IRA means: Electric vehicles

    Some details:

    • Tax credits of USD 4 000 for used EVs and USD 7 500 for new EVs. To be eligible, the EVs must be assembled in North America. After 2023, any vehicles with Chinese battery components would not be eligible.
    • Critical minerals must come from the US or a country that has a free-trade agreement with the US.
    • Applicable only on cars up to USD 55 000, and trucks, vans and SUVs up to USD 80 000
    • Additionally, the existing credit cap of 200 000 vehicles per manufacturer has been removed and is available through 2032.  

    This has meaningful implications, not least on the raw materials side, where critical minerals manufacturers and EV manufacturers based in the US could see a significant competitive advantage.

    With running costs for internal combustion engines now higher due to the increase in petrol costs, the price reduction for EVs can only help demand growth.

    References

    [1] Also see Environmental thematic strategies – BNPP AM Luxembourg professional investor (bnpparibas-am.lu)  

    [2] Also read ‘Greenflation’ – Navigating the climate policy, oil price and inflation nexus

    [3] Progress on clean energy could be derailed without an overhaul of the electricity infrastructure – a task some industry experts say requires more than USD 2 trillion. The network is decaying with age and underinvestment, a condition highlighted by failures during increasingly frequent and severe weather events. Source: https://www.reuters.com/investigates/special-report/usa-renewables-electric-grid/

    Disclaimer

    Please note that articles may contain technical language. For this reason, they may not be suitable for readers without professional investment experience. Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns. Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

    Related posts

    Infographic – Achieving net zero: what can we do?
    FORWARD THINKING | Infographic - 1 Min

    Infographic – Achieving net zero: what can we do?

    In confronting climate change, it is critical that asset managers contribute to the transition to a low-carbon economy. As the...

    Say-on-climate votes must move beyond box ticking
    FORWARD THINKING | Blog - 3 Min

    Say-on-climate votes must move beyond box ticking

    Say-on-climate votes are becoming more popular, and a common framework is needed, Paula Meissirel, stewardship analyst at BNP Paribas Asset...

    PAULA MEISSIREL
    | 23.11.2022

    Viewpoint highlights

    Subscribe to receive this week’s articles straight to your inbox.

    Please enter a valid email
    Please check the boxes below to subscribe

    FOLLOW VIEWPOINT

    Receive daily updates