Could the US climate bill be the push the system needed?

The climate bill included in the Inflation Reduction Act passed by the US Senate is likely to be enacted into law – a move that could catalyze a pivotal moment for the financial services industry to view the clean energy sector as one of opportunity rather than compromise.

Nearly $375 billion is set to be invested in different strategies aiming to reduce the country’s carbon emissions, mostly through renewable energy investments and tax rebates for consumers to purchase electric vehicles. 

This means that the legislation will drastically increase deployment of capital in the clean technology sector and move the US closer to meeting its Paris commitments.

“This legislation is a true game-changer. It will create jobs, lower costs, increase US competitiveness, and reduce air pollution. The momentum that will come out of this legislation cannot be underestimated,” said former Vice President Al Gore.

The bill is also a competitive play against China, which has become the world’s leading manufacturer of solar panels, batteries, and other clean energy materials. One provision requires that at least 50% of the components in an electric car battery come from the US, Canada or Mexico by 2024, a percentage that rises to 100% in 2028.

Overall, this represents the first major climate-related legislation to be passed in the US, which is still historically responsible for more greenhouse gas emissions than any other country – at around 400 billion tons since 1751, it is responsible for 25% of historical emissions. 

Passing and implementing the Inflation Reduction Act could reduce the country’s emissions to around 40% below 2005 levels by 2030, research concluded, enabling the US to close 50-66% of the emissions gap between the business-as-usual scenario and the Nationally Determined Contribution in 2030.

Source: Repeat Project

Unpacking the bill 

• Clean energy tax credits: The bill expands key energy tax credit provisions over the next decade to support the growth of the renewable energy sector: 
  • $60 billion for clean energy manufacturing
  • $30 billion production tax credit for wind, solar, and battery production
  • $9 billion in tax rebates for consumers adding heat pumps, electric stoves, etc. 

• Environmental justice: $60 billion for initiatives that help disadvantaged communities, in the form of grants to address issues such as environmental health problems or equitable transportation planning

• Methane emissions reduction program: $1.5 billion rewarding oil and gas companies for reducing emissions; penalties for those that don’t

• Clean energy and sustainability accelerator: An equivalent to a green bank that would invest private and public funds in clean energy technologies and infrastructure
  • $27 billion of funding

• Innovative clean energy loan guarantees
  • $40 billion for loan guarantees to eligible US projects employing new or improved technology
  • $3 billion is set aside to cover the credit subsidy cost of such loan guarantees

• Energy infrastructure reinvestment financing
  • A $5 billion loan guarantee program for projects to retool, repower, repurpose or replace energy infrastructure that has ceased operations, or to enable operating energy infrastructure to avoid, reduce, utilize, or sequester emissions

• Electric vehicle tax credits: limited to a household income of $300,000 and single income of $150,000 per year
  • $4,000 for consumers to buy used EVs
  • $7,500 for consumers to buy new EVs

Source: Bloomberg NEF

The push the system needed

Consumers have been demanding more climate action in recent years, with customer acquisition being the main driving force behind the interest of banks and financial services companies to invest in green projects.

Regulatory bodies are also drawing climate disclosure requirements, but these are still a few years away from being enacted in law. 

In this context, having a policy incentive to start investing in the clean energy transition could catalyze private capital to go in and reap the returns. 

“Renewable energy technology has made revolutionary progress, and renewables are already cheaper in many areas than fossil fuels. A moderate push from public policy is all that it will take to transition to a much greener economy. And the Inflation Reduction Act will provide that push,” argued economist Paul Krugman.

Last year, just over $100 billion was invested in clean energy assets, with record volumes of new capital deployed to support the transition to a lower-carbon economy, according to BloombergNEF head of Americas, Ethan Zindler.

Source: Renewable Energy World

Deals that weren’t profitable before could now deliver returns – it’s only a matter of having the conviction and tools in place to go out and start investing or financing renewable projects, according to Amanda Li, COO and co-founder of Banyan Infrastructure, a financing platform for sustainable infrastructure projects.

“Creating urgency in banks and capital markets is tough. These are large, slow-moving institutions. Expanding into new investment classes or markets will face that friction against a sense of urgency. The bill helps create this because it has incentives in place. The market’s growing, people can sense that there will be winners and losers, and there's a need to move quickly,” she said.