The Inflation Reduction Act (IRA) has passed the Senate. The bill provides $369 billion to support clean energy and fight global warming in the form of investment, tax credits and loans across a spectrum of areas, but its significance and impact can go well beyond the dollars.
While the bill contains certain provisions for the fossil fuel industry with respect to leasing of acres of offshore oil and gas fields and funds for carbon capture, we believe the IRA is a big win for the climate. Analyses from the REPEAT project and the Rhodium Group project the IRA to cut US emissions by close to 40% by 2030. The bill’s provisions should also enable further decoupling of emissions from economic growth. More important perhaps, is that the bill can create a “network effect” and generate momentum with investors whose actions can deliver impact beyond those projections.
The Inflation Reduction Act (IRA) has passed the Senate. The bill provides $369 billion to support clean energy and fight global warming in the form of investment, tax credits and loans across a spectrum of areas, but its significance and impact can go well beyond the dollars.
While the bill contains certain provisions for the fossil fuel industry with respect to leasing of acres of offshore oil and gas fields and funds for carbon capture, we believe the IRA is a big win for the climate. Analyses from the REPEAT project and the Rhodium Group project the IRA to cut US emissions by close to 40% by 2030. The bill’s provisions should also enable further decoupling of emissions from economic growth. More important perhaps, is that the bill can create a “network effect” and generate momentum with investors whose actions can deliver impact beyond those projections.
Institutional investors have started to incorporate climate change into their investment policies, but widespread commitments to align with net zero are still lacking. We believe that one reason for the reticence is the underlying belief among many CIOs and investment committees that performance needs to be sacrificed when adopting policies that involve decarbonization and climate solutions. Much has been written about the “green premium” – the additional cost associated with deploying many green technologies vs fossil fuel-based alternatives. Lack of political will to enact policy to reduce such a premium is often cited as an impediment, or perhaps an excuse, for not allocating capital toward green solutions.
We believe that the Inflation Reduction Act has the potential to significantly reduce the green premium and facilitate the allocation of capital to investments across a broad spectrum of climate solutions, from cleantech start-ups to mature wind and solar generation companies. And the second and third-order effects could be significant not only for the ecosystem of renewables, but also as a signal to companies across all sectors of the economy that the investments they make to decarbonize their businesses will result in financial benefits.
Society needs a certain degree of synchrony between government policy, capital allocation and consumer behavior to solve complex problems like climate change. The investments, tax credits and loans will help to lower the risk of green investments and provide investors with a significant reason to believe that aligning portfolios with net zero will be a benefit to long-term performance. Profit with a purpose continues to be our view of the best chance for not only climate mitigation, but also a more equitable society. It is our hope that the Inflation Reduction Act will reinvigorate this argument, and, in so doing, allow more institutional investors to overcome performance concerns and position their portfolios appropriately for climate risk, opportunity, and impact.