OThe Inflation Reduction Act, which President Biden signed Tuesday into law, may seem like an enormous government spending program on the surface. It promises nearly $370 billion of federal funding for the energy transition.
If you look deeper, however, the IRA doesn’t just focus on the power and influence of government spending. Instead, it is about the power and influence of the private sector. All of the tax incentives, loans, grants and other financial aid at its core are designed to push the private sector towards faster deployments of existing technologies, such as wind and solar, while also helping to develop future technology. “The path they went down is 100% the ‘sweeten the deal path,’” says Karen Karniol-Tambour, chief investment officer for sustainability at Bridgewater. “Let’s just give lots of incentives to make the green stuff really competitive.”
It’s early days, but it’s safe to say that this landmark investment will create a new ecosystem as companies—from large multinationals to feisty startups—chase the opportunities embedded in the IRA.
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The revolution is underway, let’s start with the biggest line items: green tax incentives. Tens of billions are included in the law as tax credits to a variety of clean technologies. These include electricity production, more efficient consumer appliances and even better energy efficiency. The law will boost popularity of solar and wind as well as advance technologies that are still struggling to gain mainstream acceptance. Consider: hydrogen, nuclear and other fossil fuels that capture carbon dioxide.
The credits are expected to change the corporate culture. The credits will encourage power companies to choose clean energy instead of more polluting alternatives. But the implications for industry go much further as firms—particularly carbon intensive ones—consider new, financially-rewarding ways to cut emissions. As tax consultancy PWC advised in the wake of the IRA, companies should “consider potential changes to their manufacturing or operating models” to take advantage of the benefits of the new law. In total, $3.5 trillion is expected to be invested in new, primarily clean energy infrastructure in the U.S. between 2023 and 2035, according to an analysis of the IRA’s impacts by Princeton University’s REPEAT Project.
Learn more The Inflation Reduction Act Will Soon Make it Cheaper to Buy EVs—If They Have North American Batteries
Businesses can also benefit from tax credits that allow homeowners to upgrade their homes with energy-efficient products. New companies will also emerge to offer the same service.
The IRA offers a variety of other ways for the private sector to be assisted, beyond providing tax credits. The Environmental Defense Fund has calculated that the Department of Energy will be able to lend more than $312 million to private businesses with $11.7 billion of federal funding. This will allow companies to get innovative technology, programs and infrastructure started. The same program that helped Tesla to expand its manufacturing capabilities more than a decade back was used again today.
As big corporations evolve, and as new generations of climate-tech companies seek new opportunities, all of these developments are likely to create a new environment in the private sector. The head of investment at Bill Gates’ climate fund estimated this week that the IRA would lead to the creation of 1,000 new companies.
Investors are good at allocating capital for better technology and turning a profit, but they have fewer skills at dealing with the social implications. This is why the IRA has safeguards in place to encourage domestic manufacturing, union labor and protect environmental justice. Many activists still remain skeptical. The next major climate legislation could be about securing a new climate ecosystem.
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