Investment Implications of the Inflation Reduction Act on Climate Sustainability

A preliminary report released by the Repeat Project estimates that by 2030 the IRA may cut US net greenhouse gas emissions by more than 40% from 2005 levels†. This does not take into account the innovation and growth we believe we will see in the decarbonization sector as it is spurred on by the new policies. For instance, previous subsidies for wind and solar were short-term and either expired or were renewed last minute, which made long-term investments more challenging. While some of the funding is only an extension of existing subsidies, the IRA adds more certainty and flexible, technology-neutral credits which should increase some investment not captured in the projections. The certainty that 10-year incentives afford, combined with the ability to take credits for either zero emission electricity production or upfront payments for investment in facilities that generate electricity with zero emissions, will likely motivate greater investment from the private sector. We believe these incentives will benefit publicly traded renewable energy infrastructure developers, a sector of exposure for many of our clients.

Importantly, while many sources are reporting on US emissions, often overlooked are the non-US emission reductions that we expect will come from the US exporting the new technologies to other countries, which growth and adoption will be catalyzed by the IRA†. As a result, the IRA is likely to make a larger contribution to fighting climate change globally than is being captured in the initial projections. When combined with the CHIPS and Science Act and the Infrastructure Investment and Jobs Act that were recently signed into law, the scale of investment in the green economy far exceeds anything we have seen before.

The IRA will impact all of the major emitting sectors (Energy, Industry, Buildings, Land, Transportation) that both our private market decarbonization and public market infrastructure strategies focus on. We believe our existing and future investments in this space are likely to benefit from the new funding in multiple ways. For example, our efforts to accelerate the transition to clean energy will be aided by billions of dollars in tax credits. These tax credits will have a significant impact on the market for renewable energy infrastructure, power grid modernization, methane capture, energy efficiency, and electric vehicles. The 10-year extension of the existing Investment Tax Credit (ITC) and Production Tax Credit (PTC) creates greater certainty for renewable developers as they consider bringing new projects online. The bill also allows utilities to take advantage of the tax credits, bringing a new source of lowcost capital to the market. Renewable energy infrastructure and electrification of the energy system are significant themes in both public and private markets. In addition to incentives for established clean technology, such as solar and wind, nearly 50% of the $350 billion will directly impact emerging technologies, such as green hydrogen, clean aviation fuels, long duration energy storage, low carbon materials, and biofuels. This should drive down the cost of innovation and allow these technologies to benefit from economies of scale more quickly. The IRA establishes a very generous $3/ton tax credit for qualifying clean hydrogen [investments] and also provides strong incentives for early deployment. The IRA raises the existing 45Q tax credit for point-source carbon capture from $45/ton to $85/ton. It also establishes a $180/ton tax credit for direct air capture. We see significant potential for carbon capture with some projections suggesting a 13-fold increase by 2030†. This is critical for reducing emissions from heavy emitting industries, like steel and cement, that are more difficult to entirely decarbonize. Tiedemann is very focused on investing in this area. 02 | Tiedemann InsightsImpact on Nature-Based Solutions In addition to decarbonization, our climate sustainability strategy includes nature-based solutions (“NBS”) that are also likely to benefit from the IRA. Strategies we are currently evaluating have explicit impact targets that would qualify for federal incentives under the provisions of the IRA. For example, our NBS strategy aims to increase the adoption of climate friendly agriculture practices, such as cover cropping, which qualify for $20 billion in incentive payments. Beyond agriculture, the IRA allocates $5 billion to support reforestation and other forest health initiatives that should help unlock the carbon sequestration potential of US forests. In addition, the IRA allocates $700 million to fund permanent protection of forested land and also provides additional funding to avoid grassland conversion, both of which will help protect lands that sequester carbon, a focus of our investment strategy in carbon markets. Impact on Environmental Justice The IRA’s environmental justice funding, more than $60 billion, will help support vulnerable communities that lack access to renewable energy and energy efficiency improvements. More than 50% of the $27 billion set aside to f inance clean energy projects, such as rooftop solar and transportation electrification, through the Greenhouse Gas Reduction Fund is earmarked for low-income and disadvantaged communities. The Greenhouse Gas Reduction Fund is designed to function like a federal green bank. Green banks, which have had success at the state level, leverage public financing to mitigate risk and attract private-sector investment in climate resilient infrastructure. The IRA allots $11 billion to help clean up industrial pollution that tends to disproportionately affect communities of color and low-income populations. In addition, there are bonus tax credits provided for new investment in communities where a large share of the labor force works in fossil energy extraction or processing or where coal plants have closed in the last few years. There are also direct tax rebates for energy efficiency improvements to the homes of lower income families. These measures aim to ensure that the benefits of the growing green economy are more equitably distributed. Conclusion Overall, we believe the industrial policies outlined in the IRA will provide significant tailwinds for our climate sustainability investments. We expect the policies to meaningfully improve the trajectory of US emission reductions and lay the groundwork for further advances in decarbonization technology, naturebased solutions, and environmental justice. We believe the IRA will create opportunity for investment in the energy transition in both the public and private markets in areas such as sustainable real assets, naturebased solutions, renewable energy infrastructure, and climate technology.