On August 16, 2022, U.S. President Joe Biden signed the Inflation Reduction Act (IRA) into law. Hopes were high that the broad array of open-ended tax credits (client-only research) would drive decarbonization in the U.S. (and global) economy, but the variable nature of the subsidies created uncertainty. One year later, it’s clear that the IRA is having a major impact on the energy transition and sustainable innovation in the U.S.
New analyses of the uptake of the IRA’s tax credits are uniformly higher than initial estimates (USD 370 million–USD 400 million). The University of Pennsylvania’s updated model suggests over USD 1 trillion in outlays. Although that may not be great news for the U.S. federal budget deficit, this money accelerates the energy transition: great news for the planet. Furthermore, the catalytic effect on private investment has been massive. Bloomberg reported a record high USD 70 billion in venture capital investment in climate tech last year, and Goldman Sachs predicts USD 3.3 trillion in private investment over a 10-year time frame. Although it’s possible that a future Republican president and Congress would end or somehow cap the IRA’s subsidies, this momentum in the private sector and the fact that the lion’s share of investment is flowing to Republican congressional districts suggest that the IRA will be very difficult to roll back.
From a global perspective, the “Buy American” provisions of the IRA ruffled U.S. economic partners and allies. The EU pushed ahead its own Green Deal Industrial plan, proposing expanded state aid through the European Sovereignty Fund (client-only), while Japan and some Chinese companies are finding ways to benefit from the IRA’s subsidies. Tune in to our webinar on September 7th to hear Lux break down Japan’s decarbonization policies and the implications for new market opportunities.
For more on the intersection of policy, innovation, and sustainability, check out two insightful reports we published earlier this year: the Lux Policy Compass for Chemicals and the Lux Policy Compass for Industrial Companies.