Troopsplained: How the Inflation Reduction Act Changes the Game for Energy Transition
What shareholder activists should know about Washington’s biggest climate investment ever.
ICYMI, Congress just passed what’s being called the largest federal investment addressing climate change in American history. The bill’s uninspired (and slightly misleading) name, which you probably saw bouncing around your feeds, is the Inflation Reduction Act. President Biden signed it into law last Tuesday.
The legislation dedicates around $370 billion to climate and energy programs over the next decade. The goal is to increase clean energy supply and reduce fossil fuel demand. It aims to lower the cost of renewable energy at every step of the chain so that ditching oil becomes less risky and more coordinated.
It’s a big shift in the economics of green transition that lends shareholder activists passionate about the environment — that’s you, right? — tons of ammo to agitate companies holding the reins of that transition. The bill creates ripe conditions to strengthen the financial arguments that activists have made for years to divest from fossil fuels and accelerate a decarbonized future.
Here are the details.
So, what’s in the bill?
The bill’s primary tools are tax credits — tons of them.
These credits support clean energy companies to produce more electricity and invest in new plants; manufacturers to build components needed for those plants, like wind turbines and solar panels; car companies to build more electric vehicles; consumers to purchase those cars; states and utilities to update electricity infrastructure to accommodate changing supply.
A smaller but still significant chunk of cash is allocated for direct grants and loans that will support this renewable energy ramp-up. That includes the formation of so-called “green banks,” public funds which lend to smaller projects reducing carbon emissions in order to help those projects attract even greater sums of private investment that might not otherwise be available.
What impact will the bill actually have on the climate?
This will cut an estimated 6.3 billion metric tons of greenhouse gas emissions over the next decade and by 2032 would put the country around 40% below 2005 levels, according to preliminary analysis. That’s not enough, experts told The New York Times, to limit global emissions to the extent that scientists say we need — no more than 1.5 degrees Celsius above pre-industrial levels, ever heard of it? — but it does give the energy transition a big injection of… energy!
This seems… good? What does the fossil fuel industry think?
Well, they earned some concessions, so they can’t be too mad. The bill commits to continue public land leases for oil and gas extraction (something Biden once promised to halt) and in fact prioritizes those leases over wind and solar. It expands tax credits for carbon capture, which helps offset carbon emissions. Senate Democrats also pledged to separately pass “permitting reforms” that would streamline energy infrastructure development, including oil pipelines and export facilities.
It’s worth mentioning that Big Oil is invested in renewables, too; an ever-increasing portion of these companies’ portfolios consists of clean energy projects. They know their long-term business isn’t in the ground, even as they milk the present energy crisis for record profits in the short-term. State funding for the renewable sector boosts their growth plans.
How have markets reacted?
Unsurprisingly, indexes that measure investment performance across the clean energy sector, like S&P’s, are up since news of the legislation broke. Electric vehicle makers have also rallied, as Wall Street Journal notes. In its own analysis of the bill, BlackRock sounds quite bullish on renewables. Oil and gas stocks, meanwhile, are up slightly in the weeks following the Senate deal’s announcement.
What does this mean for shareholder activism?
How Troop-y of you to ask. The bill is a huge boost for activist campaigns demanding more urgent energy transition. Shareholders this year proposed accelerated carbon emission reduction plans at all of the biggest oil companies, including Shell, ExxonMobil, BP, TotalEnergies, and ConocoPhillips. Big banks like Citigroup and Bank of America likewise faced proposals to stop financing new oil and gas projects. These campaigns fell short as oil prices skyrocketed. But it becomes even easier to argue that pivoting from fossil fuels to renewable energy is a necessary financial decision when there’s massive state investment underwriting that pivot.
Is there anything else important in the bill?
Yep. The bill’s main funding mechanism is a new 15% corporate minimum tax designed to clamp down on giant firms that report billion dollar incomes but use deductions and loopholes to pay little to no federal income tax. (Big shouts to the activists behind recent shareholder proposals at companies like Amazon and Microsoft demanding transparency around tax avoidance.)
There are also major elements related to health care. Medicare will have the ability to directly negotiate certain prescription drug prices, and seniors’ out-of-pocket spending on drugs will be capped at $2000, among other provisions. Of course, drug prices impact people of all ages, so shareholder campaigns targeting Big Pharma’s pricing strategies, like those led by the Interfaith Center on Corporate Responsibility, remain crucial.
What about inflation?
OK, the bill probably won’t impact rising prices in the near-term very much, according to analysis by a range of economists and the Congressional Budget Office. But if a sneaky name helped climate action cross the finish line, who are we to complain?
