VWV Volumes #28: Analyst-in-Training Julia Sansing on Investing in a Sustainable Future
Investing in a Sustainable Future: Harnessing the Inflation Reduction Act for Clean Technology Growth
In August 2022, President Joe Biden signed the Inflation Reduction Act (IRA) into law. With over $390 billion dedicated to accelerating the transition away from carbon-based fuels and towards lower energy consumption and renewable energy substitution, the IRA is the most significant piece of climate legislation passed in American history.
Key Climate Components of the Inflation Reduction Act
The main objective of the IRA is to incentivize large companies and polluters, especially those in the transportation and energy sectors, to adopt cleaner technologies. In order to do this, the law offers billions of dollars in tax credits for a wide range of green technologies, including renewable energy production, energy storage, energy efficient domestic appliances, and electric vehicles (EVs). Since these tax credits are uncapped and will not phase out until 2032, it is projected that these subsidies could total to more than $1.2 trillion in government funding. In addition to tax credits, the IRA will also allow the Department of Energy to loan more than $300 billion to private companies working on groundbreaking climate technology and infrastructure.
The Impact of the IRA on Climate Investments
While it is difficult to say if the IRA will be enough to help the U.S. meet its pledge to cut emissions by 40% during the next decade, the positive impacts of its passage on the future of climate tech are clear. In fact, the IRA has exceeded even the most optimistic predictions in promoting clean energy investments. According to a recent report released by Bank of America, there have been over 270 clean energy projects announced since the IRA’s passing last year, totaling to approximately $132 billion in private investments. Of these funds, over half went to EVs and batteries, and the remainder was directed towards grid storage, clean fuels, carbon capture, and renewable energy (most notably, solar power).
Since its implementation, the IRA has primarily directed its capital towards well-established companies. For example, ExxonMobil, a major hydrogen producer globally, has been motivated by IRA incentives to capture carbon emissions from its hydrogen production. It then utilizes the resulting clean hydrogen to reduce emissions for both itself and its customers. Similarly, Ford Motor Company is leveraging the IRA's 45X Advanced Manufacturing Production Credit to back its $3.5 billion investment in constructing a new electric vehicle battery plant in Michigan.
Opportunities for Clean Tech Startups
Although the IRA is not intended to directly support startups, early-stage companies have nonetheless benefited. As large companies look to switch to cleaner technology, there is an increased demand for new and improved solutions for emissions reduction. Many startups have emerged to meet this demand, offering auxiliary services to large industries. The tax credits available to households looking to purchase EVs and other energy-efficient appliances have resulted in a similar trend on the consumer side of the clean tech industry, creating additional opportunities for startups in the space. Moreover, the IRA guaranteed consistent funding through 2023. This reduced uncertainty and encouraged significant private investment, including VC funding for climate tech startups. As of June 2023, North America represented 58% of climate tech VC value, up from 43% in 2022, signaling increased interest among VC firms in North American climate tech startups.
As of now, the full potential of the IRA has yet to be realized and many of the law’s initiatives are only beginning to ramp up. Moving forward, the IRA will continue to act as a pivotal catalyst for the success of clean tech investments and startups, fostering innovation and paving the way for a more sustainable and resilient future. 🌱
About the Author
Analyst-in-Training Julia Sansing is a sophomore from Los Angeles concentrating in Environmental Science and Business Economics. She is interested in startups, especially those working in the environmental space. Julia is the cofounder of Friend in Me, a nonprofit that connects kids with disabilities and student volunteers through Zoom. She also plays for the Brown Women's Water Polo Team and is involved with EP and Scholars of Finance. She loves surfing, traveling, and trying new restaurants.🏄
Sources:
https://pitchbook.com/news/articles/us-inflation-reduction-act-canada-china-climate-tech-carbon
https://www.crfb.org/blogs/cbo-scores-ira-238-billion-deficit-reduction
https://spectra.mhi.com/the-inflation-reduction-act-is-driving-a-clean-tech-industrial-revolution
https://www.greenbiz.com/article/looking-back-inflation-reduction-act
https://www.linkedin.com/pulse/climate-tech-startups-rise-one-year-impact-ira-samuel-knight-tech/
https://time.com/6207015/clean-climate-technology-inflation-reduction-act/