At a Glance
- The Inflation Reduction Act has contributed to a sizable increase in US clean energy and tech projects, and manufacturing investments. With the Republican election campaign including plans to repeal the act, the outcome has implications for the future of these investments
- Current consensus view is that a full reversal is unlikely, but we believe the market is underappreciating the risk of a partial repeal, which could involve the weaking of tax credits and funding programmes, as well as other regulatory changes
- As part of our work around the energy transition we have developed a framework to assess this risk and the potential implications for the most exposed sectors
In November the US goes to the polls to decide who will be the next president – the Democrat incumbent Joe Biden or returning Republican nominee Donald Trump. Under Biden, in August 2022 the US introduced the Inflation Reduction Act (IRA), a federal law which aims to, among other things, invest into domestic energy production while promoting clean energy. It represents the largest ever Congressional investment in the energy transition1.
With reports that Trump would seek to “gut” the IRA if elected2, at Columbia Threadneedle Investments we have developed a framework to assess the risks of a repeal of the act across those sectors that are direct beneficiaries and identify the implications
for the most affected companies.
IRA significance and threat
The IRA deploys sizeable tax credits for every major economic sector key to achieving wholesale decarbonisation: energy, transport, buildings and agriculture. It also contains multiple funding and regulatory provisions. When it was unveiled in August 2022 that figure stood at $369 billion over 10 years, but recent estimates project a further $400 billion of investments, which could grow higher still since most provisions are uncapped3.
The IRA also has implications for industrial policy, as it provides large incentives for the domestic manufacturing of clean technologies. It seeks to establish local manufacturing capabilities to reduce the overreliance on the supply chain from China to make solar, wind and battery components4.
Since its introduction, investment announcements have increased by 60% to more than $114 billion5. Most of these are for battery manufacture and are concentrated in Republican and/or swing states (Figure 1). The benefit of these investments in terms of job creation and economic growth makes many in the market believe a full repeal is unlikely in the event of a Republican victory.
Figure 1: domestic manufacturing types and state locations (top) and billions invested (bottom)
Source: BloombergNEF. March 2024
With regards to the effectiveness of the IRA in driving investments in clean energy, attribution is more difficult to estimate. Investment in this space would have happened to some extent regardless of the IRA, but the near-doubling of interconnection requests from renewable projects to the grid post-IRA s a good indicator of its material effect (Figure 2).
Figure 2: pre- and post-IRA energy connection requests
Source: Berkeley Lab, April 2024
Scenario analysis: Republican win
The market consensus is that the risk to the IRA is binary – ie either a full repeal or no repeal at all – and that a full repeal is unlikely because many of the IRA benefits are concentrated in non-Democratic states. We think this is a strong argument – but doesn’t remove the risk of a partial repeal. In fact, we believe there are compelling arguments to believe a partial repeal is likely, and the market is underestimating this risk.
The main driver behind this belief comes from the legislative dynamics set to play out in 2025. If Republicans win, they could look to extend the tax cuts introduced by Trump in 2017 that are set to expire in 2025. Doing so could require them to offset spending elsewhere, and in that situation they could look to repeal parts of the IRA.
Additionally, despite some Republican officials having antipathy for some IRA provisions such as those around electric vehicles (EVs), they seem more supportive of certain IRA elements regarded as complementary to traditional energy and industrialisation, such as carbon capture and storage (CCS) and domestic manufacturing. As such, we believe a full repeal of the IRA is unlikely, with a partial repeal the more likely scenario.
What a partial repeal could mean in practice
1. A partial repeal of tax credits could mean capping some of the incentives, shortening their availability, or making the requirements to monetise them more difficult.
2. A partial repeal of IRA funding could mean cutting the additional funding distributed by the Department of Energy (DoE) and the Environmental Protection Agency (EPA). These programmes are of particular importance for the less mature clean technologies that need extra support in order to scale.
3. A partial repeal could see the reversal of multiple regulations, particularly those from the EPA that set emissions rules for many sectors to incentivise decarbonisation.
Based on the types of provisions Republicans have attempted to reverse throughout Biden’s presidency, these sectors and technologies could be more at risk than others:
1. High risk
- EV tax credit and related funding
programmes - Energy efficiency house/buildings credits
and funding - Clean energy funding
- Tax credits features, bonus credit provisions
- Emissions standards
Figure 2: pre- and post-IRA energy connection requests
2. Less vulnerable
- Grid
- CCS
- Clean hydrogen
- Clean fuels, sustainable aviation fuel
3. Medium risk
- Production tax credits for renewables
- Offshore wind approvals
4. Potentially supercharged
- Nuclear
- Domestic manufacturing
How a repeal scenario could materialise
A Republican president could have multiple avenues for hindering the energy transition through executive action without the need of support from Congress – in the form of policy restrictions (through changes in federal agencies) or the expansion of tariffs (under certain circumstances), for example. It is this risk that we believe is underappreciated. In a scenario in which there is also a Republican majority in Congress, legislation could be passed to repeal the IRA in part or in full, as well as passing permitting reform (Figure 3).
Figure 3: executive and legislative ways to water down the IRA
Source: Columbia Threadneedle Investments, April 2024. ** **Proposed bill by three Republican senators in November 2023
Implications
At Columbia Threadneedle we have developed a comprehensive and holistic methodology to assess the repeal risk for the clean technologies and sectors that are direct recipients of IRA support. We considered the risk of reversal of each IRA provision, as well as that of other relevant regulatory developments that could have an impact, such as higher import tariffs or the reversal of relevant sector regulations. We categorised the risks as high, medium or low likelihood. We then consider the interplay of all the dynamics of an IRA repeal. For example, domestic manufacturers of cleantech could be positively affected by a scenario that retains their subsidies and increases tariffs on Chinese competitors; but they could be negatively affected by the potential slowdown in areas such as renewables or electrification if applicable
credits are weakened. So businesses can be both positively and negatively impacted at the same time. (Figure 4).
Figure 4: key sectors and potential outcomes from an IRA repeal
Columbia Threadneedle Investments analysis, March 2024
The dynamics of a repeal could also have secondary and broader implications beyond decarbonisation, for example, with regards to the macro and geopolitical implications for many industries globally if we see a more inflationary scenario result from more protectionist measures.
As active investors who recognise the complexity of this scenario, we will engage with those companies most exposed to IRA repeal risks over the coming months and incorporate insights from these discussions in our investment decisions.
Conclusion
Current market consensus is that, in the event of a Republican victory in November’s US presidential election, the risk to the US Inflation Reduction Act is binary – either a full repeal or no repeal at all. However, we believe there is a third option in play, a partial repeal. In fact we think this could be the most likely outcome and the market is underappreciating this risk and all the investment implications that go with it. With the various sectors having potentially very different outcomes from any changes to the IRA, we have assessed the impact considering the interplay not just of the risk of lower tax credits, but also changes to funding programmes and regulatory provisions – in particular the potential imposition of higher tariffs on Chinese cleantech imports. Within each sector, we have then identified the companies most exposed to these risks and set a plan to engage with them to incorporate insights and better quantify the impact. We are using this analysis to ensure we are well positioned should this scenario play out.
