US eyes climate leadership role

The passing of the Inflation Reduction Act will boost spending in the fight against climate change

Marcus Weyerer

a flag and wind turbines

A major bill, the Inflation Reduction Act, just passed the US Senate along party lines, requiring US vice president Kamala Harris to make use of her tie-breaking vote.1 It has now passed the House of Representatives and been signed into law by President Joe Biden.

The package seeks to spend close to three-quarters of a trillion on health care, climate change and deficit reduction and fund it through strengthened tax enforcement, tax hikes and changes to the corporate tax system.

But while economists and market participants are divided about the success of the bill regarding its stated intent, there is little doubt it breaks the mould in another area. With $369bn – around 50% of the total – earmarked for climate and clean energy investments, if passed, it will be the largest package targeting climate change in US history and perhaps globally. It will also be, of course, a far cry from Biden’s originally much larger Build Back Better Act that crumbled under its own $2trn ambition.

More generally, it reflects that fostering real bipartisanship in a highly polarized society and divisive politics remains a challenge. However, we assess that the signal to the markets is a very strong one nonetheless: there is regulation, indeed; there is societal pressure, yes; but increasingly, there is also an economic case that forces investors to consider how they are addressing sustainability questions regarding their portfolios.

Beyond the pure numbers – large as they are – the underlying message is that for the first time, the US is taking leadership in the fight against climate change, and that will have effects far beyond the physical borders of the country.2

Domestically, despite fierce criticism from the GOP3, it is likely that by 2025 – the earliest the White House could have a Republican occupant – much of the act will be hard or impossible to undo.

And while it focuses on multi-year tax credits for wind, solar and a range of other clean energy options, it will have a transformative effect on the economy as a whole; according to Rapid Energy Policy Evaluation and Analysis Toolkit (REPEAT) project estimates as reported by the New York Times, it could bring the US within striking distance to achieving its 2030 climate goals.4

These specify that by 2030, US net greenhouse gas emissions should be 50% below 2005 levels. Under current policies, the trajectory would bring us to only -27%. Based on the draft legislation, the reduction could be as high as 42%. The remaining gap, according to experts, could feasibly be closed with smaller pieces of legislation, possibly on a state level.

Perhaps the most important takeaway is that, despite sky-high inflation, a significant economic slow-down and a war in the heart of Europe, the world’s largest economy is stepping up and, after years of being considered a relative laggard, taking a climate leadership role. This could bode well for diversified sustainable investment strategies that have suffered under the fossil-fuel-induced energy rally and help refocus investors toward long-term trends amid so much short-term noise.

This article first appeared in ETF Insider, ETF Stream's monthly ETF magazine for professional investors in Europe. To access the full issue, click here.

1. YouTube, MSNBC, 2022. 2. Time, 2022. https://time.com/6204582/inflation-reduction-act-climate-change/3. The Republican Party, also referred as the GOP (“Grand Old Party”).4. New York Times, and Rapid Energy Policy Evaluation and Analysis Toolkit, 2022. https://www.nytimes.com/interactive/2022/08/02/climate/manchin-deal-emissions- cuts.html,https://repeatproject.org/

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