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Investment Opportunities in Clean Energy from the Inflation Reduction Act of 2022

By Shane Hixon
Portfolio Associate

On August 16th, President Joe Biden signed into law the long-awaited legislation aimed at lowering prescription drug prices, boosting the renewable energy sector, and imposing new taxes on large corporations. The Inflation Reduction Act of 2022 includes both new spending initiatives as well as new sources of revenue for the federal government.

The Penn Wharton Budget Model at the University of Pennsylvania (PWBM) estimates that the Senate-Passed Inflation Reduction Act, would accomplish the following:

  • The Act would reduce cumulative deficits by $264 billion over the 10-year budget window
  • The Act would have no meaningful effect on inflation in the near term but would reduce inflation by around 0.1 percentage points by the middle of the first decade. These point estimates, however, are not statistically different from zero, indicating a low level of confidence that the legislation would have any measurable impact on inflation.
  • Relative to current law, the Act would slightly reduce GDP in the first decade while slightly increasing GDP by 2050. These estimates include the impact of debt reduction, carbon reduction, and tax incentives on investments and working hours.

Likewise, according to the Congressional Budget Office (CBO), a federal agency that provides budget and economic information to Congress, the bill would have a “negligible effect on inflation,” and in 2023, it would change inflation somewhere between 0.1 percentage point lower and 0.1 percentage point higher than it is currently.

Meanwhile, the White House published a detailed analysis of the Act’s provisions and how it affects Americans.

And Senate Democrats also published their assessments of the Act’s provisions.

Of particular interest to many investors, though, the legislation promotes investment in renewable energy, nuclear power generation, and electricity transmission infrastructure, with a $369 billion price tag over a ten-year period earmarked for “Energy Security and Climate Change.” As stated by Senator Joe Manchin (D-WV), “The Inflation Reduction Act of 2022 invests in the technologies needed for all fuel types – from hydrogen, nuclear, renewables, fossil fuels and energy storage – to be produced and used in the cleanest way possible.”

What Are A Few of Its Spending Provisions?
All of the spending figures are over 10 years, and most come from a study done by the Joint Committee on Taxation, a nonpartisan congressional commission:

  • Tax credits to increase production of electricity from renewable or non-carbon sources.
    • Cost: $98 billion.
  • New and expanded tax credits for electric vehicle purchases and for improving the energy efficiency of homes.
    • Cost: $51 billion.
  • An incentive and tax credit for companies developing biofuels and other renewable fuels for cars and planes.
    • Cost: $19 billion.
  • New and expanded subsidies to bring down the cost of buying health insurance through the Affordable Care Act.
    • Cost: $70 billion.

These figures have been cited according to analysis by the Penn Wharton Budget Model.

What Are Some of the Details of the Energy Security and Climate Change Provisions?
The energy and climate investments and spending in this bill aim to reduce emissions in many sectors of the economy, including those from electricity production, transportation, manufacturing, commercial and residential buildings, and agriculture. It would provide:

  • Tax credits for clean sources of electricity and energy storage and roughly $30 billion in targeted grant and loan programs for states and electric utilities to accelerate the transition to clean electricity.
  • Tax credits and grants for clean fuels and fuel-efficient commercial vehicles to reduce emissions from the transportation sector.
  • Grants and tax credits to reduce emissions from industrial manufacturing processes, including almost $6 billion for a new Advanced Industrial Facilities Deployment Program to reduce emissions from the largest industrial emitters like chemical, steel, and cement plants.
  • Over $9 billion for Federal procurement of American-made clean energy technologies to be implemented across an array of products, including, for example, $3 billion for the U.S. Postal Service to purchase zero-emission vehicles.
  • $27 billion to support deployment of technologies to reduce emissions, especially in disadvantaged communities.
  • A Methane Emissions Reduction Program to reduce the leaks from the production and distribution of natural gas.
  • The bill would require the Interior Department to hold lease sales for oil and gas exploration in the Gulf of Mexico and the Cook Inlet in Alaska.
  • It expands tax credits for carbon capture technology that could allow coal or gas-burning power plants to keep operating with lower emissions.
  • Tax rebates and credits to lower energy costs for households.

Other spending provisions of the Act include an extension of the Affordable Care Act, at a cost of $64 billion, and Western Drought Relief, at a cost of $4 billion.

What Revenues Would It Raise?
Senate Democrats published a financial report on the bill, noting that total revenue raised would be $737 billion. The sources of these additional revenues include (all figures are for the subsequent ten- year period):

  • 15% Corporate Minimum Tax, $222 billion*
  • Prescription Drug Pricing Reform, $265 billion***
  • IRS Tax Enforcement, $124 billion**
  • 1% Stock Buybacks Fee, $74 billion*
  • Loss Limitation extension, $52 billion*

* Joint Committee on Taxation estimate
** Congressional Budget Office estimate
*** Senate estimate, awaiting final CBO score

Energy Investment Implications
The new legislation may potentially change the current energy environment by encouraging new investment in clean energy. Investors seeking to take advantage of these developments should exercise caution as many companies involved in this space are new, with unproven business models. Additionally, the energy revolution is likely to play over the course of several years and potentially decades, which will require extreme patience on the part of investors in most cases.

Tax Investment Implications
The law also creates a new 1% tax charged to companies making stock buybacks, as well as a 15% minimum tax for large companies that pay little or nothing in income taxes. That could hit big names like Amazon (AMZN) and Tesla (TSLA), according to Bloomberg analysts. Advanced Micro Devices (AMD), Nvidia (NVDA) and Ford (F) were among some of the 102 companies that could be candidates for more tax liability, according to a UBS strategist review.

The provisions of the act also have some tax implications for investors, if companies shift their preference to paying dividends vs. buying back stock, given a choice between using either as a means to enhance shareholder value. That decision could be influenced by the new 1% tax on share buybacks that will be paid by the company making said buybacks. If a company chooses to buy back its shares instead of paying dividends, it will then be subject to a 1% excise tax paid by the company. However, dividends are taxable as ordinary income to investors when received in a taxable account, whereas share buybacks could potentially lead to capital gains that could be deferred until some later point.

Of course, any dent in stock prices would be slight, according to a UBS note recently. “The taxes would have a very minimal 1% drag on S&P 500 earnings per share, though some companies will be more affected than others,” the note said. That’s near Goldman Sachs estimates. It said the minimum tax and buybacks would decrease S&P earnings per share by 1.5% overall, but the declines could be deeper in sectors such as healthcare and information technology, which operate with lower effective tax rates.

In the end, though, selecting individual stocks or constructing portfolios is always a multifaceted endeavor, encompassing much more than just the implications of any one act passed by Congress. And your portfolio allocation decisions may or may not be affected in any significant way by this act. As always, discussing your individual investment strategy with your advisor will likely matter more to your investment outcome than how the Act impacts particular stocks.

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