Inflation Reduction Act (IRA) Sparks New Opportunities in 2023
Explore how the IRA Bill is paving the way for innovative solutions and strategies that can lead to success in today's market.
Introduction
Wall Street's Green Revolution and Shift in Investment Strategy
Key Changes in IRA bill for 2023+
Introduction
Overview
The Inflation Reduction Act of 2022 is the most significant landmark climate legislation that provides funding, programs, and incentives to facilitate the transition to a clean energy economy in the United States. These incentives include tax credits, grants, and other financial incentives to reduce air pollution and increase energy efficiency.
This bill has triggered a shift in investment strategies on Wall Street, as investors scramble to take advantage of the new opportunities created by the legislation. With the promise of significant funding and incentives, the bill is poised to drive innovation and spur economic growth in the green technology sector. The bill is fundamentally changing the landscape of the Carbon Economy in the U.S and encouraging further developments of other countries green initiatives, such as in the EU.
Wall Street's Green Revolution
The financial industry is undergoing a significant shift towards green investments, spurred by the new IRA Bill. Institutional investors are trying to leverage the opportunities created by the bill to identify the clean technologies that are best placed to benefit. According to Hugh Gimber, a global market strategist for JPMorgan, the US is now spending a record 1.5% of its GDP on climate initiatives, overtaking the EU at 1%.
One area that has seen significant growth in investment is carbon capture and storage projects. The global investment volume in carbon capture and storage projects reached $6.4 billion in 2022, according to Fatih Yilmaz, an expert in the Climate and Sustainability Program. Local and global efforts are focusing on carbon capture and storage, which represents the biggest opportunity for individuals and firms to benefit.
JPMorgan Asset Management has responded to the shift towards sustainable investing by creating a new strategy that focuses on this growing industry, with an initial investment of $150 million. The company also purchased 250,000+ acres of forested land, which will benefit from 120 million standing trees capturing carbon from the atmosphere. Other examples include VC fund Counteract recently raising $42 million to support carbon removal initiatives. Additionally, companies such as Climeworks and Carbon Clean have raised significant amounts of funding, with Climeworks' $634.4 million series F round being the largest-ever investment in direct air capture technology. Svante, a British Columbia-based company, secured a $318 million Series E round led by Chevron New Energies, signaling a shift towards investing in low-carbon technologies even among traditional fossil fuel companies. These developments highlight the growing momentum and potential for carbon capture to play a key role in mitigating the impacts of climate change.
At present, LanzaTech is the only publicly traded company that solely focuses on carbon capture. With a portfolio of commercial-scale carbon refining plants, LanzaTech has been at the forefront of developing innovative technology solutions to support green manufacturing and achieve carbon neutrality goals. Notably, the company has received millions of dollars in grants from the Biden administration, which has further solidified its position as a pioneer in the field. For a more detailed analysis of LanzaTech, you can read my article here.
Key Changes In the IRA Bill
The Inflation Reduction Act (IRA) of 2022 brought about significant changes to the US tax code, and businesses are already beginning to see new opportunities. With a focus on reducing inflation, the IRA includes changes to various tax credits, which can benefit businesses looking to invest green including in renewable energy, energy-efficient buildings, and clean vehicles. In this article, we will look specifically at some of the changes made to tax credits and how they can benefit businesses.
Loan Guarantee Program (Biggest Program in Size):
Provides loans to businesses for the construction of innovative energy projects that reduce greenhouse gas emissions.
Changes include an appropriation of approximately $11.7 billion for the Loan Programs Office (LPO), which increased the loan authority in LPO's existing loan programs to approximately $100 billion.
The Act added a new loan program, the Energy Infrastructure Reinvestment (EIR) Program, and an additional $40 billion of loan authority to the Section 1703 program. The Inflation Reduction Act channeled $5 billion to carry out EIR, with a total cap on loans of up to $250 billion until September 30, 2026.
The legislation also appropriated $3.6 billion in credit subsidy and set aside a percentage of these amounts for administrative expenses such as managing the loan.
The IRA removed the $25 billion cap and increased it an additional $3 billion for direct loans, providing for an estimated total available loan authority of ~$55.1 billion for The Advanced Technology Vehicles Manufacturing Loan Program (ATVM).
(The following Incentives and Tax Credits below are smaller in size compared to The Loan Guarantee Program, but can still be significant for businesses)
The Renewable Electricity Production Tax Credit (PTC) is a per-kilowatt-hour credit for electricity generated from qualified renewable energy sources.
The IRA of 2022 extended the expiration date of the PTC, provided new bonus credits, and replaced it with a technology-neutral tax credit under section 45Y at the end of 2024.
The Business Energy Investment Tax Credit (ITC) allows businesses to claim a percentage of the total cost of their investment in renewable energy property as a tax credit. The IRA of 2022 expanded eligible technologies, extended the expiration date, modified the step-down in value, and established new criteria to qualify for the full credit.
The Energy-Efficient Commercial Buildings Tax Deduction allows businesses to deduct a portion of the cost of installing energy-efficient building components such as lighting, heating, cooling, and ventilation systems in commercial buildings. The IRA of 2022 modified the value of the deduction and changed the energy efficiency requirements. Businesses can now claim a maximum tax deduction of $1.80 per square foot by reducing the building's total energy and power cost by 50% or more, meeting minimum requirements in the ASHRAE Standard 90.1, and a minimum deduction of $0.30 per square foot.
The Alternative Fuel Vehicle Refueling Property Tax Credit allows businesses to claim a percentage of the cost of installing alternative fuel vehicle refueling property as a tax credit. The maximum incentive amount is $100,000 for each single item of property, and the incentive amount ranges from 6%-30%.
Section 13801 of The IRA of 2022 established procedures to monetize certain tax credits. The new legislation allows non-taxable entities to directly monetize certain tax credits using the direct pay option. This includes the Qualified Commercial Clean Vehicle Tax Credit, which provides a 30% tax credit for businesses that purchase or lease qualified clean vehicles. The credit is worth up to $7,500 for vehicles less than 14,000 pounds or $40,000 for mobile machinery.
This incentive is available to businesses that purchase or lease qualified clean vehicles. The IRA of 2022, established new procedures to monetize certain tax credits. The tax credit is worth 30% of the cost, up to $7,500 for vehicles less than 14,000 pounds, or $40,000 for mobile machinery.
In conclusion, the Inflation Reduction Act of 2022 has opened up new opportunities for businesses to invest in renewable energy and energy-efficient technologies while benefiting from tax incentives, promoting sustainability and reducing inflation.