US Inflation Reduction Act: A catalyst for climate action
The Inflation Reduction Act 2022 (IRA) – containing sweeping tax credits/incentives and grants/loan programs across multiple industries – is the most ambitious and comprehensive legislative action the United States has ever taken on addressing climate change. Funding for innovation and R&D could position the US as a leader in the low-carbon economy in the 2030s and beyond.
Known features of the IRA’s climate and energy provisions
- Broad-based incentive programs with a technology-neutral approach.
- Benefits of certain tax credits could last well into the 2040s.
- Funds for a transition from both the demand and the supply side. (Of the climate- and energy-related provisions, around 20% of the spending will be used to spur demand transformation – such as incentives for home energy efficiency, heat pumps, electric vehicle credits, and green financing.)
- Clean electricity projects in “energy communities” and “low-income communities” could each receive a 10% bonus.
We believe the bill will have far-reaching effects on the energy systems transition, financing, supply chains, global trade and policies… the profound nature of which may take years to unfold.
IRA spending in the context of total US climate investments
In conjunction with the Infrastructure Investment & Jobs Act and the CHIPS Act, the IRA implies that the US federal government is set to triple its average annual spending on climate and clean energy this decade compared to the 2010s. Likely implications include the country reducing its own GHG emissions to around 40% by 2030 relative to 2020 levels, and also becoming a major global manufacturer of green-related products and materials.
We have identified over 60 provisions on climate and energy initiatives within the IRA, which add up to over USD 400 billion in spending over the next ten years based on Congressional Budget Office (CBO) figures1. Most of that investment is earmarked for the power sector, which encompasses funds for clean electricity generation, energy storage, and transmission.
Breakdown of >USD 400 billion climate and energy-related provisions (Congressional Budget Office estimates)
Other (e.g. land, water, agriculture)
Industrial/Cross-cutting (e.g. Carbon capture and storage (CCS) and hydrogen)
Climate spending likely to be double the headline estimate
Credit Suisse believes actual climate spending could be significantly higher for three reasons:
- Roughly two-thirds of the baseline spending is allocated to provisions where the potential federal credit/incentive is uncapped – this could propel much higher-than-expected activity levels, particularly in green manufacturing, carbon capture and clean hydrogen.
- The public spending will likely trigger private sector investment (i.e. the “leverage effect”). The multiplier generally ranges from 1.1x to 1.6x2, meaning for every dollar of public spending, at least 1.1 dollar would be spent by the private sector.
- Subsidized lending from the Department of Energy’s loan program and Greenhouse Gas Reduction Fund (i.e. green banks) will supercharge green financing.
In fact, Credit Suisse estimates total federal spending at double the headline figure – to over USD 800 billion – sending the total public and private spending mobilized by the IRA to nearly USD 1.7 trillion over the next ten years. Of that USD 1.7 trillion, the power sector remains the largest category (around USD 580 billion), but manufacturing jumps to second place (around USD 520 billion).
Breakdown of USD 1.7 trillion climate and energy-related provisions (Credit Suisse estimates)
Industrial/Cross-cutting (e.g. CCS and hydrogen)
Other (e.g. land, water, agriculture)
US well positioned to be the premier energy supplier for the world
As the US is the world’s largest fossil fuels producer, the IRA magnifies the strategic advantages the country holds already – in natural resources, infrastructure, geologic storage, technical expertise and technology talent – and could enable the industry to become a dominant energy supplier in the low-carbon economy.
The stacked benefits of the clean electricity and manufacturing tax credits would make US solar and wind the cheapest in the world between 2025-2030. The subsidized cost of a solar module may be 20%–40% of the unsubsidized costs, while wind turbine costs may be reduced by >50%. The solar manufacturing tax credits make US-made modules among the cheapest globally and could turn the US from an importer of solar modules and wind turbines to an exporter.
Clean hydrogen credits and cheap clean electricity could make the cost of green hydrogen on the Gulf Coast among the lowest in the world – positioning the US as a potential exporter of hydrogen and derivative products. And with incentives in place for both upfront capex and future production, the scale and speed of carbon and hydrogen hub developments could surprise to the upside, enabling the US to leapfrog other nations in climate actions.
But not all aspirations are achievable. The US is not globally competitive in the production of lithium-ion batteries and critical minerals used in electric vehicles (EVs). Even with manufacturing incentives in place, the USD 7,500 EV credit may not be sufficient to incentivize automakers to completely overhaul their supply chains.