After a weekend marathon “vote-a-rama,” the U.S. Senate gaveled through a 50 to 51 party-line vote to approve a monumental piece of legislation: the Inflation Reduction Act—the IRA. While the bill is not yet law, it’s likely that it will be approved by the House and signed by the President within the next few weeks. When it becomes law, the IRA will be the biggest climate legislation in U.S. history.
The IRA invests $369 billion in climate action, from an expansive system of renewable energy tax credits to targeted investments in climate adaptation, carbon sequestration, and environmental justice efforts. These investments are paid for by $739 billion raised through taxes on large corporations, increased IRS auditing, and new authority for Medicare to negotiate lower drug prices. All in all, the IRA is projected to reduce total U.S. greenhouse gas emissions 40% by 2030, putting the United States back in shooting distance of its Paris Climate Agreement emissions reduction goals.
Much has been written about the potential climate and economic impacts of the IRA, but what does the landmark package mean for enterprises and financial institutions? From grants for renewable energy to an increased focus on greenhouse gas reporting and massive investments in climate tech, the IRA has far-reaching implications for business in all sectors of the economy.
Here are the top 10 key takeaways for corporations and investors.
The IRA’s central mechanism for reducing greenhouse gas emissions is a system of tax credits and grants for renewable energy. These include the Renewable Energy Production Tax Credit, which provides tax relief for manufacturers of solar, offshore wind, geothermal, hydrogen, nuclear, and other forms of renewable energy. The bill also includes energy loans and reinvestment financing for energy-related projects, all creating incentives for companies to enter renewables manufacturing in the U.S. rather than abroad.
Much to the disappointment of environmentalists, the IRA includes new auctions for oil and gas drilling permits on federal land, but this is a relatively small-scale intervention compared to the bill’s massive investments in renewables. The bill also reinstates the Superfund excise tax on imported crude oil, raising about $25 billion and disincentivizing oil imports.
The IRA takes aim at high-carbon industries, such as agriculture and shipping, by issuing grants to de-carbonize these sectors. In agriculture, $300 million is allocated for the National Resources Conservation Service for emissions reduction and carbon capture. For real estate firms and investors, there are new tax deductions and credits to convert existing buildings into high-efficiency green buildings. Another $2 billion is allocated to reducing emissions at shipping ports, given the high carbon footprint associated with transport.
The bill increases the 45Q tax credit for companies that build and operate carbon capture and storage facilities to $85 per ton from the current $50 per ton. This is intended to incentivize hard-to-abate sectors like cement, steel, and refining to develop carbon sequestration facilities.
Elsewhere in the IRA, the Methane Reduction Investments Program establishes a fee on excess methane emissions beginning at $900 per ton, while also allocating $85 million for efforts to reduce methane emissions at natural gas plants.
The IRA provides $5 million for the Environmental Protection Agency to support the “standardization and transparency” of corporate climate disclosures, such as climate targets and emissions reduction plans. While this is a relatively small sum compared to some of the bill’s other investments, the earmark signals that companies will have to improve the quality of their climate disclosures, which aligns to the new rules in SEC’s Climate Proposal. This is a welcome sign for investors who have long complained about inaccurate climate reporting.
Reflecting the increasing impacts of climate change, the IRA funds climate resilience and ecosystem restoration projects in coastal communities, Native American tribes, national parks, and public lands. The bill also funds resilience and energy efficiency programs for affordable housing projects. These programs will create a wave of new business in these communities.
Although it seems quaint now, a decade ago Tesla received a loan from the Department of Energy to kick-start its electric vehicle manufacturing business. While the government’s role may be forgotten in the massive success of Tesla, it helped the young startup compete with the car manufacturing elite to begin a new era in green technology. The IRA aims to spur the next generation of climate tech businesses, especially ambitious, capital-intensive projects that are too expensive or too risky for traditional VCs.
For example, the bill allocates $10 billion for clean tech manufacturing, $2 billion for energy research at national labs, and provides incentives that climate tech investors say could help bring research projects out of labs and into production at scale.
Consumer-facing tax credits, like the newly extended $7,500 EV tax credit and a slew of residential energy efficiency credits, will incentivize the demand side, further accelerating climate tech development. Many climate tech investors see the bill as a complete game changer for the space, potentially reversing the recession-driven slowdown in the VC market.
In last-minute negotiations, the plan to close “carried interest loophole”—which primarily benefits private equity firms and hedge funds—was cut in order to secure support from Arizona Senator Kyrsten Sinema. This means that those industries’ profits will continue to be taxed at the lower capital gains tax rate rather than as income.
The IRA makes up for this—and more—by introducing a new 1% excise tax on stock buybacks, which could bring in five times as much revenue as the carried interest measure. This tax will apply to any publicly traded U.S. corporation repurchasing shares with a total value of over $1 million. There is sure to be a rush in buybacks before the tax kicks in next year.
The most widely publicized funding mechanism in the bill is that large corporations will now pay a minimum 15% corporate tax rate on financial statement income. The tax applies to U.S. corporations with three-year average annual financial statement income greater than $1 billion, as well as foreign multinational corporations’ U.S. subsidiaries with income over $100 million. This will make a significant impact on large, profitable tech companies like Facebook and Google that have historically avoided paying taxes by way of a litany of profit shifting, deductions, and tax credits. The tax is expected to raise $313 billion over the next decade, making it the largest tax increase in the bill.
The Inflation Reduction Act dedicates $60 billion to projects that reduce climate impacts for under-served populations. For example, the $27 billion Greenhouse Gas Reduction Fund will invest in emissions reduction projects in low-income and disadvantaged communities. With $60 billion to invest, the IRA is certain to unleash a wave of new jobs in the areas that need them the most.
Tim Mohin is the chief sustainability officer for Persefoni. Formerly, he served as the chief executive of the Global Reporting Initiative and is the author of Changing Business from the Inside Out. Kevin Stephen is the sustainability strategy associate at Persefoni and an associate consultant at Bain & Company.