The Inflation Reduction Act Paves New Ground For US Climate Change Action

The Inflation Reduction Act Paves New Ground For US Climate Change Action

On August 7th, 2022, the US Senate approved the Inflation Reduction Act, by a margin of 51 to 50 votes. Despite its name, the Act includes some of the most significant climate change legislation enacted in the US, including authorizing the spend of approximately $370bn to reduce greenhouse gas emissions by 40% below 2005 levels by 2030. In addition to clean energy investments and tax credits, the bill also includes caps on prescription drug costs and corporate tax reform. The House is expected to vote on the bill on Friday August 12th, and President Biden has indicated he will sign the bill into law.   

The mammoth $370bn will be spent chiefly on clean energy provision and related climate change initiatives. This includes tax credits to incentivise renewable power generation, electric vehicle purchasing, and a dedicated $1.5bn programme that will fund companies that cut methane emissions; those who do not will be penalised. Firms will be liable to pay $900 per metric ton of methane emitted (which exceeds federal limits) in 2024; this will rise to $1,500 per metric ton in 2026. Firms will also receive tax credits worth $85 per tonne for carbon capture and storage.

The impact this will have on the US market for clean energy investment is huge, and private investment will likely soon follow; in 2021, renewable energy sources produced just 12.2% of the country’s energy consumption, and just 20% of energy generation. It also lays the groundwork for the introduction of a federal carbon tax in the future, as the Canadian government has legislated nationally. 

It is a tumultuous time for US businesses grappling with managing the demands of ESG. It is still unclear when or if the SEC’s proposed climate change disclosure rule will come into force, and how exactly it will be implemented, although the SEC has put the rule on the October agenda. In particular, firms will have to manage carbon offset strategies closely; under the Act, they could benefit from increased tax credits from offsets, but the SEC would require the provenance of voluntary carbon credits to be disclosed for investor’s benefit. But where will suitable credits come from? Wildfires are rapidly depleting stocks of credits. CarbonPlan has revealed that 95% of so-called ‘buffer’ offsets in the Californian carbon trading system – designed to insure forest projects against fire risks – have themselves been destroyed by wildfires. Climate risk is having a perilous impact on decarbonisation initiatives.

Regarding methane – the much more harmful cousin of carbon dioxide – the onus will be on emitters to curb both direct and fugitive emissions. Expect high levels of investment from emissions intensive industries in software and technologies to manage fugitive methane emissions. Platforms such as Project Canary, which raised $11m in Series B in February 2022, will benefit from increased attention on methane management. Regarding leak detection, the mature hardware market will continue to proliferate, spearheaded by vendors including Honeywell, while the rise of geospatial data sources will expose firms reticent to take action.