Striking a Balance Between Inflation and Climate Action

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Aug 16, 2022

The US Congress recently passed the Inflation Reduction Act. This landmark bill includes several legislations that are intended to facilitate the US in achieving milestones in healthcare, tax and energy. The bill is the most significant package to address climate change in US history, and its passage comes after more than a year of disagreements between the democrats allies in Congress and a few key republican senators regarding the current administration climate agenda and its authority to directly regulate carbon emissions. Fortunately for climate change, a consensus was reached between all parties where the bill aimed to support the funding of clean energy sources and allow market incentives to incentivize citizens to reduce their emissions.

The legislation can also be viewed as national patriotic move, where all parties, irrespective of political views recognized that the USA was falling behind among developed economies acting on climate change. Additionally, increasing concerns about energy independence, worrisome imports in both commodities and technologies are most likely the key drivers for reaching the consensus on the bill.

The package contains $369 billion that will be invested over the decade in initiatives that are intended to curb the worsening climate conditions by supporting climate change fighting strategies.

These strategies include:

  1. investments in renewable energy production;
  2. tax rebates for new or used electric vehicles;
  3. federal loans to manufacture solar panels and batteries;
  4. funding for sustainable framing practices that remove carbon from the atmosphere;
  5. a penalty on excess methane emissions from oil and gas drilling;
  6. tax rebates for carbon capture and storage technologies;
  7. incentives for buying and retrofitting homes with energy efficient and electric appliances;
  8. funding to support clean energy projects, pollution abatement and infrastructure in disadvantaged communities and communities of colour;
  9. 1% tax on share buybacks by companies that have traditionally been criticized for the vast sums that they are sending to investors which could otherwise be used for better purposes. It will come into effect in 2023.

The bill didn’t leave the fossil fuel industry behind and lend a helping hand by offering 60 million acres for offshore drilling, accelerating gas pipeline permits and increasing onshore oil and gas leasing on federal lands when renewable energy providers are given leases. Consequently, a study carried out by the Energy Innovation group found that for every ton of emissions created by the bill’s oil and gas provisions, at least 24 tons of emissions are avoided by the other clean tech provisions. Moreover, the bill has incentives for hydrogen and carbon capture and storage technologies that are being embraced by oil and gas companies.

Once implemented, the initiatives and strategies in the bill will allow a cut of emissions by up to 40 percent below 2005 levels by 2030 according to a statement by the National Resource Defense Council, 42 percent below 2005 levels by 2030 according to a Princeton University analysis, and 41 percent below 2005 levels by 2030 according to a research done by Energy Innovation. This emission cut is shy of meeting the goals of the Paris climate agreement and a far cry from achieving net zero emissions. Nevertheless, the bill is a significant step in putting those ambitions within a scheduled and realistic reach for the first time in US history.

Unfortunately, only a segment of the investment market uses a solid and consistent approach when it comes to altering their investment strategies towards a more sustainable world. All portfolio managers look for great risk-adjusted returns, as it is their fiduciary duty to do so for their clients.

Nevertheless, the passage of this bill is a testimony to investors who foresaw the opportunity for a change. A change for a sustainable future that strikes a balance between the risks of a portfolio and the risks to the planet. Investors that stay consistent and persistent despite the known limitations, challenges and confusion in measuring nonfinancial metrics will benefit from the market shifts that are yet to be witnessed from its implementation.

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