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Billed as the largest climate legislation in US history, the Inflation Reduction Act (IRA) includes tax credits, incentives and other provisions intended to help companies tackle climate change, increase investments in renewable energy and enhance energy efficiency. Signed into law by President Biden on Aug. 16, 2022, the legislation also addresses healthcare and corporate taxes, but the climate-focused elements are especially significant.
The IRA is expected to advance decarbonization in many ways, including:
The law presents great opportunities for companies across multiple industries to deliver on sustainability and carbon reduction commitments, while further defining the path to get there. It’s also an opportunity to drive growth that may impact every corner or your business — from tax, finance and sustainability to operations, supply chain, risk management and product development.
The IRA offers business leaders new levers to pull as they relentlessly pursue growth — something 83% of executives in our PwC Pulse Survey said they were prioritizing in today’s environment. Given how big the IRA’s potential impact on your strategy and operations could be, leaders across the organization should begin to think through the implications. Four areas to start with include:
The Act includes $6 billion in funding for chemical and building material suppliers innovating in key carbon-intensive construction materials such as iron, steel, concrete, glass, pulp, paper, ceramics and chemical production. Breakthroughs in these areas are necessary as part of the global quest to limit climate change to 1.5°C by 2050, and companies that drive breakthrough innovations stand to potentially reap substantial opportunities. Funding available to grow and support greener engineering and construction includes $4 billion for lower-carbon materials used in transportation projects and building construction projects. The IRA also includes better standards and labeling for product declarations and carbon impact.
The Act injects funding to support growth of EVs, while encouraging expanded production and sourcing in North America. Provisions include up to $20 billion to build new manufacturing, $2 billion to retool existing facilities and tax credits for consumers. But it comes with assembly and battery sourcing stipulations that might make it difficult for some automakers to initially qualify for credits. Those that can shift their focus and supply chain rapidly enough stand to benefit the most.
Companies are thinking about how they can effectively use the credits and incentives to offset investments they’re making to achieve net zero or other decarbonization efforts. This includes funding renewable projects like wind and solar, investing in more carbon capture and carbon sequestration technologies and exploring the adoption of new, clean energy sources, such as hydrogen. The Act includes tax breaks for mining companies that produce critical minerals central to the energy transition like lithium and nickel. The ripple effect may be far-reaching, spurring cumulative capital investments in the energy and mineral supply infrastructure for the next decade.
The broader incentivization of lower-carbon energy sources should, in time, reduce Scope 2 emissions for hospitality, retail, distribution centers and office buildings. Meanwhile, the extension of production and investment tax credits support more direct investments in renewable energy, storage projects and energy efficiency. EV and low-carbon fuel credits offer direct incentives for transportation and logistics companies, as well as large corporate fleet owners, while supporting the Scope 3 emission reduction efforts of retailers that contract out shipping to third parties. Sustainable aviation provisions intend to help airlines and logistics firms address hard-to-abate aviation emissions. Finally, “climate-smart” agricultural programs could benefit not only farmers, but also retailers, including supermarkets, that are reliant on US crops.
Certain revenue-raising provisions may have an impact on both private equity firms and their portfolio companies. For example, the 1% excise tax on the value of certain net stock repurchases by publicly traded corporations could affect certain M&A strategies that may not seem obvious at first glance. Also, depending on the portfolio company’s structure, they may need to adjust for the 15% book-income alternative minimum tax (AMT) on corporations with financial accounting profits over $1 billion. We recommend examining corporate structures and exit strategies for changes that will occur as a result of the Act.
For TMT companies, the Inflation Reduction Act will continue to keep the industry in a strong position to drive growth and enable their customers’ decarbonization transformation. Companies should look for product-market fit opportunities to enhance the features and the marketing of their offerings to gain competitive long-term positioning. Further, for software companies in particular, there will be substantial growth for cloud, analytics and artificial intelligence as companies work to develop decarbonization solutions and low-carbon products.
Global Energy Advisory Leader, PwC US
Sustainability Partner, PwC US
Managing Director, PwC US