The impact of the Climate Bill (Inflation Reduction Act) on mid-market companies

In case you missed it, over the weekend, the U.S. Senate passed a major climate bill known as the Inflation Reduction Act of 2022. This bill is a once in a generation opportunity for decisive action in the battle against climate change and we’re celebrating what is already being heralded as, “the single most important piece of climate legislation in American history.”

The $369-billion package in the bill marked Energy Security and Climate Change is the largest infusion of federal dollars ever and will have significant impacts on mid-market companies. 

We’ve analyzed the areas of the Inflation Reduction Act that will impact mid-market companies, including:

1. Clean Energy Tax Credit → This is the whopping centerpiece of this legislation – technology-neutral tax credits for low or zero-carbon power production that covers roughly 30% of its capital investment.
2. EV Tax Credits → There is an up to $7,500 credit on new vehicles, based on battery capacity, with some conditions on purchaser’s income levels, the vehicle price point and manufacturing location. Notably, it does away with the manufacturer quota on credit availability (under current legislation, Tesla and GM have sold enough EVs that they no longer qualify.) Also new is a smaller tax credit for purchase of a used EV.
3. Domestic Manufacturing Tax Credits → Manufacturing incentives to expand domestic clean tech production for wind and solar aims to reduce the risk of future price shocks by bringing down the cost of clean energy, EVs, and relieve supply chain bottlenecks.
4. Emerging Climate Tech → Long-term financial support for the commercial deployment of frontier decarbonization technology, like advanced nuclear, clean hydrogen, and carbon recapture.
5. Fossil Fuel Industry → Expansion of oil and gas leasing in Alaska and the Gulf of Mexico, as well as on federal land.

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What does the Inflation Reduction Act mean for mid-market companies? 

Cost of Physical Impact of Climate Change

A reduction in physical risks (and thus costs) associated with the effects of climate change above 1.5 C in rising temperature. The rise in frequency and intensity of wildfires, floods and hurricanes is already causing real economic damage. Experts suggest this bill puts on a path to 40% drop of all-time highs by the end of the decade, reducing the risk and cost of climate change for businesses. 

Cost of Energy Transition

Many companies are setting emission reduction targets that depend on their ability to access and transition to clean energy consumption. The acceleration in investment in clean energy generation and distribution will result in a much-needed increase in supply, enabling companies to meet emission targets at a lower cost. 

Cost of Electrification of Fleet

The proposed tax incentives will accelerate the transition to an electric fleet by making electric vehicle purchases not just the right choice in meeting your company’s emission targets, but also in reducing the cost of investing and maintaining your fleet. 

Taxation

There are 3 main tax provisions that will pay for this bill (while also reducing the deficit):

• 15% Minimum Tax Rate – This applies to about 200 corporations who earn more than $1Bn in profits and pay little to no taxes, resulting in a more transparent and equitable tax environment.
• Stiffer IRS Tax Enforcement – This provision enables the IRS to enforce the tax code in a time when the gap between taxes owed and tax revenue collected keeps growing can help level the playing field for all business. 
• 1% Tax on Stock Buybacks – This provision would mostly impact the largest public companies, with over 85% of ($ based) stock buybacks occurring at companies in the S&P 500.   

Inflation Reduction

With inflationary pressures destabilizing our economy and impacting growth for all companies there is a lot in the bill that can help reduce inflation. The climate piece of the legislation will help in the fight against inflation, mainly through budget reduction efforts and growth in energy supply.

The Inflation Reduction Act has much to offer for mid-market companies. From enabling them to play their critical role in emission reduction initiatives to leveling the playing field with the largest global tax evaders. The outcomes generated will both help companies do what’s right for the planet and for their bottom line. If you’re interested in speaking with our team of ESG experts about how the IRA could affect your business, let’s talk!

Sources: The Atlantic, Rhodium Group, Moody’s, WSJ, NYT