US elections: the Inflation Reduction Act and the risk of repeal
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US elections: the Inflation Reduction Act and the risk of repeal

At a Glance

  • The Inflation Reduction Act has contributed to a sizable increase in US clean energy and tech projects, and manufacturing investments. With the Republican election campaign including plans to repeal the act, the outcome has implications for the future of these investments
  • Current consensus view is that a full reversal is unlikely, but we believe the market is underappreciating the risk of a partial repeal, which could involve the weaking of tax credits and funding programmes, as well as other regulatory changes
  • As part of our work around the energy transition we have developed a framework to assess this risk and the potential implications for the most exposed sectors

In November the US goes to the polls to decide who will be the next president – the Democrat incumbent Joe Biden or returning Republican nominee Donald Trump. Under Biden, in August 2022 the US introduced the Inflation Reduction Act (IRA), a federal law which aims to, among other things, invest into domestic energy production while promoting clean energy. It represents the largest ever Congressional investment in the energy transition1.

With reports that Trump would seek to “gut” the IRA if elected2, at Columbia Threadneedle Investments we have developed a framework to assess the risks of a repeal of the act across those sectors that are direct beneficiaries and identify the implications
for the most affected companies.

IRA significance and threat

The IRA deploys sizeable tax credits for every major economic sector key to achieving wholesale decarbonisation: energy, transport, buildings and agriculture. It also contains multiple funding and regulatory provisions. When it was unveiled in August 2022 that figure stood at $369 billion over 10 years, but recent estimates project a further $400 billion of investments, which could grow higher still since most provisions are uncapped3.

The IRA also has implications for industrial policy, as it provides large incentives for the domestic manufacturing of clean technologies. It seeks to establish local manufacturing capabilities to reduce the overreliance on the supply chain from China to make solar, wind and battery components4.

Since its introduction, investment announcements have increased by 60% to more than $114 billion5. Most of these are for battery manufacture and are concentrated in Republican and/or swing states (Figure 1). The benefit of these investments in terms of job creation and economic growth makes many in the market believe a full repeal is unlikely in the event of a Republican victory.

Figure 1: domestic manufacturing types and state locations (top) and billions invested (bottom)
domestic manufacturing types

Source: BloombergNEF. March 2024

With regards to the effectiveness of the IRA in driving investments in clean energy, attribution is more difficult to estimate. Investment in this space would have happened to some extent regardless of the IRA, but the near-doubling of interconnection requests from renewable projects to the grid post-IRA s a good indicator of its material effect (Figure 2).

Figure 2: pre- and post-IRA energy connection requests
pre- and post-IRA energy connection requests

Source: Berkeley Lab, April 2024

Scenario analysis: Republican win

The market consensus is that the risk to the IRA is binary – ie either a full repeal or no repeal at all – and that a full repeal is unlikely because many of the IRA benefits are concentrated in non-Democratic states. We think this is a strong argument – but doesn’t remove the risk of a partial repeal. In fact, we believe there are compelling arguments to believe a partial repeal is likely, and the market is underestimating this risk.

The main driver behind this belief comes from the legislative dynamics set to play out in 2025. If Republicans win, they could look to extend the tax cuts introduced by Trump in 2017 that are set to expire in 2025. Doing so could require them to offset spending elsewhere, and in that situation they could look to repeal parts of the IRA.

Additionally, despite some Republican officials having antipathy for some IRA provisions such as those around electric vehicles (EVs), they seem more supportive of certain IRA elements regarded as complementary to traditional energy and industrialisation, such as carbon capture and storage (CCS) and domestic manufacturing. As such, we believe a full repeal of the IRA is unlikely, with a partial repeal the more likely scenario.

What a partial repeal could mean in practice

1. A partial repeal of tax credits could mean capping some of the incentives, shortening their availability, or making the requirements to monetise them more difficult. 

2. A partial repeal of IRA funding could mean cutting the additional funding distributed by the Department of Energy (DoE) and the Environmental Protection Agency (EPA). These programmes are of particular importance for the less mature clean technologies that need extra support in order to scale.

3. A partial repeal could see the reversal of multiple regulations, particularly those from the EPA that set emissions rules for many sectors to incentivise decarbonisation.

Based on the types of provisions Republicans have attempted to reverse throughout Biden’s presidency, these sectors and technologies could be more at risk than others:

1. High risk

  • EV tax credit and related funding
    programmes
  • Energy efficiency house/buildings credits
    and funding
  • Clean energy funding
  • Tax credits features, bonus credit provisions
  • Emissions standards
Figure 2: pre- and post-IRA energy connection requests

2. Less vulnerable

  • Grid
  • CCS
  • Clean hydrogen
  • Clean fuels, sustainable aviation fuel

3. Medium risk

  • Production tax credits for renewables
  • Offshore wind approvals

4. Potentially supercharged

  • Nuclear
  • Domestic manufacturing

How a repeal scenario could materialise

A Republican president could have multiple avenues for hindering the energy transition through executive action without the need of support from Congress – in the form of policy restrictions (through changes in federal agencies) or the expansion of tariffs (under certain circumstances), for example. It is this risk that we believe is underappreciated. In a scenario in which there is also a Republican majority in Congress, legislation could be passed to repeal the IRA in part or in full, as well as passing permitting reform (Figure 3).

Figure 3: executive and legislative ways to water down the IRA
USA article

Source: Columbia Threadneedle Investments, April 2024. ** **Proposed bill by three Republican senators in November 2023

Implications

At Columbia Threadneedle we have developed a comprehensive and holistic methodology to assess the repeal risk for the clean technologies and sectors that are direct recipients of IRA support. We considered the risk of reversal of each IRA provision, as well as that of other relevant regulatory developments that could have an impact, such as higher import tariffs or the reversal of relevant sector regulations. We categorised the risks as high, medium or low likelihood. We then consider the interplay of all the dynamics of an IRA repeal. For example, domestic manufacturers of cleantech could be positively affected by a scenario that retains their subsidies and increases tariffs on Chinese competitors; but they could be negatively affected by the potential slowdown in areas such as renewables or electrification if applicable
credits are weakened. So businesses can be both positively and negatively impacted at the same time. (Figure 4).

Figure 4: key sectors and potential outcomes from an IRA repeal
executive and legislative ways to water down the IRA

Columbia Threadneedle Investments analysis, March 2024

The dynamics of a repeal could also have secondary and broader implications beyond decarbonisation, for example, with regards to the macro and geopolitical implications for many industries globally if we see a more inflationary scenario result from more protectionist measures.

As active investors who recognise the complexity of this scenario, we will engage with those companies most exposed to IRA repeal risks over the coming months and incorporate insights from these discussions in our investment decisions.

Conclusion

Current market consensus is that, in the event of a Republican victory in November’s US presidential election, the risk to the US Inflation Reduction Act is binary – either a full repeal or no repeal at all. However, we believe there is a third option in play, a partial repeal. In fact we think this could be the most likely outcome and the market is underappreciating this risk and all the investment implications that go with it. With the various sectors having potentially very different outcomes from any changes to the IRA, we have assessed the impact considering the interplay not just of the risk of lower tax credits, but also changes to funding programmes and regulatory provisions – in particular the potential imposition of higher tariffs on Chinese cleantech imports. Within each sector, we have then identified the companies most exposed to these risks and set a plan to engage with them to incorporate insights and better quantify the impact. We are using this analysis to ensure we are well positioned should this scenario play out.

14 June 2024
Natalia Luna
Natalia Luna
Senior Thematic Investment Analyst, Global Research
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US elections: the Inflation Reduction Act and the risk of repeal

1 US Congressional Budget Office, 2022
2 FT.com, Donald Trump would gut Joe Biden’s landmark IRA climate law if elected, 23 November 2023
3 US Joint Committee on Taxation, 2024
4 Columbia Threadneedle Investments, US Inflation Reduction Act: a strong force to accelerate energy transition technologies, November 2022
5 US Department of Energy, April 2-24

Important information

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). For marketing purposes.

 

This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.

 

In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act 2001 (Cth) and relies on Class Order 03/1102 in respect of the financial services it provides to wholesale clients in Australia. This document should only be distributed in Australia to “wholesale clients” as defined in Section 761G of the Corporations Act. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.

 

In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This advertisement has not been reviewed by the Monetary Authority of Singapore.

 

In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058.

 

In Japan: Issued by Columbia Threadneedle Investments Japan Co., Ltd. Financial Instruments Business Operator, The Director-General of Kanto Local Finance Bureau (FIBO) No.3281, and a member of Japan Investment Advisers Association and Type II Financial Instruments Firms Association.

 

In the UK: Issued by Threadneedle Asset Management Limited, No. 573204 and/or Columbia Threadneedle Management Limited, No. 517895, both registered in England and Wales and authorised and regulated in the UK by the Financial Conduct Authority.

 

In the EEA: Issued by Threadneedle Management Luxembourg S.A., registered with the Registre de Commerce et des Sociétés (Luxembourg), No. B 110242 and/or Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.

 

In Switzerland: Issued by Threadneedle Portfolio Services AG, an unregulated Swiss firm or Columbia Threadneedle Management (Swiss) GmbH, acting as representative office of Columbia Threadneedle Management Limited, authorised and regulated by the Swiss Financial Market Supervisory Authority (FINMA).

 

In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). For Distributors: This document is intended to provide distributors with information about Group products and services and is not for further distribution. For Institutional Clients: The information in this document is not intended as financial
advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparties and no other Person should act upon it.

 

This document may be made available to you by an affiliated company which is part of the Columbia Threadneedle Investments group of companies: Columbia Threadneedle Management Limited in the UK; Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.

 

Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

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Important information

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). For marketing purposes.

 

This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.

 

In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act 2001 (Cth) and relies on Class Order 03/1102 in respect of the financial services it provides to wholesale clients in Australia. This document should only be distributed in Australia to “wholesale clients” as defined in Section 761G of the Corporations Act. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.

 

In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This advertisement has not been reviewed by the Monetary Authority of Singapore.

 

In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058.

 

In Japan: Issued by Columbia Threadneedle Investments Japan Co., Ltd. Financial Instruments Business Operator, The Director-General of Kanto Local Finance Bureau (FIBO) No.3281, and a member of Japan Investment Advisers Association and Type II Financial Instruments Firms Association.

 

In the UK: Issued by Threadneedle Asset Management Limited, No. 573204 and/or Columbia Threadneedle Management Limited, No. 517895, both registered in England and Wales and authorised and regulated in the UK by the Financial Conduct Authority.

 

In the EEA: Issued by Threadneedle Management Luxembourg S.A., registered with the Registre de Commerce et des Sociétés (Luxembourg), No. B 110242 and/or Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.

 

In Switzerland: Issued by Threadneedle Portfolio Services AG, an unregulated Swiss firm or Columbia Threadneedle Management (Swiss) GmbH, acting as representative office of Columbia Threadneedle Management Limited, authorised and regulated by the Swiss Financial Market Supervisory Authority (FINMA).

 

In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). For Distributors: This document is intended to provide distributors with information about Group products and services and is not for further distribution. For Institutional Clients: The information in this document is not intended as financial
advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparties and no other Person should act upon it.

 

This document may be made available to you by an affiliated company which is part of the Columbia Threadneedle Investments group of companies: Columbia Threadneedle Management Limited in the UK; Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.

 

Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

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