The Time for Climate Investment is Here
Wednesday, April 19, 2023
Happy Earth Month! In today’s blog, we observe the historic investment opportunity presented by the convergence of efforts to address climate change and spur the energy transition, such as public grant programs, regulatory regimes, and, the biggest lever, tax credits. It’s fair to observe that it’s about time, because many of these initiatives have been attempted in some shape or form for decades, but only now have succeeded. It’s also correct to say it’s about time, meaning there is no time to waste, as meeting the reduction targets in time to stave off the worst effects of climate change is only a few decades away.
Until the summer of 2022, federal efforts to address climate change to the extent and scale capable of achieving the extraordinary results needed to keep our atmosphere in check have been, for the most part, largely elusive. From an economy-wide approach via cap-and-trade, the first attempt at which was made in the early 2000’s, to administrative efforts like the Clean Power Plan, climate change either could not swing the votes or could not survive judicial review.
However, like the 2004 season stands out as the miracle year for the Boston Red Sox (for the younger generation, this was the year the Boston Red Sox won their first World Series since 1918, breaking the famous Curse of the Bambino), the time between November 2021 and August 2022 marks the miracle year for U.S. action to address climate change. This miracle year included the Bipartisan Infrastructure Bill of 2021, the CHIPS Act of 2022, and, finally, the Inflation Reduction Act of 2022 (IRA). Combined, the three statutes will mobilize massive amounts of capital – according to the International Energy Association (IEA), the U.S. is on track to disburse in the realm of $560 B by 2031 – with the intent of decarbonizing our economy. The strategy includes transitioning our energy and transportation systems to cleaner power sources, and creating the domestic manufacturing capability to do so.
If implemented swiftly and successfully, coupled with other regulatory measures such as EPA’s forthcoming powerplant rules for greenhouse gas emissions, EPA’s tailpipe emission standards, and the Securities and Exchange Commission’s requirements for climate risk disclosure, these statutes could set the U.S. on a path to meeting its climate targets. (The United States has committed to an ambitious and achievable goal to reduce net GHG emissions 50-52% below 2005 levels in 2030). In doing so, these efforts would help to keep climate change in check “within around two decades” by, according to the Intergovernmental Panel on Climate Change’s (IPCC’s) most recent Synthesis Report, achieving the “[d]eep, rapid, and sustained reductions in greenhouse gas emissions” that “would lead to a discernible slowdown in global warming … and also to discernible changes in atmospheric composition within a few years.”
The basic strategy underlying these statutes is to incentivize zero and low-carbon energy generation through mechanisms like tax credits while phasing out fossil fuels, avoiding emissions of highly potent greenhouse gases like methane, and locking away carbon dioxide, all the while helping the U.S. regain the dominance it once had with respect to domestic manufacturing in order to secure and support the transition. The suite of legislation also works to build resilience in the face of climate change, including by improving communities and infrastructure’s ability to withstand severe and more frequent weather events brought on by a changing climate, such as droughts, flooding, and wildfires.
While the IRA is mainly focused on tax credits, which tomorrow’s blog will cover, the Infrastructure Investment and Jobs Act includes more than $70B for research, development, and deployment of innovative clean energy technologies, building new and more resilient transmission infrastructure to increase delivery of renewables and cleaner energy to the grid, and more EV charging networks.
Sandwiched between the two was the passage of the CHIPS and Science Act, which is often considered to be focused on helping U.S. manufacturers produce semiconductors to meet growing demand. The CHIPS Act, however, is also heavily focused on climate and the energy transition, authorizing up to $71B for the Departments of Commerce and Energy and the National Institute of Standards and Technology to institute a variety of programs, including the Regional Clean Energy Innovation Partnership, and award grants to public-private consortia that include industry or firms involved in technology, innovation, or manufacturing to “accelerate the pace of innovation of diverse clean energy technologies”. The Department of Energy is authorized to support research, development, and the demonstration of renewable power, electric grid modernization and security, nuclear energy, alternative fuels, and carbon removal.
All of this is good news for the climate and investors because the market signals are appropriately aligning to reward investments in the energy transition, climate mitigation, and clean technology, and bringing that investment back to the U.S. to drive what is being touted as the next domestic industrial movement – think solar panel production, wind turbines, EVs, and EV battery materials, to name just a few. The key will be moving these dollars into action.
Stay tuned for our ideas on how to put this funding to work. And remember - it's about time because it’s about time.