What could happen with the US Inflation Reduction Act after this November’s US elections? Many investors wonder what a Trump victory would mean for the most significant US legislation to address climate change. One thing at least seems clear: a full repeal of the package looks unlikely.
The Inflation Reduction Act aims to spur investment in clean energy through tax incentives, grants, and loans to reduce US greenhouse gas emissions 40% by 2030. It is also intended to boost domestic manufacturing and job creation, as well ensure energy security, and reduce the country’s reliance on Chinese supply chains.
Some components, such as renewable energy tax credits, were extended under different administrations — including under Donald Trump’s first administration.
Looking at three scenarios
The outcome of the election for the US Congress (Senate and House of Representatives) will be as important as that of the presidency. Readers should note that we are not predicting outcomes. These scenarios outlined below are in decreasing severity:
- Republicans win both the presidency and control Congress: in this scenario, Republican lawmakers would likely repeal some of the IRA subsidies to help fund their agenda, but we believe a full repeal of the Inflation Reduction Act is unlikely, in part because this would not be viewed by the Republican party (GOP) as being in their best interests. The bulk of Inflation Reduction Act investments has gone to ‘red’ (Republican-leaning) states.[1]
We would nonetheless expect stricter implementation of ‘foreign entities of concern’ and enhanced domestic content requirements to boost local manufacturing. (A foreign entity is characterised as an FEOC when it is ‘owned by, controlled by, or subject to the jurisdiction or direction of a government of a foreign country that is a covered nation’.)
Stricter FEOC rules could restrict access to electric vehicle (EV) credits, though in our view this could be subject to legal challenges. The Republican party could shorten the timeline on some credits and stop various green loans and grants. However, we expect credits related to domestic manufacturing, carbon capture and storage, clean hydrogen, nuclear, and clean fuel to have bipartisan support. Grid investments will also have broad support.
Lastly, in extremis, we could see further tariffs on Chinese goods.
In brief, there would be significant changes, but probably less material than feared by some, and almost certainly not a full repeal.
- Republicans secure the presidency, but Congress is divided: in this scenario, we believe there is a low probability of the Inflation Reduction Act being fully repealed given that this would require majority support in both the House and Senate. Treasury department rules that have yet to be set could be revised. Measures by departments such as the Department of Energy (DoE) and the Environmental Protection Agency could be hindered.
- Democrats win the presidency (either with a divided Congress or full Democratic control): in this scenario, we expect the Inflation Reduction Act to be rolled out as planned. In the case of a Democratic ‘sweep’, there could be further efforts to tighten environmental protection regulations and greenhouse gas emissions standards.
Executive orders
A Republican president could also take executive actions including the following:
- Holding back new loans under the Department of Energy’s Loan Programme and the Energy Infrastructure Reinvestment programme. With several projects now close to or at the conditional approval stage, we would expect a number of these loans to be granted before the November election.
- Increasing oil and gas production, including reopening federal land where drilling has been restricted, and accelerating the permitting time. This could inadvertently benefit renewables and electric transmission projects as they are also subject to permitting bottlenecks.
- Withdrawing regulations on methane emissions, greenhouse gas emission controls for power plants, and tailpipe emissions.
- Pulling the US out of the Paris Agreement (again) and scrapping all federal procurement rules on EVs and clean power.
What should investors watch for?
The Treasury department is currently in Phase Three of implementing the IRA and is focusing on finalising proposed rules. We expect to see the final rules by November. The Treasury can be expected to aim to finalise as many proposed rules as possible ahead of the election to help protect them from a potential Republican president.
While consumer clean energy credits for EVs and residential efficiency, heat pumps and solar would be at risk, bipartisan support is likely for manufacturing and utility-scale solar, storage and wind as they are predominantly in red or ‘purple’ (swing) states.
[1] “Republican districts dominate US clean technology investment boom”, Financial Times, 13 August 2023
