Inflation Reduction Act 2022: Climate considerations: PwC

What’s in the Inflation Reduction Act?

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:

Driving more demand for electric vehicles (EVs), low-carbon materials/construction and clean technologies
Increasing growth of renewable energy through extensions of tax credits and increases in funding
Spurring innovation through research and development (R&D) of clean technology and low-carbon materials
Creating demand for low-carbon products in construction of federal buildings and transportation projects

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.

What’s up for grabs? Nearly $370B in climate and clean energy provisions

What the C-suite should think about now

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:

Your carbon pathway. With many of the world’s largest companies committed to achieving net zero, the IRA may shift the way you achieve those targets and how you prioritize initiatives intended to get you there. For many, mapping out the cost-effectiveness of your carbon reduction efforts will help provide a better understanding of your costs, technology needs and the options for achieving your goals. This marginal abatement cost curve (MACC) will likely shift before — and after — the IRA because of these changing factors.
- What to do next: Understand your MACC curve, and reassess priorities in light of the Act.
The cost of doing business. As businesses decarbonize, their operating costs also change. For example, offering the same product that is decarbonized versus one that is not, comes at a price differential with profit and loss (P&L) implications. Additionally, provisions within the Act, including the 15% minimum tax on corporate profits above $1 billion, could have implications for your margins and cash flow. It’s important to understand how this will impact Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) and how you can continue to provide value to shareholders.
- What to do next: Consider how carbon reduction could change your cost structure, price of products and services, and profit and losses. Do a deeper assessment of how EBITDA is calculated, including where the 15% gets applied.
Revenue growth opportunities. Companies are beginning to shift their thinking about decarbonization. They’re moving from “How much will it cost us?” to “What growth can it spur?” Because of incentives, climate-focused efforts are now more economical, with available funds for innovation, R&D, technologies and other enhancements. Some industries, such as industrial manufacturing, energy and utilities, technology and consumer markets stand to see an increase in demand for what they offer. This includes businesses that offer decarbonization and efficiency solutions as well as industries in which consumers desire a lower-carbon footprint for the products they buy.
- What to do next: Embed the tax team in every conversation about innovation, product development and production in an effort to get more value out of available incentives, while capturing the highest possible increase in demand. Consider analyzing the financial considerations to better understand what makes the most sense, as well as the requirements necessary to capture the benefits.
Supply chain impacts. The Act aims to provide more supply chain security and spur more domestic manufacturing. This could lead to increased supply chain flexibility and agility based on where materials come from and where assembly occurs. For those with existing low-carbon products (e.g., electric vehicles [EVs], clean tech, batteries, low-carbon construction materials), it’s important to evaluate how aligned their current supply chain is to take advantage of the credits and funding available in the Act.
- What to do next: Evaluate how aligned your current supply chain is to take advantage of the available credits and funding. This includes understanding whether domestic source requirements apply.

Industry implications

Industrial products

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.

Automotive

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.

Energy, utilities and resources

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.

Consumer markets

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.

Private equity

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.

Technology, media and telecommunications

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.