Clean energy investments just got a big boost
Is stopping global warming close to your heart? There’s great news for you coming from across the pond.
The US Congress has just approved the biggest piece of legislation tackling climate change in US history – the Inflation Reduction Act 2022(1) (IRA). With it, the US aims to achieve 40% emissions reduction by 2030, by investing US$369 billion (NZ$582 billion) over ten years in subsidising clean energy technology, renewable energy production, and environmental justice.
But these figures don’t tell the whole story: the bill may have a ripple effect way beyond itself, making clean energy investments more and more attractive to investors. Read on for some key things to know.
The US Congress has approved the Inflation Reduction Act, aimed at cutting emissions by 40% by 2030 through a US$369 billion investment in the clean energy sector.
The importance of this bill goes beyond the US itself: it’s likely that it will trigger even more investments, and possibly encourage other countries to follow suit.
Many analysts view it as promising sign in the fight to global warming and climate change, and expect it to bring a substantial long-term boost to clean energy investments in the coming years.
Investors have already taken notice, with clean energy funds jumping up significantly. The rebound had already started in May 2022, but it accelerated following the US Government announcement.
Why is that important news for investors?
With this bill, the US Government is taking a stance against global warming, with the unspoken goal – as some environmental activists(2) have noted – of restoring the US climate leadership in the global arena. It's already clear that the ‘big winners’ are solar panel companies, hydrogen fuel cell developers, and energy storage companies. But experts say the act is likely to benefit the whole value chain.
Many are seeing it as an encouraging sign that things are moving toward a more sustainable world. And because the share market is sentiment-driven, the announcement has already shaken things up. According to Morningstar(3), investors have reacted to the news by “piling into clean energy funds”, which jumped up significantly. For example, some solar and wind energy shares saw double-digit increases year-to-date(4).
Looking at the First Trust NASDAQ® Clean Edge® Green Energy Index Fund (QCLN)
, you can see that clean energy stocks started their rebound back in May 2022, but the biggest boost came around 27 July, when US Democrats announced the Inflation Reduction Act. At the time of this writing (29 August), the First Trust index fund is outperforming the broader global share markets by almost 20% over the prior three months(5)
How long will this sentiment last?
The question is, how long will this sentiment last? It’s too early to tell. And if we look at global numbers, a US$369 billion investment per se isn’t necessarily massive: as climate economist Gernot Wagner pointed out(6), global investments in the energy transition already sit between US$750 billion and US$2 trillion a year. But, those are mostly private investments rather than Government-led – and that’s the key difference.
If enacted and designed effectively, the US Government subsidies could pave the way to even more private investments across the US and global clean energy market. And hopefully, Governments of other countries will also step up and follow in the US footsteps, allocating their own funding in favour of more clean energy investments.
That’s essentially why the impact of this bill may be way more far-reaching than its own direct investments in energy programmes. It may help accelerate the transition to a low-carbon economy across the board, and several industries are expected to benefit from it(7). In other words, the clean-energy investment market just got a big long-term boost – and environmentally conscious investors have good reasons to celebrate.
Of course, the transition won’t happen overnight, and a lot will depend on how the bill’s provisions will be implemented. But it’s a start – and a good one, at that.
The Inflation Reduction Act in a snapshot
There’s a lot to unpack in the 730-page document, but in a snapshot, here are five key areas that the bill targets:
Incentive to consumers: The bill includes direct consumer incentives (tax credits and grants) to buy energy-efficient appliances, electric vehicles, rooftop solar systems, and home energy-efficiency solutions. Consumers are the ‘big winners’ here because clean energy would become a whole lot more affordable.
Investment in clean energy supply: From energy production to breakthrough research, the bill will see an investment of over US$60 billion in the US clean energy manufacturing sector.
Carbon emission reduction: New tax credits and grants are aimed at reducing emissions across the board, including transportation, construction, agriculture, industrial manufacturing, and electricity production.
Fossil fuel provisions: The bill is an attempt to get fossil fuel companies to adopt cleaner practices, including carbon capture and air pollution monitoring solutions. Another goal is to curb methane emissions – responsible for about 30% of global warming(8) – through new fees for natural gas extraction and methane leaks.
Environmental justice: A total of nearly US$100 billion will be invested in disadvantaged and rural communities that are most affected by climate change. This includes funds to support climate-smart agriculture practices.
On top of this, the US Department of Energy (DOE) is now authorised to lend up to US$250 billion (NZ$394.5 billion) to US companies that are investing in the clean energy transition.
At kōura we are big believers in assisting in the climate transition...
That is why in May we launched the kōura Clean Energy Fund. Our fund includes companies that operate in industries like advanced materials, energy intelligence, renewable electricity generation, renewable fuels, and energy storage and conversion. We do this by investing in a managed fund that is listed in the US and invests in companies in the industries below:
Advanced Materials - Nanotech, membranes, silicon, lithium, carbon capture and utilization and other materials and processes that enable clean-energy technologies.
Energy Intelligence - Conservation, automated meter reading, energy management systems, smart grid, superconductors and power controls.
Renewable Electricity Generation & Renewable Fuels - Solar photovoltaics, concentrating solar, wind, geothermal, and ethanol, biodiesel, biofuel enabling enzymes.
Energy Storage & Conversion - Advanced batteries, hybrid drivetrains, hydrogen, fuel cells for stationary, portable and transportation applications.
Hopefully, these are the kinds of investments that will enable and support this transition. The market clearly seems to think so.
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5. Based on return of First Trust Clean Energy Fund compared to MSCI AC World for the three months ended 29 August 2022. Sourced from Factset.
Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.