How the Inflation Reduction Act Impacts Your Organization’s ESG Goals
Energy transition continues to gain momentum with the signing of the Inflation Reduction Act.
While the legislation is certainly complex, it will serve as a catalyst for the public and private sectors and allow the United States to align itself with the goals and interests of the largest global economies.
Or, as Bill Gates puts it, “(the Inflation Reduction Act) represents our best chance to build an energy future that is cleaner, cheaper and more secure.”
To date, the Inflation Reduction Act has been met with varying opinions (both positive and negative). However, there is no question that it will provide ample opportunities and incentives for existing businesses to capture new value.
Below, MGO’s Environmental, Social, and Governance (ESG) team breaks down a subset of the most important objectives you need to be aware of.
On its surface, carbon capture (or the process of removing carbon dioxide from the atmosphere and locking it away) offers opportunities to slow, limit, or even reverse climate change — especially if done at scale.
Carbon removal startups continue to research and innovate new technologies which will eventually remove many tons of CO2 from the atmosphere each year. These technologies are still relatively young and require additional financial investment in order to reduce costs and enhance impact.
With the passing of the act comes a new wave of funding, which carbon removal experts and startups are eager to take advantage of. Specifically, the bill will:
Increase tax credits for permanent carbon removal from $50 to $180 per ton (using direct air capture)
Significantly lower the amount of carbon companies must remove to qualify (100,000 tons to 1,000 tons)
While there are criticisms of this objective, effective policies and technologies are needed to explore climate change.
Objective #2: Individual tax credits
The Inflation Reduction Act also provides a host of environmental and clean energy tax rebates, credits, and incentives for taxpayers.
In a nutshell, the bill incentivizes taxpayers to seek out and use clean energy - prioritizing wind, solar, and other renewable sources. It also extends credits to taxpayers who purchase new or used clean-energy vehicles, as well as individuals who install energy efficient heating and cooling systems in their homes.
Keep in mind, both come with perimeters, including the amount of annual income you claim. A
Objective #3: Paying for the bill
Here are three ways Congress plans to fund the Inflation Reduction Act:
A minimum corporate tax rate on profits. The legislation will impose a tax rate of 15% on corporations that have at least $1 billion in profits. This will bring in approximately $222 billion in funding.
Increased IRS scrutiny. With strengthened, additional tax enforcement, the gap between what taxpayers owe and what the agency is collecting will shrink, allowing the agency to collect an approximate $124 billion.
Tax on stock buybacks. The Democrats added a 1% excise tax on stock buybacks when revising a draft of the Inflation Reduction Act. (Refresher: a stock buyback occurs when a publicly traded company buys its own stock back to raise the value of its shares). It is estimated that an additional $74 billion in funding will come from this portion of the bill.
Our perspective on how the Inflation Reduction Act will impact the ESG space
Many are calling the Inflation Reduction Act the biggest piece of climate legislation in American history. With $369 billion in subsidies and tax credits in electric vehicles, solar power, renewable energy, carbon capture and storage, the U.S. (which is the world’s second-biggest carbon emitter) is taking a leading position in the global energy transition.
