On 12 August 2022, the House passed the landmark Inflation Reduction Act (IRA), a reconciliation package that represents the United States government’s largest-ever investment in combatting climate change.1 This legislation, which President Biden is expected to soon sign into law, represents a dramatic development in the country’s chances of meeting critical climate goals. It directs nearly $370 billion toward bolstering U.S. climate change mitigation and adaptation, increasing energy security, and lowering energy costs. In this piece, we discuss the bill’s key measures and why we believe they have the potential to create compelling investment opportunities across climate-related industries.

The Inflation Reduction Act contains tax and non-tax measures aimed at accelerating the U.S.’ climate change mitigation and adaptation efforts, boosting domestic clean energy manufacturing, increasing energy security, and lowering energy costs.3,4 With these measures, economy-wide emissions are forecast to decline 37% to 41% below 2005 levels by 2030.5 Without it, U.S. emissions were forecast to fall well short of the goal, declining just 24% by 2030.6

Among the bill’s most significant measures that can help shift the U.S. economy green, we highlight the following.

The robust wind and solar power growth in the U.S. over the past 15 years is an example of how tax credits can help the energy transition. According to the Solar Energy Industry Association, the solar industry has grown more than 10,000% since the solar ITC’s implementation in 2006.19

A study from Princeton University concluded that the Inflation Reduction Act could boost annual utility-scale solar capacity additions from 10 gigawatts (GW) in 2020 to an average of 49GW per year by the middle of the decade. Wind power capacity additions could increase from 15GW in 2020 to 39GW per year over the same time frame.20 Enhanced growth over the next decade could equate to total investments in wind and solar power nearly doubling from $177 billion under current policies to $321 billion.21

For hydrogen, the tax credits may help accelerate the development of the nascent low-carbon hydrogen industry in the U.S. Low-carbon hydrogen is a key potential pathway for reducing emissions in hard-to-decarbonize segments such as refining processes, fertilizer production, and long-haul and heavy industry transport. Potential low-carbon hydrogen approaches include green hydrogen, which is produced with electrolyzers powered by renewable energy, and blue hydrogen, which is produced using natural gas that is paired with carbon capture and storage systems. Importantly, the credits may make sustainably sourced green and blue hydrogen cost-competitive with grey hydrogen, which is derived from carbon-intensive processes and accounts for nearly the entire current supply. The cost of producing grey hydrogen ranges from about $1 to $2/kg, while blue hydrogen costs $1.5 to $2.5/kg and green hydrogen $3 to $8/kg.22 In addition, the potential growth and cost benefits within the renewables sector could also yield benefits across the hydrogen value chain, given that renewable energy plays a central role in green hydrogen production.

For the EV space, the IRA’s impact may be more limited in the near term. Income and materials sourcing requirements mean that few of the EV models currently available in the U.S. are eligible for the new tax credits that begin in 2023.23 Longer-term, the bill wants to encourage the development of the domestic EV battery supply chain and shift dependence away from China. A key stipulation in the bill requires at least 40% of the critical materials contained within EV batteries to be sourced from the U.S. or its designated trading partners.24

In our view, this policy supports further development of supply chains, which could prove healthy for the U.S. economy as well as the overall EV space. Additionally, the income requirements, purchase price limitations, and tax credits on used cars may make EVs more accessible for a wider range of U.S. consumers and accelerate adoption.

By one estimate, the Inflation Reduction Act could drive $3.5 trillion in cumulative investment in climate change-related activities over its 10-year lifespan.25 Critically, we believe that this robust investment has the potential to fundamentally shift the U.S. economy green with important emissions deadlines fast approaching. Poised to benefit from this shift are renewable energy developers and producers; manufacturers of wind, solar, battery, and energy storage components; companies throughout the entire hydrogen and electric vehicle value chains; energy efficiency and green building companies; and miners of critical minerals such as lithium. By any measure, the U.S. government passed a historic climate action that we expect to reverberate across sectors and create compelling investment opportunities over the short and long terms.

CTEC: The Global X CleanTech ETF seeks to invest in companies that stand to benefit from the increased adoption of technologies that inhibit or reduce negative environmental impacts. This includes companies involved in renewable energy production, energy storage, smart grid implementation, residential/commercial energy efficiency, and/or the production and provision of pollution-reducing products and solutions.

RNRG: The Global X Renewable Energy Producers ETF seeks to invest in companies that produce energy from renewable sources including wind, solar, hydroelectric, geothermal, and biofuels.

WNDY: The Global X Wind Energy ETF seeks to invest in companies positioned to benefit from the advancement of the global wind energy industry. This includes companies involved in wind energy technology production; the integration of wind into energy systems; and the development/manufacturing of turbines that harness energy from wind and convert it into electrical power.

RAYS: The Global X Solar ETF seeks to invest in companies positioned to benefit from the advancement of the global solar technology industry. This includes companies involved in solar power production; the integration of solar into energy systems; and the development/manufacturing of solar-powered generators, engines, batteries, and other technologies related to the utilization of solar as an energy source.

LIT: The Global X Lithium & Battery Tech ETF (LIT) invests in the full lithium cycle, from mining and refining the metal, through battery production.

DMAT: The Global X Disruptive Materials ETF seeks to invest in companies producing metals and other raw materials that are essential to the expansion of disruptive technologies, such as lithium batteries, solar panels, wind turbines, fuel cells, robotics, and 3D printers. Targeted materials include companies involved in the exploration, mining, production and/or enhancement of Rare Earth Materials, Zinc, Palladium & Platinum, Nickel, Manganese, Lithium, Graphene & Graphite, Copper, Cobalt & Carbon Fiber.

HYDR: The Global X Hydrogen ETF (HYDR) seeks to invest in companies that stand to benefit from the advancement of the global hydrogen industry. This includes companies involved in hydrogen production; the integration of hydrogen into energy systems; and the development/manufacturing of hydrogen fuel cells, electrolyzers, and other technologies related to the utilization of hydrogen as an energy source.

DRIV: The Global X Autonomous & Electric Vehicles ETF (DRIV) seeks to invest in companies involved in the development of autonomous vehicle technology, electric vehicles (“EVs”), and EV components and materials.  This includes companies involved in the development of autonomous vehicle software and hardware, as well as companies that produce EVs, EV components such as lithium batteries, and critical EV materials such as lithium and cobalt.

GRNR: The Global X Green Building ETF (GRNR) invests in companies positioned to benefit from increasing demand for buildings that either positively impact the natural environment or reduce/eliminate negative impacts. This includes companies involved in green building development and management, as well as the technologies used to increase energy efficiency in residential, commercial and public buildings.

Click the fund name above to view current holdings. Holdings are subject to change. Current and future holdings are subject to risk.

1. Cochrane, E. (2022, August 12). House is set to pass climate, tax and health package. The New York Times. https://www.nytimes.com/2022/08/12/us/politics/house-climate-tax-bill.html 2. Insider Staff. (2022, July 27). Summary: The Inflation Reduction Act of 2022. Insider Inc., Document Cloud. https://www.documentcloud.org/documents/22122297-inflation_reduction_act_one_page_summary 3. Ibid. 4. The Inflation Reduction Act of 2022, H.R. 5376, 117th Cong. (2022). https://www.democrats.senate.gov/imo/media/doc/inflation_reduction_act_of_2022.pdf 5. Mahajan, M., Ashmoore, O., Rissman, J., Orvis, R., & Gopal, A. (2022, August). Modeling the inflation reduction act using the energy policy simulator. Energy Innovation. https://energyinnovation.org/wp-content/uploads/2022/08/Modeling-the-Inflation-Reduction-Act-with-the-US-Energy-Policy-Simulator_August.pdf 6. Ibid. 7. The Inflation Reduction Act of 2022, H.R. 5376, 177th Cong. (2022). https://www.democrats.senate.gov/imo/media/doc/inflation_reduction_act_of_2022.pdf 8. Pearson, K., Such, M., & Wise, A. (2022, August 3). Inflation Reduction Act would extend renewable tax credits. Stoel Rives LLP, JD Supra. https://www.jdsupra.com/legalnews/inflation-reduction-act-would-extend-3863959/ 9. Ibid. 10. The Inflation Reduction Act of 2022, H.R. 5376, 177th Cong. (2022). https://www.democrats.senate.gov/imo/media/doc/inflation_reduction_act_of_2022.pdf 11. Ibid. 12. Ibid. 13. Ibid. 14. Ibid. 15. Dow, J. (2022, August 7). Senate improves EV tax credit in largest climate bill ever. Electrek. https://electrek.co/2022/08/07/senate-improves-ev-tax-credit-in-largest-climate-bill-ever/ 16. The Inflation Reduction Act of 2022, H.R. 5376, 177th Cong. (2022). https://www.democrats.senate.gov/imo/media/doc/inflation_reduction_act_of_2022.pdf 17. Ibid. 18. Ibid. 19. Solar Energy Industries Association. (2022). Solar investment tax credit (ITC). Accessed on August 12, 2022 from https://www.seia.org/initiatives/solar-investment-tax-credit-itc 20. Jenkins, J.D., Mayfield, E.N., Farbes, J., Jones, R., Patankar, N., Xu, Q., & Schivley, G. (2022, August). Preliminary report: The climate and energy impacts of the Inflation Reduction Act of 2022. Zero-Carbon Energy Systems Research and Optimization Laboratory, REPEAT Project, Princeton, University. https://repeatproject.org/docs/REPEAT_IRA_Prelminary_Report_2022-08-04.pdf 21. Ibid. 22. Nolan, E., Alexander, A., Phillips, H., & Khonaizi, M, A. (2021, January 28). Hydrogen production technology and infrastructure restrictions. Vinson & Elkins. https://www.velaw.com/insights/hydrogen-production-technology-and-infrastructure-restrictions/ 23. Hawkins, A, J. (2022, August 8). No electric vehicles on the market today qualify for the new EV tax credit. The Verge. https://www.theverge.com/2022/8/8/23296678/ev-tax-credit-qualify-battery-supply-chain-china 24. The Inflation Reduction Act of 2022, H.R. 5376, 177th Cong. (2022). https://www.democrats.senate.gov/imo/media/doc/inflation_reduction_act_of_2022.pdf 25. Jenkins, J.D., Mayfield, E.N., Farbes, J., Jones, R., Patankar, N., Xu, Q., & Schivley, G. (2022, August). Preliminary report: The climate and energy impacts of the Inflation Reduction Act of 2022. Zero-Carbon Energy Systems Research and Optimization Laboratory, REPEAT Project, Princeton, University. https://repeatproject.org/docs/REPEAT_IRA_Prelminary_Report_2022-08-04.pdf

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