sustainable investment

What if the Inflation Reduction Act were repealed?

What if the Inflation Reduction Act were repealed?
Ella Harvey  - Senior Sustainability Analyst, holistiQ

Ella Harvey

Senior Sustainability Analyst, holistiQ

The energy transition is a polarising US political issue. For the Inflation Reduction Act (IRA), which in 2022 approved an estimated USD 670 billion to boost domestic clean-energy production and manufacturing, the November 2024 federal election will undoubtedly impact its future and the funding it provides.

A popular view is that because much of the IRA funds are being allocated to Republican states, the Act will be safe under a GOP administration. However, based on proposed legislation and policy from conservative lawmakers and think tanks, we believe it is likely that a Republican administration with full Congressional support could threaten much of the new funding. This would likely impact all unallocated funding, as well as that which has been allocated to projects but not yet spent.

In this analysis, we assess three post-election funding scenarios for the IRA:

  • Scenario 1: IRA funding persists at USD 670 bn. With a Joe Biden Presidency, Republican Senate and Democratic House, Congress will be divided. As such, meaningful changes to IRA implementation or any partial repeal of the Act would be unlikely, as any bill passed by one house would likely be voted down by the other
  • Scenario 2: IRA funding declines to USD 330 bn. If Donald Trump secures the presidency but Congress is divided with a Republican Senate and Democratic House, he would likely enact changes to the IRA vis à vis his control over government departments. Funding from loans and grants would probably be stymied and IRS guidance for tax credits tightened
  • Scenario 3: IRA funding collapses to 130 bn. If Republicans win the presidency and Congress, it is likely that GOP lawmakers will try to offset their fiscal agenda by repealing most or all IRA subsidies relating to green measures

We canvass the likely methods that could be used to potentially diminish IRA funding in line with these projections. We also identify at-risk energy-transition activities and those that should prove more resilient, and provide a case study detailing how scenarios two and three could impact funding for clean ground-transportation technologies, including private and commercial electric vehicles (EVs).

 

To read more, please explore the sections below.

  • How effectively is IRS and Treasury guidance enabling investment?

    The 2022 Inflation Reduction Act (IRA) provides an estimated USD 670 billion in federal government spending and tax breaks to scale-up domestic clean-energy production and manufacturing, reduce healthcare costs and increase tax revenues.

    Two-thirds of IRA funds come in the form of tax credits that will flow through the Internal Revenue Service (IRS). While the IRA provides outlines for the types of projects that are eligible for tax credits (e.g. clean-energy projects) it does not always stipulate the exact requirements (e.g. what qualifies as ‘clean’). Therefore, the private sector has withheld some green investments until Treasury and IRS released guidance clarifying the eligibility of projects and products, credit stacking and bonuses. This guidance trickled out during 2023 and a large tranche of key specifications was released in December 2023. It is summarised below.1

    • Final guidance. Final implementation guidance has been issued for a handful of tax credits (25E, 45L, 48C), largely building on other guidance, as several of these credits are either pre-existing or relate to other credits
    • Proposed guidance. Proposed guidance now exists for most key credits, including clean hydrogen and sustainable aviation fuel (SAF), as well as for what constitutes a foreign entity of concern (FEOC) for EVs and domestic content requirements for clean-energy projects. As a result, policy uncertainty on issues like EV eligibility and clean hydrogen is finally clearing, providing more clarity to investors. The proposed guidance is expected to become final before the election, and there is limited expectation that most of it will change meaningfully from its current form

     

    Why the IRA might – or might not – be resilient under a Trump administration

    Current market consensus is that the IRA would survive a Trump presidency – largely due to the job creation and beneficial economics it is delivering, and the difficulty of repealing legislation. We expand on these reasons below.

    • Funding to red states. More of the announced funding has gone to Republican states than Democratic ones, with Texas likely to attract more than any state with USD 67 bn. This leads to an expectation that constituents will pressure Republican lawmakers to preserve the IRA.
    • Delay in benefits. It typically takes more than two years for the benefits of major legislation to become visible in the economy. For instance, the Infrastructure Investment and Jobs Act (IIJA), signed into law in November 2021, was understood to be visibly driving business investment in mid-2023. It’s therefore likely that the next president will benefit from the economic impact of the IRA, potentially limiting any desire to repeal it.
    • Major bills are rarely repealed. Conventional wisdom in Washington D.C. is that significant programmes that directly benefit individuals and companies rarely get rolled back.Further, political gridlock and multiple veto options make any major legislative change difficult without a party winning the trifecta of Presidency, Senate and House.

     

    However, as strong as these arguments are, they do not guarantee the longevity of the IRA. The state of US finances and heated culture wars over sustainability are key reasons why IRA funding could be threatened if the Republicans prevail this November.

     

    • Federal deficit. A combination of factors – debt incurred due to the Covid response and social-support efforts, resurgent inflation, higher interest rates and increasing healthcare costs amid an ageing population – create anxiety about an emerging fiscal crunch. Any government spending perceived as unnecessary could therefore be axed. These concerns are especially relevant in the wake of the Joint Committee on Taxation’s (JCT’s) significant upwards revision for the impact of the IRA on the federal deficit.3
    • Cultural politics around key ‘green’ topics. The IRA subsidises projects and goods, including electric vehicles (EVs) and home electrification, that have been the subject of an ongoing culture war between liberals and conservatives in the US about sustainability – even if these innovations are as much about applying superior technologies as environmental benefits.

     

    Even if the IRA stood a good chance of supporting the energy transition under a Trump government, Republican efforts to repeal the law or constrict the flow of funds will be persistent.

  • Repealing tax credits and clawing back funding through new legislation are key tactics the GOP would likely employ to undermine the IRA, as we explain below.

    • Repealing or reverting IRA tax credits. Several tax credits in the IRA are simply modified versions of pre-existing ones (e.g. 25C, 25D, 30D, 45Q, 48C and 179D). Republicans could therefore be expected to revert these tax credits to their pre-IRA status and repeal all new ones. This is addressed in the proposed Limit, Save, Grow Act from House Republicans, which is seen as a major policy initiative from the GOP heading into the 2024 election.
    • Limiting funding for home electrification. The proposed Limit, Save, Grow Act proposes to repeal many IRA funding mechanisms that would improve home electrification, including the High Efficiency Electric Homes Rebate, home energy efficiency contractor training grants, and assistance for the latest and zero building energy code adoption.
    • Limiting funding for electrifying transport infrastructure. The House Budget Committee’s Reverse the Curse Resolution (2023) proposes to claw back USD 25 bn in IIJA funds for electrifying transportation (e.g. EV charging, low-carbon buses and ferries, etc.), skills training, and the Carbon Reduction Program. (See Section H for more on the IIJA.)
    • Clawing back IRS and other departmental funding. Both the proposed Limit, Save, Grow Act and proposed appropriations bills from Republican House committees4 propose to restrict IRA funding to the IRS, as well as pull IRA funding for the Environmental Protection Agency’s (EPA’s) Greenhouse Gas Reduction Fund programme and from Rural Electric Cooperatives, among other green incentives for rural Americans.

     

    Republicans have effective mechanisms for undermining the IRA – but there are other dynamics that could also adversely impact the legislation.

     

    What are the key risk factors for IRA funding mechanisms?

    Rising costs for green technologies, departmental influence over funding allocations, and the vulnerability of new subsidies are  seen as weaknesses in IRA funding distribution.

    • Tax credits where IRS guidance is key. Credits where IRS or Treasury guidance has a definitive role in determining final eligibility may be at risk of having the guidance being significantly tightened, as this can be done without involving Congress.
    • Increasing costs. Funding might be impacted where the anticipated cost of green goods or projects have been revised upward, as additional government expenses are likely to become more difficult to justify in a high-inflation environment. Such funding could become vulnerable in efforts to offset tax cuts.
    • Limiting bonus funding. Supplemental funds subject to additional rules towards domestic content of goods or FEOCs could be seen as ‘excessive’ and tightened by a new administration without approval from Congress5
    • Abandoning new pools of funding. Subsidies that are in the early stages of being distributed would likely be less politically painful to repeal than long-established programmes.
    • Departmental funding, subsidies and grants, as these are funding streams that can be largely adjusted without congressional approval

     

    Given the potential for IRA funding to be constrained, what aspects of clean-energy production, storage and transmission could be at risk? We address this next.

     
  • A range of green power sources and technologies would be impacted be reduced IRA funding, chiefly:

    • The modified tax credit for carbon capture and storage (45Q) and the new clean hydrogen production tax credit (45V) are expected to become substantially more expensive for the government than what was originally anticipated by the JCT, despite relatively strict guidance from the IRS for hydrogen production (see appendix B). As a result, the proposed Limit, Save, Grow Act would return 45Q to the pre-IRA version and repeal 45V entirely. Although some expect CCS to be vulnerable, we think it is unlikely to be repealed completely since the technology has received broad bipartisan support in the past (2008, 2018, 2020), as well as support from industry.
    • Other tax credits at risk include bio-based and other clean fuels (45Z, 40B), some investment and production tax credits for clean electricity (48E, 45Y), energy storage (48C), and production credits for zero-emission nuclear power (45U), as these are all targeted for repeal in the proposed Limit, Save, Grow Act. This bill would also restore the tax credit for second-generation biofuels (40) to its pre-IRA version. In addition, pre-IRA tax code provisions that delivered a production tax credit of 1.5 cents per kilowatt hour (c/kWh) and investment tax credits of up to 30% for some renewable resources would reappear, but with considerably shorter time frames.
    • While Republicans are expected to continue to target provisions relating to EVs and the production of certain types of green energy, solar subsidies are considered to be relatively less at risk because this power source has become an established component of the energy-supply mix – even in deep-red areas like the Florida panhandle. This would make their removal politically painful and prone to substantial pushback from utilities. Finally, all grants relating to expanding low-carbon electricity to rural Americans would be severely limited or effectively cut off after 2025

     

    The above is not a comprehensive list of proposed or anticipated changes to US federal green stimulus for clean-energy supply. Rather, it highlights some of the more prominent potential impacts.

    Beyond supply, several funding mechanisms relating to clean-energy demand are also at risk. These include:

    • The IRA’s tax credits for clean vehicles (30D for consumers, 45W for corporates) are considered to be especially vulnerable under a Republican administration. The proposed Limit, Save, Grow Act would restore the pre-IRA credit cap of 200,000 vehicles per manufacturer, which many major automakers have already reached, and it would repeal credits for previously owned EVs and qualifying commercial clean vehicles.
      This move would be backed by an anti-EV narrative being promoted by the Republican party. The GOP asserts that Democrats are forcing consumers to buy overpriced, unreliable EVs to the benefit of China and to the detriment of US auto manufacturers, domestic jobs and the resilience of US auto supply chains. This narrative has played out in politics. For example, in January 2023 Glenn Youngkin, the Governor of Virginia and a Republican, blocked a proposed Ford-CATLpartnership to build a battery plant in the state. In addition, these tax credits are expected to cost the government significantly more than initially expected based on the uptake observed so far, which has been interpreted by Republicans as a ‘cost overrun’ that should be curtailed.
    • The components manufacturing for solar and wind energy, inverters, battery components, critical minerals and automobiles is also expected to be a target for Republicans. These provisions are expected to become much more expensive than originally anticipated by the JCT, and they have also been targeted for repeal under the proposed Limit, Save, Grow Act.
    • Home electrification and energy efficiency has also been in the Republicans’ crosshairs. For example, the Limit, Save, Grow Act proposes to repeal the High Efficiency Electric Homes Rebate, assistance for zero building energy code adoption, as well as state-based home energy efficiency contractor training grants. For example, the Trump administration unwound regulations that would have made various home appliances more energy efficient, and former Presidential candidate and Florida governor Ron DeSantis blocked IRS funding for home electrification from being included in the state’s budget.

     

    As with the supply measures, this is not a comprehensive list of proposed or anticipated changes to the US green stimulus for clean-energy demand, but focuses on technologies that could suffer lower IRA funding.

     

    Is there anything in the IRA that is not at risk?

    It is unlikely that the drug-pricing provisions of the IRA will become a target since these provisions would save the government money – which would be beneficial in the event of additional tax cuts. This is because these provisions allow the Secretary of Health and Human Services ) to negotiate prices for some of the most expensive Medicare drugs with manufacturers, with the aim of lowering costs for the government and taxpayers. These provisions are also among the most popular elements of the IRA on both sides of the aisle – as indicated by a recent KFF poll and the fact that these provisions are not targeted by any proposed Republican bills.

     

    Besides the IRA, are any other policies at risk?

    As mentioned above, the IIJA has also been targeted by some Republicans. For example, the Reverse the Curse resolution from the US House Budget Committee seeks to eliminate USD 25 bn from the IIJA. In addition, the Project 2025 initiative, launched by highly influential conservative think tank The Heritage Foundation, proposes cutting USD 102 bn from the IIJA’s total of USD 1.2 trillion. These cuts focus on what it claims are “wasteful” green initiatives, pointing to EV charging and low-carbon transport. However, the IIJA appropriates a fixed amount of spending, and much of the IIJA spend will have already been outlaid by 2025, which means that a repeal of these provisions would provide limited cost savings. This contrasts with the IRA, which has uncapped spending for many components for more than 10 years. Further, the IIJA gained relatively broad bipartisan support, unlike the IRA.

    It is unlikely that the CHIPS Act will be targeted by Republicans, as this bill has not been highlighted in any conservative policy or legislative proposals. Further, it supports US independence from China in manufacturing semiconductors – a strategy broadly supported by both parties.

     
  • Scenario 1: Democratic President, Republican Senate, Democratic House

     

    presidency-blue.pngsenate-red.pnghouse-blue.png

     

    A divided Congress is unlikely to be able to meaningfully influence IRA implementation or repeal any part of the Act. This is because any bill passed by one house would likely be voted down by the other, as demonstrated by the failed attempts by the 118th House of Representatives to repeal the IRA. Even if Congress did approve a bill to repeal the IRA, Biden would veto it (and the chances of a 2/3 veto override are unlikely given the current Senate map). Therefore, there would likely be gridlock on most issues except bills that are essential for keeping the government running. As a result, Biden would likely focus on directing resources to government departments to accelerate IRA implementation.

    In the event of a Democratic trifecta, it is likely that the Democrats would continue to pursue Biden’s fiscal agenda, including tax increases and expanded drug-price negotiations under Medicare.

    In summary, with Biden in office, there is very limited risk of any part of the IRA being substantially altered or repealed. In this case, federal stimulus spending from the IRA would likely peak by 2027-2028. Even without a Republican president (and a tiebreaking Vice-Presidential vote), the Senate may be expected to turn Republican with Democrat Senator Joe Manchin, Governor of West Virginia, stepping down this year7.

     

    Scenario 2: Republican President, Republican Senate, Democratic House

     

    presidency-red.pngsenate-red.pnghouse-blue.png

     

    As with scenario one, a divided Congress would stymie Republican attempts to pass a full repeal. Therefore, it is likely that in this scenario, the President would focus on hindering IRA implementation through measures that are within the purview of government departments (e.g. the IRS, Treasury, Department of Energy and EPA). This situation would be similar to Trump’s failed attempt to repeal Obamacare in 2017, but which resulted in a material weakening of the law.

    A Republican president could hinder IRA implementation in many ways, including:

    • Reducing funding to government departments to restrict processing capacity and outreach
    • Changing the guidance for tax credits (e.g. altering the definitions for eligibility or adjusting guidance around FEOCs)

     

    Departmental grant and loan spending would also be a key target, as this would be relatively easy to redirect to different programmes via executive action (i.e. without majority support in Congress).

    To conclude, a Republican president without full congressional support is likely to dial back IRS guidance for many IRA tax credits as early as Q1 2025, and would try to stifle any outflows from government departments (e.g. departmental spending, grants and loans). Assuming that implementation changes are made in the first 100 days, federal green stimulus spending would peak in 2024.

     

    Scenario 3: A Republican trifecta

     

    presidency-red.pngsenate-red.pnghouse-red.png

     

    If Republicans win the Presidency, the Senate and the House, this puts the IRA at serious risk of repeal as part of a larger package that extends Trump’s 2017 tax cuts. However, it is likely that Congress would only be Republican by a narrow margin based on current polls and the 2024 Senate map. Therefore, it is likely that a Republican-dominated Congress would pass any amendments to the IRA through the reconciliation method, which requires only 51 votes instead of the typical 60 (see appendix C).

    There is a good chance that if elements to repeal the IRA are introduced into a Republican reconciliation bill, they will be passed by Congress due to pressure to toe the party line. The repeals would likely go into effect from mid-2025. This would affect all unobligated funds (including allocated funds that have not yet been outlaid8. Based on the Limit, Save, Grow Act and other proposed Republican bills, all new green tax credits would likely be repealed and pre-existing credits would be returned to their pre-IRA status (see appendix A). However, it is unlikely that outlaid funding would be clawed back after a repeal.

    A Republican trifecta opens the possibility of Congress partially repealing the IRA (a complete repeal is unlikely, as some elements of the bill are still popular). This is the riskiest situation for the Act. If the required legislation is passed within 100 days of the new President taking office, federal green stimulus spending would probably peak in 2024.

  • The growth of US private investment in the green transition has been slow – largely due to high interest rates, permitting issues and a lack of IRS guidance – reaching only USD 280 bn in total spend by October 2023.9 But now that most key guidance has been released, the door has opened for greater private-sector investment in the transition.

    The market consensus has largely been that the IRA will be resilient in the face of a new administration, especially given how difficult it has historically been to repeal major laws in the US. Recent analyses from Alpha Capital Partners, UBS and Goldman Sachs suggest that many analysts do not expect a change in administration to result in a meaningful overhaul of existing regulations (a sentiment that has also been echoed by regulators like CARB). However, a more cautious tone has been taken by other analysts10. If federal green spending becomes a key issue in the primary season, this consensus is liable to change. If consensus changes, there may be a surge of investment in transition projects to secure subsidies while they still exist.11

    For each scenario, our analysis12 suggests the following for federal spending:

    • Scenario 1: relatively unchanged at USD 670 bn
    • Scenario 2: decrease to USD 330 bn
    • Scenario 3: decrease significantly to USD 130 bn (see figure 1)

     

    If Republicans secure the presidency but Congress is divided, there is a reduced risk of significant funding headwinds for any sector, because efforts to curb the IRA would be largely limited to restrictions on implementation and slowing down grants and loans from government departments.

    Accounting for a multiplying factor to estimate private investment on top of public spending, we estimate that if Republicans secure the presidency but not Congress, total public and private spend on the energy transition from 2023-2033 would be USD 477 bn. If there is a Republican trifecta, total spend would be USD 173 bn.

    Given that federal outlays would not be affected until mid-2025, federal investment in the energy transition would peak in 2024 for scenarios two and three, and in 2027-28 for scenario one.

     

    Clean-energy investment under a Republican trifecta

    Different clean-energy sectors would experience headwinds of varying strengths in the event of a Republican sweep:

    • Strong headwind: EVs, SAF, nuclear and hydrogen power, energy-efficient or electrified buildings
    • Slight headwind: wind and solar power, and CCS
    • Limited change: second-generation biofuels (derived from waste) and drug-pricing reforms

     

    The greatest absolute difference in funding amounts would be seen in the clean-electricity sector, with drops of USD 170 bn and USD 264 bn in 2023-2033 spending for scenarios two and three, respectively. But the largest relative change would happen in the clean-transport market, with a -61% and -90% decrease in 2023-2033 spend for scenarios two and three, respectively (see figure 1).

     

    FIG 1. Projected cumulative IRA funding volumes by sector and scenario, 2023-2033

    Source: LOIM analysis at February 2024. The funding outcomes for each scenario are based on LOIM calculations. For illustrative purposes only.

     

    Looking at the estimated federal energy transition spending over time, we calculate that investment peaks in 2027 for scenario one at USD 670 bn, and in 2024 for scenarios two and three at USD 330 bn and USD 130 bn, respectively.

     

    FIG 2. Forecast US energy-transition spending by scenario (bn USD)

    Source: LOIM analysis at February 2024. The funding outcomes for each scenario are based on LOIM calculations. For illustrative purposes only. Notes on the above figures: scenario one represents all estimated tax credit and grant/loan outlays from the IRA in these categories; scenario two has modified estimated outlays for all spending categories to account for the removal of bonus credits, tightening of credit guidance, and reallocation of departmental funding to reduce outlay capacity; scenario three illustrates a repeal scenario as posited under the Limit Save and Grow Act. All scenarios exclude all departmental funding and any funding directed towards sectors not directly connected to the energy transition (e.g. natural resource conservation and ecosystem restoration, climate resilience, drug pricing or Medicare).

     
  • In this case study, we consider how scenarios two and three could affect total federal spending on electrifying ground transport. Since Republicans would most likely aim to simply stem the flow of federal spending going to these credits, this analysis focuses on a handful of mechanisms that are likely candidates for restricted funding.

    Our analysis suggests that in scenario two, with a Republican President but divided Congress, the funding pool for purchasing new EVs would be significantly constricted due to tighter guidance for vehicle eligibility (for example, by further escalating FEOC restrictions). In scenario three, this funding pool would be severely depleted and drop to zero after 2025. If FEOC restrictions are tightened, this may serve as a tailwind to battery and critical mineral recycling in the US due to the ongoing need to procure these automobile components to meet the demand for EVs.

    It is important to note that the tightening or repeal of the IRA would largely affect funding going towards EV adoption but not EV charging infrastructure, as only 1% of total funding going towards the electrification of ground transport is intended to bolster charging networks. This is because the majority of EV charging funding is provided under the IIJA, not the IRA.

     

    The IRA financing measure for clean transport

    New EVs for domestic and business use

    Scenario two

    Scenario three

    The key features of the IRA’s support for electrified mobility are tax credits of up to USD 7,500 for new clean vehicles for consumer (30D) or commercial (45W) use.

    Section 30D modifies the pre-existing new clean vehicle subsidy by removing previous volume caps on qualifying auto sales. At the same time, it imposes several new requirements for the inclusion of local inputs, the price of the vehicle and income-based restrictions.

    These amendments provide a credit of up to USD 7,500 per qualifying new clean vehicle purchased, with USD 3,750 conditional on meeting local-content requirements for critical minerals, and USD 3,750 provided if requirements for using domestic inputs in battery components are met. Similarly, section 45W of the IRA creates a new tax credit for up to USD 7,500 for each qualifying new clean vehicle bought for businesses and tax-exempt organisations.

    Under the IRA, a new clean vehicle being used after 31 December 2023 will not qualify for section 30D or 45W credits if its battery, or battery components, were manufactured or assembled by a FEOC. The FEOC restrictions will then expand to exclude vehicles whose battery cells contain any critical minerals that are extracted, processed or recycled by a FEOC after 31 December 2024.

    Summary: for new clean vehicles, the estimated total amount of funding distributed is USD 99.23 bn13.

    The IRA does not clarify what companies are considered to be FEOCs. This detail was provided in proposed guidance issued by the DOE and Treasury in December 2023. That document defines what is a FEOC and offers directions for how companies should certify compliance with the FEOC restrictions to the IRS.

    Therefore, a President seeking to curtail funding available for new clean vehicles via these tax credits, but who is acting without the backing of Congress, may aim to tighten the FEOC definitions and thereby restrict the number of eligible manufacturers.

    For example, the guidance specifies that a FEOC is partially defined as an entity which is “owned by, controlled by or subject to 25% or more of the entity's board seats, voting rights or equity interest” claimed by a foreign entity. Thus the guidance could be tightened from 25% to zero.

    On balance, a tightening of the guidance in this way would likely benefit US original equipment manufacturers with domestic supply chains, and therefore critical-mineral recycling and battery production within the nation’s borders.

    However, it is important to note that if the vehicle is intended to be leased, the FEOC concern does not pertain to credit 45W. Therefore, depending on the contribution of leased vehicles to overall sales, this tightening of guidance would have less of a material impact.

    Summary: Accounting for the effects of tightening the FEOC definitions, but also the fact that this would not apply to leased vehicles, we would expect the total IRA subsidies from 2023-2033 for purchasing new clean vehicles to drop to USD 70-80 bn.

    If there is a Republican trifecta and these credits are included for repeal in a GOP-sponsored bill, the clean-vehicle credit would likely be modified to the pre-IRA version, effectively eliminating it.

    There would be no further tax incentives for consumers to purchase EVs, and with commercial clean vehicles also likely to lose the tax break, companies would no longer have this incentive for EV purchases.

    Summary: if both credits are repealed, for EV purchases all tax incentives would likely disappear.

    Used EVs

    Scenario two

    Scenario three

    The IRA also provides a tax credit for previously owned EVs. Section 25E provides up to USD 4,000 for purchases of used clean vehicles (as described under credit 30D).

    Summary: for used clean vehicles, the estimated total amount of funding outlaid is USD 0.76 bn1.

    The guidance for this credit applies mostly to reporting rules, as vehicles are described as needing to meet “the requirements of subparagraphs (C), (D), (E), (F), and (H) of section 30D”.

    Therefore, the FEOC restriction does not apply to this credit, which reduces the capacity for the guidance to be tightened. As a result, this tax credit is less likely to be materially affected.

    Summary: we would expect this tax credit to not be severely affected.

    Since this credit would be targeted by the proposed Limit, Save Grow Act, it is likely that it would be repealed if there is a Republican trifecta.

    Summary: if this tax credit is repealed, for used EV purchases all incentives would disappear.

    EV charging infrastructure

    Scenario two

    Scenario three

    There is a tax credit for installing refuelling systems in properties for cars using alternative power sources, primarily electricity.

    Section 30C establishes a tax credit for up to USD 100,000 to support the installation of qualified alternative fuel vehicle refuelling systems, including EV charging infrastructure, that are equipped through to 31 December 31 2032.

    Summary: for installing alternative refuelling systems, the estimated total funding is USD 1.33 bn1.

    The IRA stipulates that the credit is only available for property placed in service in census tracts that qualify as low-income communities or are designated as being non-urban areas.

    However, the definitions of ‘low-income community’ and ‘non-urban’ needed to be clarified. Therefore, the relevant guidance from the IRS clarifies which census tracts qualify for the credit, and provides a relatively expansive definition of qualifying tracts, confirming that at least 10% of the census blocks are not designated as urban areas.

    The guidance could, therefore, change the definition of what qualifies as a census tract that is eligible for the credit.

    Summary: the census tracts qualifying for this credit could be drastically reduced by redefinitions – e.g. by changing what qualifies as a ‘non-urban’, area. We would expect the level of subsidies for building EV charging infrastructure to drop to USD 670 mn.

    Based on the fact that this tax credit would be targeted by the proposed Limit, Save Grow Act, it is likely that a Republican trifecta would repeal it.

    Summary: If this tax credit is repealed, then this portion of incentives for installing EV charging infrastructure would disappear. However, this is only part of the total US federal funding provided for EV charging, alongside that provided by a range of policies, including the Bipartisan Infrastructure Law (IIJA).

    Source: LOIM analysis at February 2024. The funding outcomes for each scenario are based on LOIM calculations. For illustrative purposes only.

     

    Figure 3. Estimated clean-transport spending in the US under the three scenarios (USD bn).

    Source: LOIM analysis at February 2024. The funding outcomes for each scenario are based on LOIM calculations. For illustrative purposes only.

  • Contrary to consensus, full deployment of IRA funding is not guaranteed irrespective of the 2024 US election outcome. In this analysis, we assess the likely impact of IRA outlays under three scenarios: a Biden presidency and a split Congress, a Trump presidency with a split Congress, and a Republican trifecta.

    We find the bill is likely to be far from immune to a Republican victory, with one outcome resulting in a collapse from today’s estimated USD 670 bn to USD 130 bn. In assessing the potential outcomes of each scenario, we catalogue clean-energy supply and demand activities at risk of reduced funding, from SAF and hydrogen to EVs and energy-efficient buildings, while highlighting that solar energy will probably remain resilient given its current market penetration. It Is important to note that energy-transition funding from other bills – the CHIPS and Science Act and IIJA – should remain largely unaffected due to their bipartisan support.  

    To illustrate how Republicans might exercise departmental influence or introduce new legislation to stymie or repeal the IRA, we use funding to clean ground transportation as a case study. This shows the extent to which tax credits could be repealed, and the concomitant reduction in funding, under increasing Republican power.

    If the market takes a similar view of the threat a Republican administration would pose to the IRA, we expect a surge in clean-energy investment in the coming months – especially since detailed guidance on the implementation of tax credits has been released.

     
  • Policy and legislation

     

    Legislation commentary and analysis from the government

     

    Relevant broker analysis

    • Wolfe Research. November 28, 2023. “IRA Repeal Risk: Three Reasons to Doubt It, and Three Reasons to Take It Seriously in 2025”
    • UBS. January 3, 2024.  “UBS: Where the Puck is Going -- Shifting into 2nd Gear, Remember the Clutch”.
    • Wolfe Research. January 2024. “US Policy and Politics Outlook: 10 Questions for 2024.”
    • BofA. December 7, 2023. “Scenario analysis on federal stimulus if the Republicans win in ’24.”
    • Goldman Sachs. January 8, 2024. “2024 Political Outlook: Uncertainty at the Start and End of the Year (Phillips/Krupa).”
    • Goldman Sachs. January 2, 2024. “Navigating Sustainable Investing uncertainty and opportunity in 2024.”

     

    Analysis of IRA funding

     

    Appendix A

    Update on IRS guidance

    Note that this is not a complete list of tax credits provided by the IRA. Instead, it lists only some of the most important credits. For a full list of credits and other funding mechanisms in the IRA please refer to: Inflation Reduction Act Guidebook | Clean Energy | The White House. Although there are many significant differences between the original tax credits and the IRA-modified versions of these credits, in general the IRA increased the base credit amount, extended the timeframe, and added bonus credits where additional criteria were met. Please note this table only includes guidance released on or before February 5, 2024.

    Code

    Tax provision

    Type of credit

    Guidance status

    Guidance link

    Guidance issue date

    Likely outcome under Republican trifecta

    40

    Extension of Second-Generation Biofuel Incentives

    Extended through 12/31/2024

    No guidance

    n/a

    n/a

    Modified & effectively repealed

    45

    Production Tax Credit for Electricity from Renewables

    Modified and extended

     No guidance

    n/a

    n/a 

    Modified (lower base credit, earlier sunset)

    48

    Investment Tax Credit for Energy Property

    Modified and extended

    Proposed (draft) guidance issued

    Link

    17/11/2023

    Modified (lower rate, earlier sunset, bonuses removed)

    179D

    Energy Efficient Commercial Buildings Deduction

    Modified and extended

    Awaiting guidance

    Link

    n/a

    Modified to pre-IRA version

    25C

    Energy Efficiency Home Improvement Credit

    Modified and extended

    Proposed (draft) guidance issued

    Link

    04/09/2023

    Modified to pre-IRA version

    25D

    Residential Clean Energy Credit

    Modified and extended

    No guidance

    n/a

    n/a

    Modified & effectively repealed

    25E

    Credit for Previously-Owned Clean Vehicles

    New

    Final guidance issued

    Link

    12/12/2022

    Repealed

    30C

    Alternative Fuel Vehicle Refuelling Property Credit

    Modified and extended

    Proposed (draft) guidance issued

    Link

    30/1/2024

    Modified to pre-IRA version

    30D

    Clean Vehicle Credit

    Modified and extended

    Proposed (draft) guidance issued

    Link

    19/01/2024

    Modified to pre-IRA version

    40A

    Extension of Incentives for Biodiesel, Renewable Diesel, and Alternative Fuels

    Extended through 12/31/2024

    No guidance

    n/a

    n/a

    Modified & effectively repealed

    40B

    Sustainable Aviation Fuel Credit

    New

    Proposed (draft) guidance issued

    Link

    15/12/2023

    Repealed

    45L

    New Energy Efficient Homes Credit

    Retroactively extended for homes acquired after 2022

    Final guidance issued

    Link

    27/09/2023

    Modified to pre-IRA version

    45Q

    Credit for Carbon Oxide Sequestration

    Modified and extended.

    No guidance

    Link

    n/a

    Modified to pre-IRA version

    45U

    Zero-Emission Nuclear Power Production Credit

    New

    Awaiting guidance

    Link

    n/a

    Repealed

    45V

    Clean Hydrogen Production Tax Credit

    New

    Proposed (draft) guidance issued

    Link

    22/12/2023

    Repealed

    45W

    Credit for Qualified Commercial Clean Vehicles

    New

    No guidance

    n/a

    n/a

    Repealed

    45X

    Advanced Manufacturing Production Credit

    New

    Proposed (draft) guidance issued

    Link

    14/12/2023

    Repealed

    45Y

    Clean Electricity Production Tax Credit

    New

    Awaiting guidance

    n/a

    n/a

    Repealed

    45Z

    Clean Fuel Production Credit

    New

    Awaiting guidance

    n/a

    n/a

    Repealed

    48C

    Advanced Energy Project Credit

    Modified and extended

    Final guidance issued

    Link

    13/02/2023

    Modified

    48E

    Clean Electricity Investment Tax Credit

    New

    Proposed (draft) guidance issued

    Link

    17/11/2023

    Repealed

    48E(h)

    Low-Income Communities Bonus Credit

    New

    Proposed (draft) guidance issued

    Link

    08/11/2023

    Repealed

    n/a

    Domestic content bonus requirements

    Applies to 45, 45Y, 48, 48E

    Proposed (draft) guidance issued

    Link

    28/12/23

    Inactivated

    n/a

    Prevailing wage & apprenticeship requirements

    Applies to 30C, 45, 45L, 45U, 45V, 45Y, 45Z, 48C, 48E, and 179D

    Proposed (draft) guidance issued

    Link

    30/08/23

    Inactivated

    n/a

    Foreign entity of concern requirements

    Applies to 30D (but not 45W)

    Proposed (draft) guidance issued

    Link

    01/12/23

    Inactivated

    Source: LOIM analysis at February 2024. The funding outcomes for each scenario are based on LOIM calculations. For illustrative purposes only.

     

    Appendix B

    Commentary on stringency of tax credit guidance

    Government departmental guidance on tax credits has the ability to dramatically expand or constrict the scope of a given tax credit by defining what is or is not eligible for the subsidy. For example, a recent Treasury ruling clarifies that certain eligibility restrictions relating to income and domestic content do not apply to leased EVs. As a result of this decision, EV leasing grew from 7% of EV sales in September 2022 to 34% percent of EV sales in June 2023 [New York Times]. Correspondingly, the JCT updated its revenue estimate for EV credits from $11bn to $69bn. Similarly, Treasury’s interpretation of what qualifies as a ‘non-urban’ area for credit 30C (alternative fuelling property) can be construed as being quite generous, as this guidance specifies that now areas in which eligible property can be installed cover 60+% of the American population [Electrification Coalition]

    On the other hand, the proposed guidance released in December 2023 for the clean hydrogen production tax credit (45V) is quite restrictive, as it allows only certain types of renewable energy to be used for hydrogen production. Further, to ensure additionality, the renewable energy project must be new (i.e. it must be operating commercially no earlier than three years before the hydrogen production facility is placed in service). Finally, the renewable energy generation must be hourly matched to hydrogen production starting in 2028. The guidance is so much more restrictive than the market anticipated that if it is finalised without significant alterations, it may be subject to legal challenges on the grounds that Treasury and the IRS have exceeded their statutory authority in implementing these regulations.

    It is useful to note that the relative stringency of departmental guidance is often a key reason why estimated outlays in CBO scores may differ from the total budget authority estimate.

     

    Appendix C

    Explanation of the Reconciliation approach

    Typically, the Senate requires 60 votes to pass any bill. If a party wins more than 50 but fewer than 60 seats in the Senate, the only way they can pass a bill (assuming that they do not secure any votes from across the aisle, or any Independent votes), is through what is called the reconciliation process. This is an important tool because it enables Congress to pass budgetary legislation with a simple majority, including tax and spending bills, in the event of a Congressional deadlock.

    Some key things to know about the reconciliation process:

    • Usually budgetary legislation (i.e. legislation on taxes, spending, and the debt limit) is incorporated into an omnibus bill.
    • Bills being tabled under the reconciliation process are typically considered under expedited procedures in both the House and the Senate, allowing for only limited debate and amendments.
    • The reconciliation process precludes the inclusion of any non-budgetary provisions that do not directly impact spending or revenues.
    • This process can typically only be done once a year.
    • Notably, both Trump’s 2017 Tax Cuts and Jobs Act and Biden’s 2022 Inflation Reduction Act were passed through the reconciliation process.

    See: What is reconciliation in Congress? | Brookings

sources.

[1] For the complete list of Treasury and IRS guidance, please see appendix A.
[2] For example, The Affordable Care Act (also known as Obamacare) proved to be resilient in the face of Trump’s efforts to repeal it in 2017. Further, Medicare, while controversial at the time it was passed, has become embedded in the bedrock of federal government spending.
[3] A draft estimate by the JCT issued in May 2023 suggested that the total impact of the IRA on the federal deficit would exceed USD 660 bn, which is 246% of the original estimate from 2022 of USD 270 bn. The reason for the discrepancy has to do with the fact that the JCT was bound to using the 2021 revenue baseline when producing revenue estimates of the IRA in August 2022 under reconciliation instructions. This meant the original estimates were based on outdated data and economic forecasts from 2020 and early 2021. However, the 2023 revenue baseline is based on updated data and new implementation rules from the Treasury and IRS. Source: “JCT Estimates Impact of Repealing IRA Energy Tax Provisions”, published 25 May 2023 on TaxNotes.
[4] The proposed Financial Services and General Government appropriations bill would cut IRA funding to the IRS, the proposed Department of State, Foreign Operations, and Related Programs Appropriations Act would remove IRA funding for the EPA’s Greenhouse Gas Reduction Fund program, and the Agriculture, Rural Development, Food and Drug Administration, and Related Agencies appropriations bill would remove funding from Rural Electric Cooperatives, among other green incentives for rural Americans.
[5] The IRA includes several bonus tax credits that provide additional incentives to: (1) projects situated in low-income or communities or energy communities, (2) products that meet a minimum domestic content requirement. For example, the Bonus Credit for Qualifying Clean Energy Investments in Energy Communities provides a bonus credit of up to 10 percentage points for qualifying clean energy investments in energy communities, the Bonus Credit for Siting in Energy Community or Low-Income Community provides a bonus credit of 10% for projects that are sited in an energy community or a low-income community, the Bonus Credit for Domestic Content Minimums provides a bonus credit of 10% for projects that meet certain domestic content requirements, meaning a percentage of the project's components are manufactured in the United States, and the Bonus Credit for Qualified Low-Income Residential Building Project or Economic Benefit Project provides a bonus credit of 20% for projects that involve qualified low-income residential building projects or economic benefit projects. Sources: US Treasury and Environmental Protection Agency.
[6] Any reference to a specific company or security does not constitute a recommendation to buy, sell, hold or directly invest in the company or securities. It should not be assumed that the recommendations made in the future will be profitable or will equal the performance of the securities discussed in this document.
[7] Given that West Virginia is typically a very conservative state, it is unlikely that another Democrat will be elected to fill Senator Manchin’s  seat. The Senate is currently Democratic, but only by a narrow margin (Democrat: 49; Republican: 48; Independent: 3). Provided that West Virginia does elect a second Republican Senator, the Senate would be expected to go Republican if (1) there is a Republican President (as the VP can serve as a tiebreaker in the event of a 50/50 split) and (2) if one additional state besides WV elects a Republican Senator. A recent poll from CNN indicates that the states most likely to flip to being Republican are Montana and Ohio. On the House of Representatives side - while the House is currently Republican, 38 Representatives have announced they are stepping down, creating opportunities for both parties to gain or lose seats.
[8] Most IRA funding is in most of the money coming out is in the form of one-time payments instead of ongoing payments that last for the full duration of a project. For example, grants and loans for specific projects are one-time payments to projects so any new awards would be stemmed after a repeal. For the tax credits, rebates are paid out annually via tax returns based on the previous year’s filing, and so would also constitute one-time payments on an annual basis for the duration of the project, as long as the credits exist.
[9] Sources: “$18 Trillion Capital Gap Is Threatening the Green Energy Transition,” published by BCG on 20 November 2023; “The US Inflation Reduction Act Is Driving Clean-Energy Investment One Year In,” published by Goldman Sachs Asset Management on 31 October 2023; and “US energy policy faces political risk | Wood Mackenzie,” published by Wood Mackenzie on 6 October 2023.
[10] See: “IRA Repeal Risk: Three Reasons to Doubt It, and Three Reasons to Take It Seriously in 2025”, published by Wolfe Research. November 28, 2023; and “US Policy and Politics Outlook: 10 Questions for 2024”, published by Wolfe Research. January 2024.
[11] If investors and companies become increasingly concerned that IRA green subsidies will disappear under a new administration, but still have conviction in the long-term green transition in the US, then they may try to push forward investment to take advantage of the credits while they last since if they decide that it would still be cheaper in the long run, provided they were planning to make the investment/purchase anyway. This may be particularly relevant for e.g. EV tax credits for vehicles bought in 2024, because the credits would most likely be issued as part of the 2025 tax return season and therefore before a repeal is passed that might invalidate unobligated funds.
[12] Source: LOIM analysis at February 2024. The funding outcomes for each scenario are based on LOIM calculations. For illustrative purposes only.
[13] Source: “JCT Estimates Impact of Repealing IRA Energy Tax Provisions”, published by TaxNotes. Accessed February 2024.

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