Green Transition, part I: US Inflation Reduction Act - Just another headache or a gold mine?

The overall success of the green transition would require global policies, but, perversely, the opposite seems to be the case here. For the investor, the increasing complexity of climate-related regulation is a headache, as the assessment of market risks and opportunities increasingly requires immersion in the ever-changing political environment and assessing its implications.

Support for cleaner technology

For example, the US Inflation Reduction Act (IRA) is estimated to have a significant impact in the US on industries such as renewable energy, renewable jet fuel processing and production, and cleaner transport. Among Finnish companies, Neste, Cargotec, Konecranes, Wärtsilä and Kempower operate in sectors that we believe will be directly affected by the IRA in the light of current information.  There are always winners but also losers in industry transitions and the incentives now being built in the Inflation Reduction Act are mainly targeted at activities on US soil.

To put it roughly, if a company operates in the US market but the products produced are not manufactured, stored, or otherwise processed in the US, in many cases you may find that the sectoral IRA benefits flow to competitors.

Focus on supporting US industry and business

The US Inflation Reduction Act repeats the same old story: Building back better (and from a European business perspective: let´s make America great again).  The package will channel around $400 billion into activities around climate change. The benefits come in the form of, e.g., tax breaks and direct financial benefits. Consumers will also receive support when, e.g., purchasing electric cars or renewable energy appliances for household use. 

The breakdown of subsidies is roughly as follows: energy takes the lion's share ($250.6 bn), manufacturing ($47.7 bn) and environment ($46.4 bn) come next, with transportation and electric vehicles ($23.4 bn), agriculture ($20.9 bn) and water ($4.9 bn) receiving a small but significant share of the total. (Depending on the calculation method, the sums may differ; here the source is McKinsey 2022).

In many cases, the direct or indirect beneficiary of a subsidy or tax break must be able to clearly prove that the product or activity was manufactured on US soil, or at least in FTA countries (which automatically excludes products made in China, for example). In addition, in several cases, the beneficiary must be able to meet certain conditions relating to workers' salaries and apprenticeships. Of course, the beneficiary must also meet the technical criteria for greener products. The headache for businesses naturally is that the conditions are defined separately for each sector and often differ from each other.

Practical implications for businesses and investors' choices are manifold, surprises cannot be ignored

 For companies, the IRA means, among other things, the need to assess possible deeper cooperation with US operators or even the possibility of setting up production in the US if the market is desired and the benefits offered by the federation start to affect the market in the relevant sectors as expected. An additional challenge is posed by the import of components from, e.g., China, as the prerequisite may indeed suddenly be that production or other significant value chain activities are located on US soil.

For the investor, an IRA does provide a little help when considering which industries to invest in for the long term. Headaches will be caused by the complexity of the regulations and the specific conditions that exclude certain companies from receiving support, even if the sectors are the right ones. Ultimately, choosing the winners of the green transition will be a matter of who can best assess the changes ahead, the measures and investment needs they will require, and who can respond most flexibly to the demands of both the market and policymaking.