The Inflation Reduction Act (IRA) plan is to direct nearly $400 billion in federal funding to clean energy and sustainable transport, with the goal of substantially lowering the country’s carbon emissions by the end of this decade.

Corporates will be the biggest recipient of those generous tax credits so that the IRA can catalyse significant private investment. Indeed, two thirds of the funding will be in the form of corporate tax credits to support both profitable and scalable clean energy technologies such as wind, solar, battery storage, electric vehicles, but also emerging technologies such as hydrogen and carbon capture and storage. Meanwhile, there is also significant direct funding available through US government agencies in grants and loans to support innovation especially to decarbonise the most carbon intensive sectors.

Whilst most of the past year has been focused on working out the details to decide which projects and products will receive the tax credits, that process is now coming to an end and the first commitments made by companies are encouraging especially around clean energy and electric vehicles.

As part of the US plan to become net zero by 2050, there is an interim plan to reach a net-zero U.S. power grid by 2035. In the power sector, according to The American Clean Power Association, $271bn of investment have been so far announced for clean energy projects and manufacturing facilities. The 185 GW of new clean power capacity announced during the first year is equal to almost 80% of the current clean power capacity in the US.

The US electric vehicle industry (EV) is also seeing huge investment announcements. To date, automakers and their suppliers have announced more than $62 billion in investments not just in EV manufacturing, but along the entire value chain, including battery manufacturing, recycling, and raw minerals. This is on top of the Bipartisan Infrastructure Law which recently invested $17 billion to build a national network of 500,000 EV chargers and ensure domestic manufacturers have the critical minerals and other components necessary to make batteries.

The IRA is expected to play a vital role not only in incentivizing investments but also in creating jobs. In fact, over 86,000 jobs could be created out of projects announced thus far. As the impact of these announcements will only begin in 2024 and 2025, we have only seen so far, a relatively muted response from investors who are waiting for the IRA promises to materialise in US and global companies order books.

However, we believe that markets are underestimating the impact the IRA will have on the US economy. Since the IRA is almost entirely formed of tax credits, it is not possible to say how much government spending it will ultimately unleash. Whilst officials expectations are for just under $400 billion (about $1,200 per person in the US), Goldman Sachs estimates that the IRA could reach $1.2 trillion in government outlays unleashing about $3 trillion in total investments in the next decade. It should also make those companies benefiting from the generous tax advantages more resilient when the economy slows down or hits a recession.

The impact of the IRA is likely to be global. Recently published precisions by the US administration allows for several components used in clean technologies to be imported from China. European companies should also receive help from the new Temporary Crisis and Transition Framework allowing state members not only to deal with the energy crisis but also to foster the transition to a net-zero economy through generous tax incentives.

There is however one potential cloud on the horizon with Republicans suggesting that they would like to roll back on the IRA tax incentives if they win the presidential elections in 2024. Even though Republican districts have secured far more investment, with more than 80% of cleantech and semi-conductor projects announced.

Despite this, the democrats are focused on finalising the last details whilst still in power, and we believe that environmentally minded investors have plenty to celebrate with the one year anniversary of the Act. Expectations are starting to turn into concrete projects, and we look forward to seeing these commence across the US in the coming months and quarters.