Our short answer to both questions is that we doubt it. Even if the Republicans win both Houses of Congress and the presidency, we doubt that there is an appetite for a full repeal of the Inflation Reduction Act (IRA). However, there might be adjustments to the law and this risk will constitute significant noise for US renewable energy equities until the election. Moreover, this noise will only intensify the better the Republicans do in the polls.
Former president Donald Trump, who is a strong favourite to win the Republican Party’s primaries, is campaigning on gutting much of the Inflation Reduction Act (IRA) and to dismantle President Biden’s climate change policies. We can only hope that he will tone down the rhetoric in the general election to appeal to centrist voters, but there are no guarantees.
What would it take to repeal the IRA? The Republicans would need a red sweep, meaning winning the presidency and a simple majority in both the House and the Senate. The IRA was passed in a partisan vote by the Democrats under budget reconciliation, a special parliamentary procedure that overrides the Senate’s filibuster rules, which means that it can similarly be repealed or altered by a simple majority of republican senators.
Before discussing the likelihood of a repeal, what would be the consequences if the Republicans would gut the IRA?
First, according to BNP Paribas, about USD 700bn to USD 1.1tr of capital expenditures over the next 5 to 7 years rely on the IRA. This represents about 5-7% of all US corporate capex across those years. Factoring in the multiplier effect, the impact on US economic growth could be substantial. Moreover, the IRA has supposedly created more than 100,000 manufacturing jobs already and researchers with the Foundation for Renewable Energy & Environment estimates that IRA could help to create 900,000 jobs per year over the next decade, totaling more than 9 million jobs. Compared to a labour force of about 167 million, we take that estimate with a grain of salt, but it is obvious that there is a significant positive contribution to employment.
Second, it is estimated that 70-80% of these jobs will be created in red or purple states, i.e. republican dominated or swing states that could go both ways in the election. Obviously, a repeal of the IRA subsidy would jeopardize many of these jobs, a highly unpopular outcome.
Finally, unless Trump intends to prohibit the construction of renewable energy installations, undermining US manufacturing of renewable energy equipment will play into the hands of the Chinese who are dominating most segments of the renewable energy industry.
Facing these consequences, why would the Republicans try to repeal the IRA? For many climate change sceptics, the IRA is a simply a waste of money. However, the IRA does almost more to the other objectives of the act, i.e. energy security, re-shoring supply chains and creating manufacturing jobs in the US. This is a fact we believe will be hard for the Republicans to ignore.
In Trump’s first presidential period, he talked constantly about creating blue-collar jobs for Americans and he restricted import of foreign manufactured goods, especially Chinese, in order to help US corporations. Repealing the IRA would be contrary to these goals. Additionally, many of the republican members of Congress have selfishly taken credit for bringing manufacturing jobs to their counties and states, even though none of them voted in favour of the IRA. For these politicians to vote for a repeal would be a risky step considering that there is always another election for congress around the corner.
Moreover, a full repeal looks unlikely considering that the last time the Republicans controlled both Houses and the presidency, Trump did not manage to keep his campaign promise of revoking the much-hated Affordable Care or ‘Obama care’ act. We believe the IRA has significantly more bipartisan support than Obama care. Furthermore, the investment tax credits (ITC) and the production tax credits (PTC) that preceded the IRA were both born during republican presidencies and have been extended ever since, including during Trump’s four years in power. Rather than eliminating subsidies, Trump introduced tariffs on Chinese products to bolster US manufacturers and to hurt the Chinese. Revoking the IRA would be doing the opposite, and we find it unlikely.
Instead of a full repeal, we do fear though that a red sweep might lead to modifications in certain aspects of the IRA. For instance, the Republicans have shown limited enthusiasm for direct consumer subsidies, suggesting that the USD 7,500 electric vehicle tax credit could be at risk. Similarly, direct support for residential solar, although part of the ITC since 2006, might face reductions. On the other hand, it is hard to envision the Republicans withdrawing support for nuclear energy or significantly altering manufacturing tax credits, given the clear negative impact such moves would have on their own constituencies.
A bigger fear we have is that a Republican president, with or without a Congressional majority, will reinterpret the guidelines for the IRA. The executive branch cannot eliminate a tax credit, but it can make access to the credit much more strident. This could have a significant impact on tax credit adders e.g. the important domestic content adder, which is so complex that the current administration has not yet been able to create the guidelines.
All in all, we doubt the IRA will be repealed, but there is little doubt that the White House occupied by a Democrat is better for the renewable energy universe. We are not making any prediction on electoral outcomes, but this uncertainty will create volatility through the year. However, since Trump started campaigning on repealing the IRA, it has been widely discussed by the sell side and the buy side have already factored in the risk. Any indication that the Democrats are in the lead would therefore be a significant positive catalyst. We will follow the developments closely and believe the fund should benefit from the opportunities on both the long and the short side during the year.
