How Climate and Industrial Policy Create a Massive Opportunity
The recently introduced Inflation Reduction Act (IRA) has the potential to rapidly transition the United States to clean energy. That alone is reason for excitement, given the dire need for action and the investment, but if congress passes this act we will also capture enormous economic benefits out of the transition to clean energy through industrial policy. The IRA can open the door to radically transforming the U.S. economy and the future of jobs. New industries will be born out of scaling critical technologies, which will also aim to improve the wellbeing and livelihoods of our communities. The combination of these efforts creates a massive set of opportunities for the Tough Tech ecosystem and for the creation of foundational companies for the United States. These companies are purpose built to create a more resilient future. We hope our friends and supporters will raise their voices to see the Inflation Reduction Act become law, and get ready to roll up their sleeves and get to work to turn its potential into the better, bright reality we all seek.
The IRA is unique among previous efforts because it incentives invention and provides support for new industries that enable a transition to clean energy. The presence in the IRA of policies to support these industries in the United States is a significant shift and one The Tough Tech community is poised to leverage for years to come. Previous federal efforts to address Climate Change — the BTU tax during the Clinton administration, Cap & Trade in the Obama administration and various other efforts in intervening years — were largely focused on regulatory action, paired with incentives. What has been absent from these efforts, has been the commitment to building industries which will invent, develop, and deploy the technologies to enable our transition to clean energy. Conversely, by capturing the economic benefits of the transition to clean energy through industrial policy, the IRA creates a massive set of opportunities and incentives for technical innovation, new business, and the regional economic development that is spurred from that.
Existing Incentives are Improved and Expanded
The IRA builds off of a series of existing incentives and support programs. The federal Energy Investment Tax Credit (ITC), Production Tax Credit (PTC), Department of Energy (DoE) Loan Programs and others have existed for years, largely, if not exclusively focused on deploying clean energy. Under current law these credits would steadily decline. Instead, all have been extended, increased and reformed to incentivize use of prevailing wage labor, United States materials (mined, processed, manufactured) and supply chains to achieve the highest possible 50% ITC. In addition to these reforms, stand-alone storage would be eligible for the credits, a significant new inclusion. Along with tax incentives, the IRA provides the DoE Loan Program with the capital ($3.6B appropriation) and guarantee authority ($40B for principal) to significantly expand its work.
Transformative Investment in Manufacturing
In addition to greater support and needed reforms for existing incentives, the IRA includes billions in support for manufacturing in the proposal. This investment could be transformative. Support comes in the following forms:
- Advanced Manufacturing Tax Credit — 10% credit for costs of eligible components including critical minerals and component parts of solar, wind, storage facilities (or companies can choose specific incentives for their specific component). Paired with incentives in the Investment and Production Tax Credit (ITC and PTC) to create demand for these products, the estimated $30B Advanced Manufacturing Tax Credit can ensure this generation and next generation of climate tech is built in the United States.
- Federal procurement — $9 billion for the federal government to purchase zero emission technologies, to meet government’s portion of climate goals. This support will also create a stable market for clean products from American made technologies. At The Engine we have consistently heard from our Portfolio Companies that demand for new technologies is critical. Federal procurement support helps new, zero emission technologies overcome adoption inertia, and begin to shape the future.
- Clean Technology Manufacturing Facilities — $10B grants for new facilities and $2B grants for existing vehicle facilities to repurpose, modernize and update facilities and workforce at existing automotive facilities for electric vehicles. Building out the capacity needed to deploy American made energy storage, solar, wind and more will require a massive expansion of existing capacities. This support will do that for both new and operating facilities.
- Advanced Industrial Facilities Program — $6B to reduce emissions from the largest industrial emitters like chemical, steel and cement plants. While we support new technologies, we will also have to continue to find ways to reduce greenhouse gas emissions from existing facilities. Often these advanced industrial facilities are large energy users, whose needs cannot be met by one size fits all programs various governments have developed to date.
- Clean Vehicle Manufacturing Facilities — $20B Loan program for clean vehicles will provide support not just for the automotive sector’s transitions to a clean energy future. As the industry reshapes itself to help combat climate change, we know there will be massive impacts on the entire supply chain to support their work. But we need all of that to happen and fast, which is why enabling this transition is so critical.
Room to Expand and Improve
There are new initiatives which are only outlined, but could have significant benefit for the Tough Tech community. For instance, $27B to support state ($7B) and federal ($20B) green banks, present an opportunity. The Engine looks forward to working with public sector policymakers to ensure these resources meet the needs of Tough Tech companies and leverage their potential to solve climate change and create jobs.
A Singular Opportunity
Whether it is investments in transmission creating opportunities for VEIR, methane fees pushing the Oil & Gas industries to look at Emvolon’s technology, Storage incentives opening up markets for Form Energy or critical minerals support enabling Lilac’s growth, Tough Tech companies stand to benefit significantly from the passage of the Inflation Reduction Act. Most importantly, for founders, their companies, and for inventors and researchers still in the lab, our society stands to benefit significantly. Multiple independent analyses show the Inflation Reduction Act massively improving the United States ability to reduce Greenhouse gas emissions. They also all show that even if the proposal is passed, signed into law and implemented successfully, our work will not be done.
This moment in congress is one that could move the needle for generations to come and one that could finally convince private markets that attention on climate mitigation is both necessary and worthwhile. It could stand out beyond the Paris Agreement or any other pledge we have made to date. It must be passed if the U.S. intends to begin the path towards solving this crisis, and doing so will have lasting ripple effects throughout our economy that we can only begin to imagine today. The time to act is now.