What the "Inflation Reduction Act" Means for Clean Energy Stocks
Clean energy outperforms as a carbon-less future awaits.
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The “Inflation Reduction Act” aims to lower costs and aid a transition to cleaner energy.
Clean energy stocks outperform major indices year-to-date.
Dissecting the 1% buyback tax on corporate stock buybacks.
The “Inflation Reduction Act”
On Sunday the Senate passed their version of the poorly named “Inflation Reduction Act”. I put the name of the bill in quotes as economists agree this bill does very little to reduce inflation in the short run, but instead aims to meet promises made by President Biden’s campaign. While there are multiple parts of this bill, I will be focusing on the climate initiatives and their impact on clean energy stocks. Does this open up the flood gates for clean energy, or do we need more?
This bill promises a lot, and you can see the Senate Democrats summary of the Climate Change investments here: Summary of Climate Change and Energy Security Investments. Below I will share key points of the summary, a summary of the summary, and talk about their influence towards clean energy stocks:
Senate Democrats make 5 promises as a part of the Climate Change portion of this bill:
Lower energy costs for Americans
Increase American energy security
Invest in decarbonizing all sectors of the economy
Focus investments into disadvantaged communities
Support rural communities by investing in farmers to be a part of climate solutions
To achieve these promises, some of the steps they will take are to invest $9 billion in consumer home energy rebates, 10 years of consumer tax credits to make home energy efficient and run on clean energy, $4,000 tax credit for used clean vehicles and up to $7,500 for new clean vehicles, $10 billion investment tax credit to build clean technology manufacturing facilities, and $27 billion for clean energy technology accelerator to reduce carbon emissions.
In total, the Climate Change portion of this bill will cost $369 billion, and reduce carbon emissions between 31%-44% by 2030, putting us below 2005 levels of emissions.
What Does This Mean For Clean Energy Stocks?
Clean energy stocks have been outperforming drastically this year, which is made apparent by the chart above. Comparing any of the above stocks to the S&P 500, which is down about 12% on the year, you will wish you owned them. If these stocks have already performed this well to start the year, is it possible for this bill to bring them any more room to run? Probably not.
The stock market is forward looking, and while these stocks were up slightly on the news the bill passed in the Senate, much of that positivity was priced into these stocks. Looking 4-5 years down the road is always a shot into the dark, but as money from this bill flows into the hands of consumers who buy the products of these companies, then we could see much higher valuations for these stocks.
It is also important to point out the amount of stocks in clean energy, especially solar, many of which will most likely not make it. This bill will most likely speed up the process of consolidation in the solar industry, that is there will be more mergers & acquisitions as the larger companies buy out the smaller ones and grow more efficiently.
Many stock analysts expect clean energy and solar to outperform in the coming years as the United States moves to lower carbon emissions.
The Buyback Tax
One part of the “Inflation Reduction Act” that affects every single stock is the 1% tax on all corporate share buybacks. This is not a very popular measure amongst many financial analysts, CEOs, shareholders, and many others involved in the world of Finance. The disagreement does not come with the 1% tax itself, but the idea that the government will try to raise this tax in the coming years.
Because of this 1% tax, it is reasonable to expect more corporate buybacks this year before the tax goes into place. This tax will also have companies looking for new ways to return capital to shareholders that are not affected by this tax. This tax will, as expected, most likely have a 1% drag on earnings for major companies. Major tech companies, like Meta, Google, and Apple, who are notorious for buying back large amounts of shares, will now have to pay large amounts in taxes if they want to continue this practice. This will also affect the larger clean energy and solar companies who also buy back shares to return capital to shareholders.
The Rundown
The “Inflation Reduction Act” offers promises to promote a transition to cleaner energy.
The transition will be fueled by tax incentives and corporate tax breaks for technology manufacturing in the industry.
Solar and Clean Energy stocks have outperformed year-to-date.
The 1% buyback tax will slow down earnings growth in the long run.