The Inflation Reduction Act: Implications of the U.S.’s latest climate change policy

As its name implies, the IRA is legislation aimed at curbing inflation. U.S. President Joe Biden signed the IRA into law on August 16, 2022 after it narrowly passed in the U.S. Senate and in the U.S. House of Representatives along party lines. The bill lowers prescription drug costs, extends healthcare subsidies for the Affordable Care Act (ACA), expands the tax enforcement capabilities of the Internal Revenue Service (IRS), and increases taxes on corporations.

Importantly, for those keeping tabs on how the world’s largest economy is acting to combat climate change, this bill includes historic investments in climate protection, including household tax credits to offset energy costs, investments in clean energy production, and company and household tax credits to incentivize reduced carbon emissions.

The legislation is an important signal in the U.S., and globally, about the trajectory of climate policy. It follows a bold proposal from the U.S. Securities & Exchange Commission (SEC) in March requiring publicly registered companies to disclose climate-related financial information, including risks and metrics. “We welcome bold government action to combat climate change,” says Bassi. “The IRA’s targeted measures to unleash clean energy development and support climate innovation are unprecedented in the U.S.. This serious piece of legislation demonstrates the Biden administration’s resolve to address climate change. It’s also critical to achieving his goal to halve carbon emissions from 2005 levels by 2030.”

With new climate-related disclosure rules expected in the coming months, the U.S. is set to send a clear message to the world about climate change in 2022. The IRA and disclosure rules represent major steps toward fulfilling the Biden administration's climate goals. “We need every country to send a clear message about climate change with bold legislative changes. Individual countries must take responsibility for their carbon emissions and make significant changes to their energy production if we are to meet the 1.5 degrees maximum warming target set by the Paris Agreement,” Bassi says.

Carol Browner, Cervest Climate Intelligence Council member and former Head of the U.S. EPA, echoes Iggy’s opinion, stating, “With the signing of the Inflation Reduction Act, President Biden took a huge step forward in fulfilling U.S. climate commitments. While the climate provisions of the act are largely focused on reducing pollution, importantly, there are also dedicated funds for adaptation and resiliency. As we continue to develop adaptation and resiliency programs the work must be driven by science and data.”

Even as governments across the world enact more policies and regulations to address climate change, Bassi says companies and other stakeholders must not wait to act. Climate represents value loss for shareholders, and poses security issues for enterprises and communities.

Iggy points out that rapid collaboration is possible, for example, when all parties share a unified view of climate risk. This view is available today through Cervest’s climate intelligence platform which calculates and displays climate risk ratings for the world’s physical assets – including offices, hotels and factories.

“Using Cervest’s climate risk ratings as a guide, businesses can act now to build sustainability and mitigation plans to counteract the climate hazards most likely to affect their operations – and their bottom line. Importantly, when all parties use the same standardized climate risk ratings to make decisions – including banks, insurance companies, investors, suppliers, and governments – the result is millions of climate-aligned actions. Together, these will drive the behavior change needed to build resilient sustainability at scale,” says Bassi.

The IRA is designed to unleash unprecedented investment in clean energy infrastructure. However, to secure its passage, the IRA avoids measures to phase out fossil fuels. The Act also includes more generous tax credits for carbon capture and storage (CCS). Proponents of CCS argue that this technology is essential for decarbonizing hard-to-abate industrial sectors while critics, including major climate justice organizations, claim CCS will actually slow the transition away from fossil fuels and encourage the production of more carbon.

Wherever investment happens, focusing exclusively on carbon emissions misses out on crucial action – that of adaptation to our incredibly volatile climate. Net zero is essential but on its own is insufficient to tackle the climate change problem. “Net zero is absolutely necessary to prevent build up of risks, but is it not sufficient by itself,” says Bassi. “We have already locked in changes that guarantee greater frequency and severity of extreme weather events. We need urgent and equal investment in adaptation to build a future where resilience is the norm and not the exception.”

Iggy points to a Cervest survey that makes this urgency clear. In the survey of 800 business decision-makers, 9 out of 10 respondents said their company’s physical assets had been impacted by at least one extreme weather event in the last five years. Yet, 80% prioritized transitional risk - material risks associated with the shift to a low carbon economy - over adapting to physical risks, with 75% aiming to become net zero between 2030 and 2040.

Adaptation efforts cannot be made blindly, especially considering the risk of maladaptation.

It requires a level of insight that is granular enough to produce asset-level insights and prescriptive enough to inform broader operational decisions. Historically, this spectrum of insights has been challenging to gather and intensive to collate and interpret. Climate intelligence (CI) – business intelligence for managing asset level climate risk – has simplified this process and is accelerating adaptation for companies across industries.

Cervest’s CI is asset level, on-demand, and shareable, providing companies with a transparent and single source of climate insight into the assets they own, manage and rely on. Covering multiple climate hazards such as heat stress, wind risk and drought, users can discover which of their assets, or which portfolio of assets is at most at risk from which hazards, under multiple climate scenarios and time periods. This insight empowers businesses to make informed decisions to build resilience, incorporating physical risks into decisions such as which assets to shore up, invest in, or divest from.

Biden has overcome serious political opposition to achieve something truly monumental. Only time will tell what real action will come from the Act in the U.S., and if his bold move will nudge more global leaders to act. Where will the next bold move come from? Many eyes are on COP27 in November, where there are high hopes for – and low confidence in – meaningful global action.

“Yet, our global mandate for action has never been more clear: we need to simultaneously decrease our emissions and build climate resilience,” says Bassi. He stresses that no single country can achieve this alone. “It will take unprecedented collaboration among governments, businesses, and communities to compel the scale of adaptation needed to handle the changes already underway and build a climate resilient future for our planet.”

Looking to take a bold next step towards climate resilience? Join our EarthScan™ Starter Program to see science-based climate risk ratings for your assets and portfolios – on-demand. Use EarthScan’s insights and risk ratings to fulfill ESG, supply chain and financial reporting requirements.