- Macro Strategist
United States, Intermediary
Change
The views expressed are those of the author at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.
By 2030, the recently passed Inflation Reduction Act (IRA) could cut US emissions by 40% (relative to 2005 levels), compared with a 27% reduction under current policies.1 But along with this important environmental impact, the IRA is likely to affect the US economy in a variety of ways, including driving up investment spending, driving down the cost of new technologies, and giving productivity a needed boost.
Adding to the US spending spree, with a focus on climate and energy
Like the infrastructure bill passed in August 2021 and the CHIPS Act passed in July 2022, the IRA is consistent with my thesis that we will see higher domestic capital spending in the US over the coming decade. Together, these three bills include roughly US$1 trillion of spending over 10 years. Higher capex should translate into higher productivity and somewhat higher nominal growth, implying higher rates over time.
The bulk of the spending in the IRA is aimed at energy and climate initiatives, with the key provisions totaling US$387 billion (Figure 1). The bill is expected to boost capex in clean technology by as much as 2.7 times the current projected level (Figure 2).
Figure 1
Figure 2
Targeting the chief contributors to greenhouse gas emissions
The three largest contributors to greenhouse gas emissions by economic sector are electrical power, industry, and transport. Not surprisingly, then, the key elements of the IRA include the accelerated deployment of clean electricity, the use of carbon capture and storage in industry, and the electrification of transport. I’ll offer some details and observations on each of these areas:
- Tax credits for alternative power sources (solar panels, wind turbines, batteries, geothermal plants, and advanced nuclear reactors) are extended for 10 years rather than one to two years as has been typical in the past. By some estimates, the coming decade could see wind capacity increase at twice the pace at which it is currently growing and solar capacity increase at five times the current pace. Newer but not yet independently cost-effective technologies also benefit, including hydrogen.
All this paves the way for better planning by utility companies on their green transition path. According to the REPEAT Project, power will be the single biggest area of emissions reduction, accounting for almost a quarter of the total forecasted improvement.
- Technologies aimed at industrial emissions, including carbon capture and storage (CCS) and direct air capture, will benefit from a variety of spending provisions, including grants and loans. According to some independent energy forecasters, we could see carbon capture increase by 13 times its current level over the coming decade, thanks to the new incentives.
- Incentives aimed at accelerating the adoption of electric vehicles (EVs) include a US$7,500 tax credit for the purchase of new EVs and a US$4,000 credit for used EVs, which are effective until 2032. The bill introduces household income limits on the credits, minimum domestic content provisions (e.g., on batteries and vehicle assembly), and vehicle price caps to ensure that middle-income consumers benefit rather than the wealthy.
Today, the US has only 2.1 million EVs on the road, versus 5.5 million in Europe and 7.8 million in China. It is not clear how much the new credits will help, since 70% of current EVs would be ineligible based on the domestic content requirements. The vehicle price caps, on the other hand, could help break the trend of ever-rising average transaction prices (ATPs) for new vehicles. Recall that two percentage points of the increase in inflation (CPI) in 2021 came from autos alone, as manufacturers and dealers pushed the most expensive vehicle models to consumers.
Thoughts on policy, politics, and productivity
US climate policy has lagged efforts in Europe and other countries globally, but the IRA provides more predictable funding for renewables in the US and makes the path to net zero credible (read more on US efforts here). Several independent climate experts have touted the sound design of key provisions and the potential for meaningful reduction in emissions. Of course, execution will be key. The mix of federal and state involvement means that even with the IRA funds in hand, the pace of deployment could vary based on local policies.
From a political perspective, the IRA represents a badly needed win for the Democrats ahead of the upcoming midterm elections, as climate continues to poll as an important policy area for constituents. While it still appears that the Democrats will lose control of the House of Representatives, they may be able to contain losses and keep the Senate, especially as inflation starts to move lower in coming months as I expect (read more on my inflation outlook).
President Biden’s legacy now includes a boost for both physical and climate infrastructure. The passage of two bipartisan bills — the 2021 infrastructure bill and the 2022 CHIPS Act — alongside the Democrat-led IRA will shape the capacity and competitiveness of US industry for the coming decade. The 2010s brought one of the weakest recoveries in US investment spending in post-war history. It is plausible to assume that the 2020s will see a different pattern (Figure 3). With stronger investment spending, as well as a greater policy focus on domestic production (amid the US/China decoupling), we could see improving productivity growth ahead.
Figure 3
Fossil fuels remain important, of course, as energy is chronically undersupplied and (perversely) likely to see strong demand driven by infrastructure changes required to decarbonize the economy. But in the meantime, technological advances continue to drive down the all-in cost of renewables, with onshore wind and solar already lower in price than hydrocarbon-based power — another plus for productivity (Figure 4).
Finally, it is worth noting that the IRA’s focus on investment spending does not come at the cost of more US public debt, as offsets on the revenue side make the tax credits deficit neutral.
Figure 4
1Source: Repeat Project. Other independent forecasters, such as Energy Innovation and Rhodium Group, also suggest similar numbers.
Expert
Related insights
Showing
of
Insights Posts
Article
4 min
Japan's reflation story: An overlooked equity opportunity?
Continue reading
4 min
Article
2026-12-01
Article
6 min
Commercial real estate debt: Transitional assets deep dive
Continue reading
6 min
Article
2026-10-31
Article
4 min
Twilight zone: how to interpret today’s uncertain macro picture
Continue reading
4 min
Article
2026-09-30
URL References
Related Insights
Stay up to date with the latest market insights and our point of view.
Read next
Showing
of
Insights Posts
Article
16 min
Are hedge funds the missing ingredient?
Inflation, volatility, and valuations — they all raise questions about portfolio diversification and resilience. Multi-Asset Strategists Nanette Abuhoff Jacobson and Adam Berger explain why multi-strategy and equity long/short hedge funds could provide the answers. They offer insights on adding allocations to a traditional portfolio mix and a recipe for manager selection.
16 min
Article
2026-12-31
Article
4 min
Japan's reflation story: An overlooked equity opportunity?
Macro Strategist Nick Wylenzek analyzes the structural shifts in Japan's economy and identifies potential equity opportunities.
4 min
Article
2026-12-01
Article
6 min
Commercial real estate debt: Transitional assets deep dive
Our private commercial real estate debt experts explore transitional CRE assets, highlighting their key characteristics, how they differ from other parts of the CRE debt universe, their potential roles in a portfolio, and much more.
6 min
Article
2026-10-31
Article
5 min
FOMC: Cushioning the US labor market
Fixed Income Portfolio Manager Jeremy Forster analyzes the Fed's decision to cut interest rates at the September FOMC meeting.
5 min
Article
2026-10-31
Article
4 min
Is it time to prepare for stagflation?
Discover why concerns about stagflation are rising, and how asset allocators may be able to hedge the effects on their portfolio.
By
4 min
Article
2026-08-28
Article
4 min
Twilight zone: how to interpret today’s uncertain macro picture
Macro Strategist John Butler and Investment Director Marco Giordano explore how to interpret today’s uncertain macroeconomic picture and its key implications.
4 min
Article
2026-09-30
Article
7 min
Rethinking the Fed’s dual mandate
Is it time for a fresh perspective on the dual mandate? Fixed Income Portfolio Manager Brij Khurana explores the potential benefits of reorienting monetary policy toward maximizing productivity.
By
7 min
Article
2026-08-31
Article
5 min
Stagflation watch: Thoughts on tariffs, inflation, and Fed policy
US Macro Strategist Juhi Dhawan considers signs the US economy may be moving toward a toxic mix of slowing growth and rising inflation, creating challenges for the Fed and investors.
5 min
Article
2026-08-31
Article
4 min
One Big Beautiful Bill: Why it’s “buy now, pay later” for markets
Multi-Asset Strategist Nanette Abuhoff Jacobson weighs the near-term benefits of the recently enacted US tax and spending bill against the longer-term costs, and suggests several investment implications.
4 min
Article
2026-07-31
Article
4 min
The power of positive and pragmatic thinking
While markets have a lot to worry about, from government policy to geopolitics, Global Investment and Multi-Asset Strategist Nanette Abuhoff Jacobson looks at the world from another angle: What could go right? She offers five reasons for positive thinking and considers the investment implications.
4 min
Article
2026-06-30
Article
4 min
FOMC: Patiently waiting to ease
Jeremy Forster discusses the Fed's steady policy rates, inflation forecasts, and potential interest rate cuts amidst economic uncertainties.
4 min
Article
2026-08-01
URL References
Related Insights