A complete guide to the Inflation Reduction Act and its impact on ESG

A complete guide to the Inflation Reduction Act and its impact on ESG

The Inflation Reduction Act-22 (IRA22) is a significant United States law that aims to lower the prices of prescription drugs, reduce the deficit, and invest in the production of domestic energy while encouraging clean energy use. On August 16, 2022, President Joe Biden signed it into law in the 117th U.S. Congress.

The IRA22 will collect $737 billion and spend $369 billion on energy production and $300 billion on lowering the deficit. According to independent studies, the law will make the greatest investment in combatting climatic conditions in U.S. history. According to various independent studies, the law will bring the U.S. closer to Biden’s objective to reduce greenhouse gas emissions by less than 50% by 2030 due to its impact on climatic conditions. It also involves a substantial effort to expand and upgrade the Internal Revenue Service (IRS).

Planning and Need:

Between 2020 and 2021, President Biden proposed the Build Back Better Plan, a legislative framework. It was widely seen as an ambitious, wide-ranging program to invest in environmental, social, and infrastructure programs, the largest national public investment since the Great Depression. The plan was divided into three sections, namely American Rescue Plan (ARP), American Jobs Plan (AJP), and American Families Plan (AFP).

To implement certain components of the Build Back Better Plan, a measure known as the Build Back Better Act was filed in the 117th Congress. Along with the Infrastructure Investment and Jobs Act, it was separated from the AJP as part of a $3.5 trillion Democrat reconciling bill. Negotiations resulted in a price reduction of roughly $2.2 trillion, which was approved on November 19, 2021. Democrats had expressed a slight chance for a renaissance of many of their priorities, so the sudden agreement on the IRA was agreed upon in secret and declared on July 27, 2022.

The Creation

The Build Back Better Act, which the House passed on September 27, 2021, aided in passing this legislation. Chuck Schumer, the Senate Leader, proposed a modification on August 6, 2022, replacing the previous IRA’s text with the bill as it stood. Later, this amendment was adopted.

Democrats unanimously supported the amended bill after a nearly 16-hour Vote-A-Rama on amendments on August 7, 2022, while all Republicans voted against it. Kamala Harris, Vice President, broke the tie. The House passed the bill on August 12, 2022, with all Democrat members in support and all Republican members against it. It was signed into law on August 16, 2022, by President Biden.

Insights:

The law is expected to generate money over ten years from:
  • $265 billion by reforming the cost of prescription pharmaceuticals, including having Medicare negotiate drug costs.
  • $222 billion by applying a 15% corporation minimum tax rate only to businesses with yearly financial statement income of more than $1 billion.
  • $203.7 billion by increased tax collection.
  • $74 billion by levying a 1% extra tax on share repurchases.
The law is expected to spend the money in the same period on:
  • $369 billion on addressing the climatic crisis and internal energy sustainability.
  • $300 billion on lowering the deficit.
  • $80 billion on greater financial support for the IRS’s transformation and tax collection efforts.
  • $4 billion on funding for western states’ disaster protection.
With the The Inflation Reduction Act-22 (IRA22), $369 billion will be invested in Climate Change and Energy Security to ensure sustainability.

The Impact on ESG:

ESG (environmental, social, and governance) considerations are used to gauge a company’s sustainability and societal impact. A company’s future financial performance, including return and risk, can be predicted by analyzing the three criteria.

Several laws were passed during the Environmental Decade (1969-1980). The IRA is the most comprehensive Climate Change law ever passed in the United States. With the IRA, $369 billion will be invested in Climate Change and Energy Security to ensure sustainability. The fund will be allocated into five categories to meet this goal.

If the Affordable Care Act’s (ACA) premium tax incentives are considered, the Tax Policy Center (TPC) calculated that the bottom 80% of individual taxpayers’ income would have a tangible gain. The average federal tax rate would rise only 0.01-0.1% for the 81st-99th percentile but by 0.2% for the top 1%. Since individual tax rates were not altered, the costs are mostly felt indirect as firms may limit wage increases for employees in response to rising taxes.

According to the non-political Council for a Sustainable Federal Budget, the bill’s deficit reduction, combined with other aspects of the legislation, would diminish inflation and recession risks. According to the committee, the legislation would save $1.9 trillion in federal deficits over 20 years. According to the nonpolitical Energy Innovation group, the bill would create around 1.5 million new jobs and boost GDP by 0.84 to 0.88 percent by 2030.

To Conclude

As the world is moving towards a greener economy, government measures to boost the efforts in Sustainability and Climate change is a welcome change. It is quite encouraging to see the Governments taking such crucial steps toward investing in clean energy and reducing the deficit to bring down inflation. Corporations are encouraged to take vital steps towards investing in Emissions Management Reporting Software to create a sustainable and cleaner environment for all.

LOCOMeX connects your ESG & Sustainability goals to Supplier Diversity & Local Content Compliance needs. Our unique AI-powered data-driven tools like the ESG Benchmarking Tool & Scope 3 Emissions Management Software is here to ease your Scope 3 Emissions Management hassle. Please speak with our expert team and learn how the LOCOMeX tool can help you track and manage your Scope 3 emissions.

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