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Despite its name, the Inflation Reduction Act is largely a climate spending bill. The bill, signed by President Joe Biden on Aug. 16, represents the largest climate investment in U.S. history, allocating about $370 billion to programs to mitigate the effects of climate change over the next 10 years.
Here's how this might affect those who currently hold green energy stocks — or are thinking of adding them to their portfolio now.
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What’s in the Inflation Reduction Act?
On Aug. 7, the Senate narrowly passed a budget reconciliation bill known as the Inflation Reduction Act. The House of Representatives passed the bill Aug. 12, and President Biden signed it into law on Aug. 16.
It's a wide-ranging bill with several provisions. For example, the bill increases corporate taxes, a few investment taxes and IRS funding in a bid to decrease the deficit and inflation. It also allows Medicare to negotiate the prices of certain prescription drugs with manufacturers, and it extends some provisions of the Affordable Care Act through 2025.
But the biggest line item in the Inflation Reduction Act is its 12-figure spend on carbon emissions reduction initiatives, which largely consists of incentives for green energy and electric vehicles, or EVs.
What does the legislation mean for green energy stocks?
The Inflation Reduction Act budgets tens of billions of dollars for green energy incentives. Those include a 30% tax credit for the construction or refurbishment of renewable energy facilities, credits on clean energy generation (paid per kilowatt-hour) and special production-based credits for solar and wind power equipment manufacturers.
“What’s it going to do for [green energy] stocks? I think it’s only going to bolster them,” says Peter Krull, the director of investments at Earth Equity Advisors, a North Carolina-based registered investment advisor specializing in sustainable investing.
“After a great 2020, 2021 and 2022 have been pretty dismal for anything in the alternative energy space,” Krull says. “This should start to bring them back into positive territory.”
» Dive deeper into renewable energy stocks.
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What does the legislation mean for EV stocks?
The Inflation Reduction Act extends the $7,500 consumer income tax credit for the purchase of a new EV, and it eliminates the per-manufacturer limit on these tax credits. It also creates a new credit for the purchase of a used EV that would be up to $4,000.
“Everything from Tesla, to Rivian, to Lucid, to anything that’s selling here in the United States — they certainly should get a push from this,” says Krull.
He notes that traditional auto manufacturers — “the Fords and the GMs of the world” — could also benefit from the legislation.
But Christian Hutchins, a certified financial planner with California-based registered investment advisor LourdMurray, cautions that the Inflation Reduction Act’s impact on EV stocks may be uneven across the industry.
“A lot of the automakers that are in the EV space will probably do well, but some better than others — some are in a better position to capitalize,” Hutchins says.
The legislation caps the price of tax-credit-eligible new cars at $55,000 ($80,000 for trucks and vans). It also requires EV manufacturers to produce their cars and batteries in North America to qualify for the credit.
The domestic manufacturing rules mean that foreign companies such as BMW and Volvo are unlikely to reap all the benefits of the subsidies. The price rules could also put Tesla at a disadvantage, as some of its cars are too expensive to qualify for the credit.
» Learn more about EV stocks.
Should you buy individual stocks because of the Inflation Reduction Act?
The Inflation Reduction Act could cause substantial moves in green energy stocks and EV stocks. But Hutchins says that active stock picking may not be the best way to take advantage, compared to more passive strategies that use exchange-traded funds.
“Eight percent of active managers outperform the S&P 500 each year," says Hutchins. "You’re either going to be on the side of the 92%, or on the side of the 8%. Statistically, we like to go where the odds are in our favor."
Hutchins adds that keeping your portfolio diversified, such as in products like ETFs, can also help give you a better outcome.
» Ready to get started? Find the best-performing clean energy ETFs.