Despite extensive debate over this legislation's prudence and efficiency, the Inflation Reduction Act became law on August 16 when President Joe Biden signed the bill.

In addition to attempting to combat inflation, the Inflation Reduction Act includes the second largest public financial commitment to combating climate change in history. The bill includes a number of investments in clean energy and household tax credits aimed to help offset energy costs. Most notably, it allows people who own solar panels on their property to apply for a 30 percent tax credit.

Homeowners and companies that invest in solar may be able to save money on their energy bills as well as impact the environment for good if they hold onto the solar array for at least 10 years. 

Some investors may be wondering: Will the Inflation Reduction Act boost green energy consumption, and return big dividends to investors in alternative energy sources? 

The Inflation Reduction Act

The Inflation Reduction Act has a three-fold mission:

• To reduce inflation by investing in manufacturing and domestic energy production.

• To allow Medicare to negotiate the price of prescription drugs.

• To reduce carbon emissions by 40 percent by the year 2020.

According to its supporters, the act will raise $737 billion in revenue and invest $337 billion with $400 billion going toward deficit reduction. 

Its opponents say it will result in higher taxes, elevated prices, and more inflation. These leaders may try to thwart this legislation if they are elected to a majority in November 2022. For now, however, the Inflation Reduction Act is federal law, and investors may find it changes the landscape of American economics.

What the Inflation Reduction Act Is Poised to Do

The Inflation Reduction Act is a multi-dimensional law reaching into healthcare, the environment, and manufacturing. It also increases taxes on some corporations by adding a 15% corporate minimum tax and a 1% fee on stock buybacks. Both of which are likely to impact corporate earnings. Furthermore, it includes a provision to enhance IRS enforcement.

Specifically, the act expands Medicare benefits to include free vaccines, cost-capped insulin, and an extension of the ACA marketplace for three years. It also invests $60 billion in manufacturing.

The lion's share of the legislation, however, is directed toward climate change. The act aims to cut average household energy bills by $500, clean up pollution in low-income communities, and reduce carbon emissions.

What Does Climate Change Have to Do With Inflation?

If you are wondering what an investment in climate change has to do with combating inflation, you are not alone.

After all, the primary inflationary drivers are the world's tangled supply chains, oil and gas prices , and Russia's invasion of grain-rich Ukraine. Only one of these drivers seems directly related to climate change. 

However, the theory fueling this legislation is that severe weather events and shifting climate patterns increase the destruction of natural resources. Floods destroy crops, raising the price of food. Forests no longer flourish, raising the price of construction materials. Natural disasters destroy homes and vehicles, increasing the costs of insurance and transportation.

Under the Inflation Reduction Act's model, slowing climate change will also slow inflation. Part of the shift toward a greener future, however, is also a course correction away from traditional fossil fuels like oil and toward alternative energies. 

…Or is it?

How the Inflation Reduction Act (Doesn't) Affect Oil & Gas

In early 2022, the presidential administration was pushing hard to curtail new oil and gas drilling in the U.S. To secure the support of swing voters in the Senate, however, the Inflation Reduction Act actually guarantees fossil fuel companies new drilling opportunities in Alaska and the Gulf of Mexico. 

It also requires the U.S. Department of the Interior to lease 2 million acres in federal lands onshore and 60 million acres offshore for gas and oil development each year for the next ten years. 

Consequently, the new law may not have the impact some observers feared on fossil fuel investments.

The History of Oil and Inflation

Oil prices have been on the rise since the early 2000s, and at the same time, inflation has increased as well. The Inflation Reduction Act is designed to help offset some of these costs by offering a tax credit on solar installations. 

This could be a good deal for investors looking to get in on the solar industry long-term.  However, it is important to do your research and consult with financial professionals before making any decisions.

What Are Other Alternative Fuels?

Solar isn't the only renewable energy source out there. Wind, water, and geothermal energy are all viable options for generating electricity. And while solar power has seen a boom in recent years, other renewables are also gaining ground.

Right now, renewable energy sources provide just shy of 20 percent of our nation's electricity. Even before the Inflation Reduction Act, that number was expected to hit 30 percent by 2030. Now, it may increase even faster. Despite solar's popularity, hydro and wind actually take up the lion's share of renewable energy. 

Potential Benefits of Investing in Green Energy

With billions of federal dollars going toward solar and other green energy alternatives, is this the time to invest in a greener future?

Let's take a look at solar as an example:

• The Inflation Reduction Act offers a 30 percent tax credit on solar investments, making it an attractive option for those looking to reduce the cost of going solar .

• Solar is a renewable energy source that can help combat climate change, making it a socially responsible investment as well.

• Solar panels have become more efficient and less expensive in recent years, making them a more viable option for homeowners and businesses alike.

With all these benefits going to solar consumers, will green energy companies see their profits explode? Is this the time to invest in an ESG fund (environmental, social and governance)?

It could be, but to find out, we need to drill deeper. 

How will the Inflation Reduction Act impact household solar installations?

Prior to the Inflation Reduction Act, many investors had grown skittish about solar companies. Solar panel manufacturers were coping with the same supply chains that affected other industries, and prices were skyrocketing on essential components like aluminum and polysilicon.

Some companies are dodging these problems by manufacturing their panels and batteries in house. Without having to cope with the challenges of trading with sources in China or other overseas partners, these companies can also claim the coveted "Made in America" mark. 

In fact, some analysts project that solar could grow by 2-2.5 times its current rate as homeowners cash in on the tax incentives the new legislation offers. Others are not as optimistic, saying that if American citizens are struggling to buy gas and groceries, they won't make a payment plan to weatherize their homes.

The jury is still out on whether — or how — the Inflation Reduction Act will impact household solar installations or the overall solar energy industry. 

The Long-term Outlook on Renewables

Overall, observers have a positive view about renewable energy's future.

• The U.S. Energy Information Administration projects that non-hydroelectric renewables will grow while coal and gas will decline in 2023.

• Deloitte suggests that renewables will grow quickly thanks to rapid technological innovation, public policy support, and infrastructure development.

• Researchers at Yale believe the recent lag in renewable growth can be traced to the now-fading COVID-19 pandemic and that a booming future is ahead for the sector.  

Investors seem to agree. Globally, the Canada Pension Plan Investment Board, the National Employment Savings Trust in London, and Legal & General Investment Management have all jumped on board. Other investors are proceeding more cautiously, though, and expressing concerns that the prices on renewables will increase when government subsidies decline.

To put it simply, we just don't know.

Did the Inflation Reduction Act affect the long-term outlook on renewables?

The Inflation Reduction Act is very, very new legislation. No one knows for sure how it will affect energy, healthcare, or inflation — or if the act will even remain untouched after the November elections. 

We do know that technological innovation typically underlies economic growth by boosting wages and lowering inflation. Hence, creating and disseminating technology that slows climate change should provide a double benefit. How it will affect the overall economy, however, or even an individual portfolio is completely unknown.

As always, prospective investors should only proceed with eyes wide open to the potential downturns of any investment.

Questions to Ask Before Investing in Renewables

Before investing in solar, it's important to do your research and ask yourself some important questions: 

• How much money can you realistically afford to invest? 

• What are your long-term goals for this investment? 

• What are the risks involved? 

• What are the potential rewards? 

• How will this investment fit into your overall portfolio? 

Answering these questions can help you make a more informed decision about whether or not solar is right for you.

Contact Cooke Wealth Management to set up a meeting with one of our financial advisors. We'd love to talk with you.