Clean Investment Trends Post-IRA
The Inflation Reduction Act (IRA) has set the stage for a surge in clean energy investments, particularly benefitting disadvantaged communities. Post-IRA, Energy Communities saw clean electricity investments jump from $2 billion to nearly $4.5 billion monthly.
Areas with lower median incomes and lower college graduation rates are seeing significant boosts in investments as well. After the IRA, 75% of announced clean tech investments were in counties below the U.S. aggregate median income, up from 68% pre-IRA. Likewise, clean investment in counties with lower college graduation rates increased from 79% to 84% post-IRA.
The act has essentially created a twofold increase in clean electricity investments in these historically underserved areas. This broader allocation of resources aligns with the goals of economic inclusivity and fosters resilience against market fluctuations. Solar, wind, and electricity storage technologies eligible for the Energy Community Bonus have seen substantial upticks, indicating a balanced distribution over high-growth markets.
For businesses, investments in clean technologies are now also economically rewarding due to supplementary tax credits. The IRA's extended and modified tax credits, especially for commercial clean vehicles and renewable electricity production, offer a sturdy foundation for long-term investment.
Facilities adhering to wage and apprenticeship requirements can stack up their base credit fivefold. This robust environment allows for turning investments into palpable growth. The new business credit for clean electricity production phases out gradually over nearly a decade, providing ample time for businesses to plan with foresight.
States like Georgia and North Carolina, driven by favorable policies and workforce training programs, showcase how regional strategies can harness IRA provisions to their advantage. Georgia alone attracted $15.4 billion in invested dollars, demonstrating that well-funded projects can ignite economic activity.1
Economic Impact of IRA on Manufacturing and Employment
The IRA has catalyzed notable economic activity, particularly in the manufacturing sector. By promoting investments in domestic clean energy and infrastructure projects, the IRA has spurred a new wave of industrial revitalization, especially in states like North Carolina, Georgia, Michigan, and South Carolina. The surge in clean energy investments has contributed to a greener economy and amplified job creation and economic stability.
In North Carolina, Toyota's investment in a battery plant initially set at $1.29 billion in 2021 has escalated to nearly $14 billion post-IRA, resulting in over 5,000 new jobs.2 This level of investment underscores the significant confidence and long-term vision these companies are placing in the region, driven by the IRA's favorable provisions.
Georgia showcases similar trends. The state attracted multi-billion-dollar investments from major players like Hyundai, LG Energy Solution, and Hanwha Qcells. These investments translate to over 13,000 new manufacturing jobs.3 Georgia's state-led initiatives have complemented federal policies, creating a synergistic effect that drives both economic and environmental benefits.
Michigan and South Carolina also highlight the transformative power of the IRA on the manufacturing landscape.
- Michigan has seen more than 10,000 new jobs, backed by investments from automakers like GM and Ford. This influx rejuvenates the state's storied automotive sector, enabling it to pivot to electric vehicles and battery production.
- South Carolina follows closely with significant investments from companies like Scout Motors and Albemarle, leading to over 10,000 new jobs and further solidifying its position as a manufacturing hub for clean energy technologies.
The IRA's incentives have catalyzed investments that are not limited to clean technologies and have spilled over into secondary industries like construction, logistics, and services. This ripple effect fosters a wider economic revitalization, leading to more resilient and diversified local economies.
The growth in manufacturing spurs ancillary benefits, such as increased demand for skilled labor and subsequent growth in workforce training programs. States that have proactively developed workforce training, like Georgia and Michigan, are reaping immediate rewards from this alignment of federal incentives with local capabilities.
The shift to clean energy manufacturing creates a more competitive economic landscape. As companies flock to states offering the best combination of incentives, workforce, and infrastructure, we witness a rebalancing of industrial activity across the country. This geographically distributed approach mitigates regional economic disparities and enhances national economic resilience.
Inflation Trends and IRA's Mitigative Measures
While the IRA was not primarily intended to curb inflation, certain provisions in the act target inflation mitigation indirectly. For instance, the Medicare Prescription Drug Inflation Rebate Program aims to lower prescription drug costs linked to inflation. The program mandates that drug companies pay rebates to Medicare if they hike drug prices faster than the inflation rate.4 As a result, Medicare Part B drugs will see decreased coinsurance rates for beneficiaries, ensuring that older Americans and people with disabilities do not bear the brunt of exorbitant price increases.
This modulation of drug prices can have a stabilizing effect on overall healthcare costs, which constitute a significant expenditure for retirees. By lowering out-of-pocket costs, the program helps beneficiaries directly and stimulates disposable income that can be allocated to other areas of the economy, thereby supporting consumer spending and economic stability.
On the clean energy front, tax incentives laid out in the IRA play an indirect but crucial role in tempering inflationary pressures through economic growth and a reallocation of investments. The act's provisions encourage substantial investments in renewable energy sources, which can help reduce dependency on volatile fossil fuel markets. As more clean energy projects come online, the increased supply and reduction in input costs for electricity generation could lead to lower energy prices, indirectly curbing inflationary pressures.
Clean energy investments have a multifaceted impact on reducing inflation. As domestic supply chains for clean technologies become more robust, the need for imported energy sources diminishes. This reduction in import reliance shields the economy from global energy market shocks, which have historically driven inflation. Combined with the technological advancements and scale achieved through these investments, the overall energy costs will likely stabilize, contributing to long-term economic resilience against inflation.
Similarly, the reshaping of manufacturing sectors under IRA provisions acts as another buffer against inflationary trends. By promoting the onshoring of manufacturing jobs, as seen with automakers and battery plants expanding in Michigan and Georgia, the act alleviates supply chain bottlenecks. Localizing production of critical components avoids the delays and cost increases associated with international logistics, thereby stabilizing the prices of manufactured goods in the broader economy.
The clean fuel production credit introduced in the IRA further punctuates this trend. By providing incentives for fuels that meet strict emissions standards, the act ensures that cleaner fuels are economically viable options. This encourages the transition to less polluting fuels and diversifies the fuel market. A diversified energy portfolio mitigates risks associated with price hikes in any single energy source, contributing to a more stable and resilient economic environment.
Through a combination of lower healthcare costs, diversified energy sources, and strengthened domestic manufacturing, the IRA supports an economy that is better equipped to manage inflationary pressures. These efforts foster economic stability and reinforce the long-term growth trajectory of the American economy, paving the way for a resilient and inclusive future.
Comparison of IRA with Previous Economic Policies
The Inflation Reduction Act (IRA) presents a distinct departure from previous economic policies like the Tax Cuts and Jobs Act (TCJA), with targeted investments and sector-specific incentives standing in stark contrast to the broad tax cuts and incentives provided by the TCJA. The TCJA aimed to stimulate the economy across a wide spectrum by lowering the corporate tax rate from 35% to 21% and introducing 100% bonus depreciation for short-lived assets.5 In contrast, the IRA takes a more focused approach, providing substantial incentives for clean energy and manufacturing sectors.
An essential metric for evaluating these policies is private nonresidential fixed investment. Following the TCJA, there was a notable increase in investment: the average annual growth rate of nonresidential private fixed investment was 4.3% in the two years immediately post-enactment, exceeding pre-TCJA projections of 2.4%.6 This trend indicates that the broad tax cuts succeeded initially in boosting general business investment.
The IRA exhibits a different pattern. Its incentives have steered investments directly into the clean energy and manufacturing sectors. Since the IRA's implementation, clean energy investments surged, as seen with significant announcements in battery manufacturing and electric vehicle (EV) production. Companies have committed substantial capital to develop domestic manufacturing capabilities, driven by the IRA's targeted tax credits and subsidies.
The TCJA's approach of broad tax cuts aimed to rejuvenate the manufacturing sector indirectly by making capital more affordable. Data indicates an uptick in manufacturing structure investments post-TCJA, but the distribution was less focused, leading to moderate but uneven growth across various sectors.
The IRA directly incentivized the manufacturing of clean technologies, leading to concentrated booms within states accommodating these investments. For example, Michigan and Georgia saw significant manufacturing growth in the clean energy sector, fueled by IRA provisions. The manufacturing surge in these states supported local economies and contributed to modernizing the U.S.'s industrial capabilities, fostering innovation in renewable energy and advanced manufacturing technologies.
The TCJA spurred an immediate but somewhat scattershot effect on economic growth by lowering corporate tax rates and encouraging capital reinvestment broadly. However, the holistic economic gains were diffused, lacking significant concentrations of sector-specific growth.
In contrast, the IRA's targeted approach resulted in heightened sector-specific development, notably in clean energy and EV manufacturing. This approach has proven effective in direct economic stimulus and in preparing the economy for future trends focused on sustainability and technological advancements. The targeted incentives have promoted long-term economic resiliency by building robust, future-proof industries that can withstand global economic shifts and create sustainable employment opportunities.
While the TCJA's broad tax cuts provided a quick surge in investments and economic activity, the IRA's sector-specific focus has demonstrated a more strategic long-term approach. By funneling incentives and investments into burgeoning sectors like clean energy, the IRA stimulates immediate economic activity and sets the stage for sustainable industrial growth. This nuanced approach ensures that the benefits of economic policies are distributed more equitably, promoting innovation and inclusivity across the American landscape.
- Zandi M, Rogers J, Cosma V. Global economic outlook: prospects for stronger and more equitable growth. Moody's Analytics. March 2023.
- Egan M. Toyota to invest $3.4 billion in US automotive battery production. CNN Business. October 18, 2021.
- Georgia Department of Economic Development. Hyundai Motor Group breaks ground on Metaplant America in Bryan County, GA. October 25, 2022.
- Centers for Medicare & Medicaid Services. Inflation Reduction Act (IRA) Medicare Prescription Drug Inflation Rebate Program. March 15, 2023.
- U.S. Congress. H.R.1 – An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018. Public Law No: 115-97. December 22, 2017.
- Kopp E, Leigh E, Muresianu A, Pomerleau K. Evaluating the effects of the Tax Cuts and Jobs Act. American Enterprise Institute. January 30, 2019.