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How The Inflation Reduction Act Has Aided the UN SDG, The Knock-on Effect It Has Had on Europe and How This Will Impact Goldman Sachs?

In recent weeks there has been a lot of talk surrounding the US Inflation Reduction Act (IRA). In this week's blog post we will discuss what the Act entails, what impacts it will have on Goldman Sachs and how it will aid the UN in meeting their Sustainability Development Goals (SDG).

What is the Inflation Reduction Act?

The Inflation Reduction Act was signed into law in the US on August 16th 2022 by President Biden. It has been deemed as one of the most significant actions that Congress has ever taken on green energy and climate change since its existence (Podest, 2023). The main functions of the act are to heavily invest into great technologies, reduce the cost of prescriptions and increase taxes for corporations (Smith, 2022). Although it is named the Inflation Reduction Act, it is not likely that it will have much effect on inflation rates, it is more likely to cause a slight increase in inflation until 2024 but nonetheless it is still deemed to be an incredibly important piece of legislation (Huntley & Ricco, 2022).

Why is it in the news now?

Although the IRA was signed into law in August of 2022 it didn’t come into effect until January 2023. It has seen heavy criticism from the EU when it became evident that it would create barriers to trade between the EU and the US. The IRA introduced tax credits for goods that contained a ‘clean power component’ that had been manufactured (or mined in the case of rare earth elements) in the US or any of their free trade partners. This meant that it did not include the EU, Japan or China as countries qualifying for this subsidy (Colombatto, 2023). The European Commission accused the US of breaking the World Trade Organisation rules, stating that it “contain provisions with clearly discriminatory domestic content requirements, in breach of WTO rules” (Bounds, 2022).

This has evidently led to a huge amount of controversy surrounding the Act, with a number of EU companies announcing plans to expand into the US after the announcement of this Act. Such as the Italian energy supplier Enel, who announced that they would be building a huge solar panel factory in the US, naming the IRA as the catalyst for this decision (Dvorak, 2022).  

Earlier this month (February 2023), in an effort to reduce the number of companies moving from the EU to the US, Ursula von der Leyen, the President of the European Commission announced the Green Deal Industrial Plan (European Commission, 2023).

What is the Green Deal Industrial Plan?

Green Deal Industrial Plan builds on and compliments the EU’s European Green Deal to enhance the EU’s competitiveness in the net-zero industry and support a faster transition into climate neutrality. It is based upon on four pillars (European Commission, 2023):

Predictable and Simplified Regulatory: Introduction of the Net Zero Industry Act to support industrial manufacturing capacity and multi country projects and the Critical Raw Materials Act, to ensure access to rare earth elements for manufacturing of net-zero technologies (European Commision, 2023). This should enable consumers to benefit from lower costs of renewable energy (European Commission, 2023).

Faster Access to Funding: The EU commission promises to have a level playing field in the single market under the competition policy. This means it will be quicker and easier for member states to give aid to streamline the approval process for green transition (European Commission, 2023).

Enhancing Skills: This pillar focuses on upskilling and reskilling workers who could be affected by the green transition. They will do this by establishing the Net-Zero Industry Academies who will take a skill first approach to enhancing the EU labour markets (European Commission, 2023).

Open Trade for Resilient Supply Chains: The EU is exploring the possibility of setting up the Critical Raw Materials Club which will bring together the raw materials and resources rich countries to create global security of supply (European Commission, 2023).

What Effect Will the IRA and Green Deal Industrial Plan have on Goldman Sachs?

Goldman Sachs approved a share buyback of $30 billion this month (February 2023) (Natarajan, 2023). In accordance to the IRA, Goldman Sachs will be required to pay a 1% excise tax on share repurchases that exceed $1 million over the course of the year (Podest, 2023). This means that will be subjected to excise tax of up to $300 million. Goldman Sachs did not release a schedule for the share buyback, so the exact amount of tax they will be due to pay is unclear. (Goldman Sachs , 2023).

The introduction of these acts will also increase institutional investors interest in investing in clean energy due to the tax incentives that are now available for green projects (Hedley, 2022). Goldman and Sachs teamed up with Bloomberg to bring out their Clean Energy Equity ETF, this gives clean energy investors and providers an easy place to borrow and lend funds. The fund will offer $100+ Trillion to multi decade investment opportunities in clean energy (Goldman Sachs, 2022). In the below graph you can see a clear spike in their market price in August of 2022 when the IRA was announced and a further, smaller spike in January when it came into effect. 


                          (Source: S&P Capital IQ)
 

In January 2023, Goldman Sachs came out with an article reviewing the importance of green energy. It briefly discussed how geopolitics have accelerated the need for clean affordable energy, and went through the trends in capital investment in this sector (Goldman Sachs, 2023). It is clear from this that Goldman and Sachs have already begun to revaluate their shareholdings to encourage their investors to invest into green projects. 

How has this Aided the UN’S SDG?

The introduction of the IRA had a domino effect and resulted in legislation being implemented in the EU and there has been recent pressure put on the UK to also implement legislation to promote sustainable projects to enhance economic growth and decarbonisation (Hawes, 2023). 

Climate change policies can affect poverty levels both directly and indirectly. It can directly help with the livelihoods of those stuck in poverty by reducing levels of energy poverty it can also indirectly affect them through changes in trade and economic growth (Barbie, 2014).

Energy poverty is something that greatly effects people living in both developed and developing countries like India, Spain, the Philippines and the US to name a few (Zhao, et al., 2022). By reducing and ultimately ending energy poverty there will be a massive reduction in overall poverty levels. It the levels of health issues suffered by people stuck in poverty allowing them to have more opportunities to work. It would also facilitate education opportunities for children (Acharya & Sadath, 2019) which would help stop the poverty cycle.

All in all, the IRA will have a positive effect on society despite its lacklustre effect on inflation levels.

Reference List

Acharya, R., & Sadath, A. (2019). Energy poverty and economic development: Household-level evidence from India. Energy and Buildings, 183, 785-791.

Barbie, E. (2014). Climate change mitigation policies and poverty. WIREs Climate Change, 5(4), 483-491.

Bounds, A. (2022, November 26). EU accuses US of breaking WTO rules with green energy incentives. Financial Times.

Colombatto, E. (2023, February 22). The U.S. is subsidizing clean energy. What about the EU? Retrieved February 26, 2023, from https://www.gisreportsonline.com/r/eu-clean-energy/

Dvorak, P. (2022, November 17). Enel to Build Massive Solar Panel Factory in U.S. The Wall Street Journal.

European Commission. (2023, February 1). Questions and Answers: Green Deal Industrial Plan for the Net-Zero Age. Retrieved February 26, 2023, from https://ec.europa.eu/commission/presscorner/detail/en/qanda_23_511

European Commission. (2023, February 1). The Green Deal Industrial Plan: putting Europe's net-zero industry in the lead. Retrieved February 26, 2023, from https://ec.europa.eu/commission/presscorner/detail/en/ip_23_510

Goldman Sachs. (2023). Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the Fiscal Year Ended December 31, 2022. Delaware: The Goldman Sachs Group, Inc.

Goldman Sachs. (2015). Goldman Sachs Environmental Policy Framework. New York: Goldman Sachs.

Goldman Sachs. (2022, February 10). Goldman Sachs Asset Management Launches the Goldman Sachs Bloomberg Clean Energy Equity ETF. Retrieved 03 2023, 23, from https://www.gsam.com/content/gsam/us/en/advisors/about-gsam/news-and-media/2022/goldman_sachs_asset_management_launches_the_goldman_sachs_bloomberg_clean_energy_etf.html

Goldman Sachs. (2023, January 22). The Energy Transition. Retrieved from Goldman Sachs Asset Management: https://www.gsam.com/responsible-investing/en-GB/professional/insights/articles/the-energy-transition-trinity

Hawes, M. (2023, February 3). Attracting investment is key to electrifying UK Auto. Retrieved February 26, 2023, from https://www.smmt.co.uk/2023/02/attracting-investment-is-key-to-electrifying-uk-auto/

Hedley, N. (2022, August 2022). What the Inflation Reduction Act Means for Investors, Energy and the Climate. Markets Group.

Huntley, J., & Ricco, J. (2022, July 29). Inflation Reduction Act: Preliminary Estimates of Budgetary and Macroeconomic Effects. Retrieved February 26, 2023, from https://budgetmodel.wharton.upenn.edu/issues/2022/7/29/inflation-reduction-act-preliminary-estimates

Natarajan, S. (2023, February 24). Goldman Sachs Sets $30 Billion Repurchase Plan as Buyback Pace Climbs. Bloomberg UK.

Podest, J. (2023). Building A Clean Energy Economy. Washington: The White House. Retrieved February 26, 2023, from https://www.whitehouse.gov/cleanenergy/inflation-reduction-act-guidebook/

Smith, K. A. (2022). The Inflation Reduction Act Is Now Law—Here’s What It Means for You. Retrieved February 26, 2023, from https://www.forbes.com/advisor/personal-finance/inflation-reduction-act/

Zhao, J., Dong, K., Dong , X., & Shahbaz, M. (2022). How renewable energy alleviate energy poverty? A global analysis. Renewable Energy, 186, 299-311.

 


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