Can Trump ruin Biden’s Inflation Reduction Act?

The Inflation Reduction Act (IRA) has so far survived Republican-led attempts to repeal major parts of its $369 billion in clean energy and climate spending. But President Joe Biden’s signature legislation faces a new threat: the possible re-election of Donald Trump.

Recent polls show Trump leading Biden in key swing states that will likely decide the 2024 election.

Investors, who appreciate the policy certainty of the ambitious ten-year subsidy programme, understandably feel dismayed at the possibility of disruption, and are carefully trying to work out where the Republican fist would hit hardest.

“While the politicians of a potential Trump administration are talking about rolling back the IRA, the reality is that it would take an act of congress to do so,” said Shannon Rinehart, portfolio manager at Threadneedle.

Trump may not be able to roll back the law unilaterally, but he could make its "implementation more difficult", she added.

A new Republican administration could hinder the climate law through executive action by tightening limits on tax credits, holding back some of its loans and grants, or revising treasury department rules that haven’t yet been finalised.

Some investors, like Robeco, opt for a cautious “bipartisan” approach to IRA-related investments, picking areas that are unlikely to be affected by a regime change.

“Some parts of the IRA will receive more pushback from Republicans than others,” said Robeco, Chris Berkouwer, portfolio manager at Robeco. “We’re trying to steer clear of those parts.”

For example, investments in improving the grid infrastructure are likely to receive support from both parties, and are therefore a safe bet for investors worried about political risk.

However, even here there is a difference. While democrats want the grid to cater for the rollout of more renewables, Republicans look to the many utilities companies that would use the renewed infrastructure for coal and gas fired energy generation.

Grid infrastructure investments can consist of hardware and equipment, but also transformers and smart grids with higher levels of automation.

Smart grids are widely seen as essential for managing the “intermittency issues” associated with renewables, according to Berkouwer.

Other parts of the IRA, especially those related to electric vehicles and longer-dated renewable energy projects, are more likely to enter the Republican crosshairs.

“Those who make investments that pay off in ten or 15 years don’t want the rules of the game to keep on changing,” said Berkouwer. “From that perspective, the Republican rhetoric, at least going into the elections, looks dangerous.”

Rust-belt states and manufacturing

All sources argued that the IRA is simply too big to roll back entirely. The worst a Trump administration could do is stymie and delay certain parts of its implementation.

“We don’t believe a Trump administration will disrupt the biggest parts of the IRA, simply because it is not in its interest to do so,” said Ashish Bhardwaj, portfolio manager at Fidelity Investors. “However, there will likely be plenty of tweaks.”

Studies show that Republican states have actually benefitted the most from the Democrat-led climate law, a bias that could help soften the impact of a new Trump administration.

Republican states account for 58% of the projects announced under the IRA, Democrat states 32%, and swing states 10%, according to research from Fidelity.

Republicans, who tend to be ideologically opposed to large-scale spending programmes, may feel duty-bound to rail against the IRA publicly, but privately appreciate the jobs and investments.

It is also noteworthy that Trump has promoted himself as a kind of anti-elitist political hero for citizens of the left-behind, “rust belt” US – the very group that stands to make significant gains from the Biden-branded IRA.

“While Republicans may like the sound bites, it might be very difficult to find political support to vote for the rollback of the bill, on account of its boost for manufacturing in Republican states,” said Rinehart.

However, whether the IRA’s support for deprived Republican areas translates as active political capital for the Democrats in terms of votes remains to be seen. The severity of the polarisation in US politics could cancel out any gains.

Andrew Smith, US equities client portfolio manager at Columbia Threadneedle, stressed the importance of diversification in mitigating the political risk of the 2024 presidential elections. “We try to ensure that our portfolios are sufficiently diversified to weather any political storm,” he said. “We do not base investments purely on speculation over the binary outcome of an election.”

The IRA's approximately $400 billion of federal incentives has already attracted $278 billion in new private clean energy investments, created 170,000 new jobs, and boosted energy security by on-shoring key green manufacturing processes, such as those needed for solar panels, which have previously been the preserve of China, according to research from Climate Power.

The IRA incentives, along with those of its sister policies the Infrastructure Investment and Jobs Act and CHIPS Act amount to around $2 trillion in stimulus, and could attract trillions of dollars in private investment in the next five to ten years, according to Columbia Threadneedle analysts.

This enabling policy environment has created opportunities up and down the net zero value chain, as the far-reaching green industrial plan boosts not only clean energy and electric vehicles (EVs) but an entire ecosystem of businesses that indirectly benefit from the tax credits.