- The Inflation Reduction Act provides $369 billion in funding for sustainability, manufacturing, and clean technology production, which will impact total business costs and demand for a variety of different goods and services.
- The bill will subsidize US production of clean energy technologies. This will lead to lower costs and reduced supply chain risk.
- After so much uncertainty over the past few years, many businesses moved their supply chains closer to home. More products being made in the United States will lower supply chain risk.
The Inflation Reduction Act of 2022, which was signed into law on August 16, provides $369 billion in funding for programs that curb energy prices, combat climate change, and boost US energy security.
This funding will affect procurement professionals by increasing demand for manufacturing and construction services and materials in the short term, as well as reducing costs for energy, utilities, and transportation in the long term.
Although businesses have already taken steps to fight climate change and promote environmental sustainability, new funding will speed up this process. Even though the events of the past few years have already convinced many businesses to move their supply chains closer to home, this bill will subsidize US production of clean energy technologies. That should lead to lower costs and a reduction in supply chain risk.
How does the Inflation Reduction Act support sustainability?
The Inflation Reduction Act will directly affect buyers by providing funds for investment in clean energy technologies. Both businesses and governments may qualify for this funding. Some of the most interesting and impactful contributions toward sustainability include:
- $30 billion in tax credits and loans for buyers of clean electricity and energy storage technologies: This provision will impact organizations in the electric power industry, and may increase demand for power purchase agreements (PPAs), solar panel installation services, and more.
- $27 billion for a Greenhouse Gas Reduction Fund: This fund will provide competitive grants to national and local funds for investments in projects that will reduce greenhouse gas emissions.
- $9 billion in funding for federal agencies to purchase clean technologies made in the United States: The government is supporting the transition to clean energy by using its procurement powers. This funding includes $3 billion for the US Postal Service to purchase zero-emission vehicles rather than gas-dependent vehicles, which could place upward pressure on the price of electric vehicles and EV charging stations.
- Tax credits for clean vehicles for the transportation sector: This funding includes a tax credit for small businesses purchasing clean commercial vehicles equal to roughly 30.0% of the vehicle’s purchase cost. Clean vehicles are already approaching cost competitiveness with conventional vehicles, but this tax credit will help even the playing field.
Key Takeaway: Businesses will have more opportunities to meet their company’s environmental, social, and governance (ESG) goals, and can benefit financially by doing so.
How does the bill encourage adoption of clean technologies?
The Biden administration wants cleaner renewable technology readily available and enticing for domestic businesses to make the switch. However, since producers are slow to make investments to change their product lines, this bill uses tax credits, subsidies, and low-income loans to speed up the production of cleaner technologies. This includes:
- $30 billion in production tax credits to encourage clean technology manufacturing and critical minerals processing: The government is offering production tax credits to manufacturers that build clean technologies such as solar panel installation, wind turbines, and batteries in the United States rather than abroad. Minerals such as lithium and rare earth metals are vital for these technologies, but the processing of these minerals is heavily concentrated in China. The government is offering tax credits to companies that process these minerals within the United States.
- $20 billion in loans to encourage the construction of clean vehicle factories: The business tax credit provision will cause a surge in demand for electric vehicles, which most automakers don’t have the infrastructure to accommodate at a large scale. To fix this, the government is allocating $20 billion in low-interest loans to speed up the construction of these factories in the United States.
- $10 billion in production tax credits to encourage the construction of clean technology factories: The production of wind turbines and solar panels is highly capital intensive. The government will provide $10 billion worth of tax credits for companies to build electric vehicle, wind turbine, and solar panel factories in the United States.
- $2 billion in subsidies to encourage automakers to retool their factories and produce clean vehicles: Car manufacturers encounter heavy one-time costs to retool factories for producing electric cars. These subsidies will cover the cost of retooling American factories and speed up the transition to clean vehicles while cutting costs in the meantime. Some automakers have already made investments to overhaul their factories, such as Volkswagen, which plans to spend $7.1 billion in making electric cars in North America so it can offer 25 new EV models by 2030.
- $500 million in subsidies to encourage heat pump manufacturing and critical minerals processing: The Biden administration invoked the Defense Production Act of 1950 this June to provide these subsidies. Heat pumps run on electricity instead of natural gas and serve as alternatives to furnaces and air conditioners. Heat pumps will help US energy security and the effort to combat climate change because a growing share of electric power generated in the United States comes from renewable sources such as wind and solar. Subsidies for US heat pump manufacturing and critical minerals processing will reduce supply chain risk
Key Takeaway: Once domestic production of clean vehicles and other equipment is ramped up, businesses will benefit by having a shorter supply chain, reducing risks and lead times for sourcing these products.
What can procurement do to maximize the impact for your business?
- Decide which programs affect your purchasing patterns. Which of these programs might positively or negatively affect your purchasing power in key markets?
- Meet with your stakeholders and build an actionable strategy. There’s no time like the present to meet with your decision makers and build a comprehensive strategy. This funding comes with strings attached, so making these commitments won’t be a good decision for every organization.
- Review your company’s ESG commitments. Confirm that your new strategy meets or exceeds your company’s ESG pledges.
- Ask your current suppliers about their plans and goals resulting from this legislation. Check in with your suppliers to see if they’re taking advantage of subsidies or funding allocated by the Inflation Reduction Act.
- Leverage supplier cost savings in negotiations. Suppliers that receive funds from the government enjoy a lower cost of production. Leverage their cost savings to negotiate a better deal for your company.
