Pitfalls & Pitch Calls: Climate action tops governments’ spending agenda

This article first appeared in Wealth, The Edge Malaysia Weekly, on September 26, 2022 - October 02, 2022.
Pitfalls & Pitch Calls: Climate action tops governments’ spending agenda
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The recent financial struggles faced by businesses and households worldwide due to soaring energy prices highlight that the low-carbon transition will not be smooth. Still, the passing of the US Inflation Reduction Act of 2022 (IRA) and its climate and clean-energy-related incentives recently do indicate that the longer-term policy trajectory is clear — the world is heading inexorably towards a climate-friendly economy.

On Aug 16, US President Joe Biden signed into law a US$700 billion climate, health and tax package, paving the way for significant government support for climate initiatives over the next decade. The IRA includes roughly US$370 billion (RM1.7 trillion) in climate and energy spending.

Key highlights include:

•     Subsidies to spur greater spending on zero-emissions electricity production, including for wind, solar, geothermal, biomass and hydropower projects. These include a manufacturing tax credit for equipment such as photovoltaic (PV) cells, solar modules, wind energy components and battery cells.

•     Incentives for clean hydrogen production.

•     Tax credits for carbon capture, utilisation and storage projects.

•     A tax credit of up to US$7,500 for purchasing new electric vehicles (EVs), and US$4,000 for second-hand EVs, as well as credits for installing EV chargers.

•     Various incentives for homeowners who install equipment and appliances that improve energy efficiency in homes.

•     A fee aimed at limiting emissions of methane, a particularly potent greenhouse gas known to have much greater global warming potential than carbon dioxide.

Many of the incentives are valid until end-2032 or beyond, offering longer-term visibility to encourage businesses and households to invest in green technologies to curb harmful emissions. The IRA could boost wind and solar capacity growth in the US for the next three to four years by 160% and 390% respectively.

The bulk of the climate-related spending is to be funded by other tax provisions, including a new 15% minimum tax on corporate book income for corporations with over US$1 billion in profits.

Investment in hydrogen production could rise to US$3 billion a year by 2030, triple the level projected under current policy. The new incentives would also encourage deployment of carbon capture technologies at new and existing natural gas power plants and retrofits of existing coal plants. Overall, the climate package would likely drive nearly US$3.5 trillion in cumulative capital investment in new US energy supply infrastructure from 2023 to 2032.

That would help put the US on course to meet its pledge on Earth Day last year to slash its greenhouse gas emissions by 50% from 2005 levels by 2030, and its promise to reach net zero emissions by 2050.

The IRA follows similar large spending initiatives by the European Union and China on clean energy and related technologies.

Apart from catalysing new spending by businesses and households in the US, the climate package is also likely to accelerate the intensifying rivalry between the US and China on green investment.

In Europe, ongoing struggles by the European Union to wean itself off Russian fossil fuels led to its REPowerEU plan that aims to increase the share of renewables in its energy mix to 45% by 2030.

Meanwhile, China continues to pour billions into expanding its renewable energy (RE) capacity, and it remains by far the biggest spender on energy transition technologies, outpacing the US and other major economies. This underpins our ongoing preference within China for businesses with exposure to renewables as well as the new energy vehicle infrastructure and supply chain, among other policy beneficiaries.

Closer to home, with Malaysia’s commitment to be net zero by 2050, national utility Tenaga Nasional Bhd has announced in its 2021 annual report a similar net zero target. It plans to expand its RE mix and reduce its coal-generating capacity by 50% by 2035. This will be achieved through the non-renewal of the respective power purchase agreements as they expire in the years ahead. Tenaga has reorganised its international assets group into a New Energy Division to drive RE growth through partnerships with leading global players.

Overall, RE capacity continues to expand rapidly worldwide, and the new US climate spending package will accelerate this further.

Globally, installed RE capacity reached 3,064gw in 2021, four times the capacity in 2001, according to the International Renewable Energy Agency. Most of the growth over the past two decades has been driven by additions of solar and wind energy capacity.

The current macro environment is challenging for risk assets, while rising interest rates are a key headwind for the utilities sector as well as companies that are exploring new, still-unprofitable ventures including business lines that are positioned for the low-carbon transition.

Nonetheless, looking ahead over the longer term, global efforts to strengthen climate ambition and pursue sustainable, climate-resilient development paths will continue to drive profound structural changes to the global economy.

This ongoing transformation of economic activity globally will create significant disruption and new opportunities for businesses as supporting regulations and policy incentives are progressively rolled out. As investors, it is necessary to incorporate climate action-related exposure to future-proof your investment portfolio.


Michael Lai is executive director of wealth advisory (wealth management) at OCBC Bank (M) Bhd