Review of the Inflation Reduction Act Passed by the U.S. Senate

It’s finally done. The Senate adopted the long-awaited inflation reduction act to lower drug prices, raise corporate taxes, and reduce carbon emissions.

That’s good news for electric vehicle manufacturers and renewable energy & fossil fuel companies since they’ll get new tax subsidies. The act provides for the biggest spending ever made by the government to slow warming and reduce the demand for fossil fuels.

We’re talking about an investment of more than $400 billion over ten years in tax breaks to encourage consumers to switch to electric cars and spur wind and solar energy. The plan is to reduce carbon emissions by 40% by 2030.

The facts speak for themselves

First

Clean energy producers (solar panels, wind turbines, and hydrogen fuel cells) will rank among the beneficiaries of the act.

Here’s how the market reacted at yesterday’s peak:

✔Manufacturer of solar panels First Solar (#FSLR): +11%, Sunrun #RUN: +12%, and SunPower #SPWR: +4.70%
✔Manufacturer of wind turbines Vestas Wind Systems (#VWDRY): +1%
✔Developer of hydrogen fuel cell systems Plug Power (#PLUG): +5.50%
✔Manufacturer of solid oxide fuel cells Bloom Energy (#BE): +7%

Second

The act expands the $7,500 tax credit provided for buying electric vehicles. Also, it offers up to $4,000 in credit for those who buy used electric vehicles.

Here’s how the market reacted at yesterday’s peak:

✔Tesla (#TSLA): +5.90%
✔Lucid Group (#LCID): +9%
✔Rivian Automotive (#RIVN): +10%
✔Nikola (#NKLA): +11%

Third

The act is a far cry from Joe Biden’s $4 trillion proposal to transform the U.S. at the start of his term. But it’s far from zero as well.

The plan is to raise $740 billion over the next ten years through enhanced tax enforcement and a 15% minimum corporate tax (affecting companies like Alphabet #GOOG, Meta Platforms #META, etc.), bringing it into compliance with the global minimum tax rate. The act was submitted to the House of Representatives. A final vote is scheduled for this week.

Key figures:

✔~300+ billion are to pay off the public debt
✔~$64 billion are to expand subsidies for insurance premiums for those who receive insurance under the Obamacare program
✔$369 billion for «energy security and climate change»

Fourth

Prescription drugs in the U.S. cost an average of two and a half times more than in other developed countries. Until now, the government couldn’t negotiate prices with pharmaceutical companies.

For the first time ever, this act will enable Medicare to freely negotiate prescription drug prices. The Congressional Budget Office estimates that the act will help free up $288 billion over the next decade.

It’s no surprise that this triggers a flurry of dissatisfaction among the pharmaceutical giants:

✔They lose hundreds of billions of USD
✔Suffering from profit reduction
✔Damage to innovation and risk research
✔Bans on raising prices for some drugs annually by more than the inflation rate (we’re now talking about the ten most expensive ones with different time requirements.)

Fifth

The Democrats hope the $433 billion program will slow inflation over time. Nonetheless, this can happen even before Joe Biden signs the act into law.

If the core CPI, due on Wednesday, fails to live up to expectations and reverses its downward trend since March, the Fed will get another chance to raise interest rates by another 75 bp in September.

Roughly speaking, the Fed has an operational impact. All in all, the new law will take years to bolster the economy.