What the Cut Inflation Act Means for Green Energy Stocks | Business News | Investment

Sam Taube

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Despite its name, the Cut Inflation Act is largely a climate spending bill. If passed, it would represent the largest climate investment in US history, allocating $369 billion to programs aimed at mitigating the effects of climate change over the next 10 years.

Here’s how it could affect those who currently own green energy stocks — or are considering adding them to their portfolio now.

What does the Inflation Reduction Act contain?

On Sunday, the Senate narrowly passed a budget reconciliation bill known as the Inflation Reduction Act. The bill is now on its way to the House of Representatives and then to the White House – both of which are expected to approve it.

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It is a large-scale bill that contains several provisions. For example, the bill would increase corporate taxes, some investment taxes, and funding for the IRS in an effort to reduce the deficit and inflation. It would also allow Medicare to negotiate the prices of certain prescription drugs with manufacturers, and it would extend some provisions of the Affordable Care Act through 2025.

But the biggest item in the Cut Inflation Act is its 12-figure spending on carbon-cutting initiatives, which largely consist of incentives for green energy and electric vehicles, or EV.

What does the bill mean for green energy stocks?

The bill would provide tens of billions of dollars for green energy incentives. These include a 30% tax credit for the construction or renovation of renewable energy installations, clean energy production credits (paid per kilowatt hour) and special production-based credits for manufacturers of solar and wind equipment.

“What will he do to [green energy] actions ? I think it will only strengthen them,” says Peter Krull, Chief Investment Officer at Earth Equity Advisors, a North Carolina-based registered investment adviser specializing in sustainable investing.

“After a great 2020, 2021 and 2022 have been pretty dark for anything in the alternative energy space,” says Krull. “That should start to bring them back into positive territory.”

What does the bill mean for electric vehicle stocks?

The Cut Inflation Act would extend the $7,500 consumption tax credit for the purchase of a new electric vehicle and eliminate the per-manufacturer limit on these tax credits. It would also create a new credit for the purchase of a used electric vehicle of up to $4,000.

“Everything from Tesla, to Rivian, to Lucid, to anything that’s selling here in the United States, they should definitely get a boost out of it,” Krull says.

He notes that traditional automakers – “the Fords and GMs of the world” – could also benefit from the legislation.

But Christian Hutchins, a certified financial planner with California-based registered investment adviser LourdMurray, warns that the impact of the Cut Inflation Act on electric vehicle stocks could be uneven across the industry.

“A lot of automakers that are in the EV space will likely do well, but some better than others — some are better positioned to capitalize,” Hutchins says.

The legislation caps the price of new cars eligible for the tax credit at $55,000 ($80,000 for trucks and vans). It also requires electric vehicle makers to produce their cars and batteries in North America to qualify for the credit.

Domestic manufacturing rules mean foreign companies like BMW and Volvo are unlikely to reap all the benefits of subsidies. The pricing rules could also put Tesla at a disadvantage, as some of its cars are too expensive to qualify for the credit.

Should You Buy Individual Stocks Because of the Inflation Reduction Act?

The Cut Inflation Act could lead to substantial moves in green energy stocks and electric vehicle stocks. But Hutchins says active stock picking may not be the best way to take advantage, compared to more passive strategies that use exchange-traded funds.

“Eight percent of active managers outperform the S&P 500 every year,” says Hutchins. “You will either be on the 92% side or on the 8% side. Statistically, we like to go where the odds are in our favor.”

Hutchins adds that keeping your portfolio diversified, as in products like ETFs, can also help you perform better.

Neither the author nor the publisher held a position in the aforementioned investments at the time of publication.

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