I recently had the opportunity to listen to Mark Zandi, the Chief Economist of Moody’s Analytics, speak about a white paper, titled The Macroeconomic Cost of Climate Inaction, that he and his team had recently written on climate change.  This paper attempts to quantify the U.S. environmental, macroeconomic, and federal fiscal impacts under four climate-related scenarios.

Mark discussed how climate change can broadly impact the economy by increasing physical risks (i.e. hurricanes, wildfires, floods, etc.) and transition risks (i.e. macroeconomic and industrial).  He then explained how his team took Moody’s standard global economic model and added demand for fossil fuel sources (i.e. coal, natural gas, oil, etc.).  From here, they created three scenarios focused on the effects of climate change on natural disasters and the U.S. economy, as measured by the GDP (Gross Domestic Product).  Their study then illustrated how the use of tax credits may help to remove some of the roadblocks needed to deploy clean energy at scale (i.e. grid expansions and improvements, trained workforce, etc.), which are targeted for funding in the recently passed In­flation Reduction Act (IRA).  Their optimal model, in terms of economic consequences, imposes an immediate price of carbon and slowly increases this price over time.

Theoretically, these strategies sound simple but the concept of using tax credits as a tool to transition the U.S. economy to one that is Net Zero by 2050 does not come without controversy.  Imposing a tax on carbon could potentially put American companies at a disadvantage against their foreign competitors.  Such a tax could also end up being regressive, hurting the finances of lower-income populations significantly more than those with higher incomes.  Lastly, the political opposition to a carbon tax is fierce. 

The work that Mark and his Moody’s team has done on this subject is commendable.  In light of the scheduled single largest investment in climate and energy in American history under the In­flation Reduction Act (IRA), the U.S. has an opportunity to lead the energy technology economy in the post-carbon world and safeguard its people against economic and planetary risks, if it couples these dollars with the right implementation strategy.  

So, the bottom line seems to always come back to this question, “What does this mean to me?”.  To start, your long-term health and prosperity are expected to benefit from the targeted IRA programs.  From an investment standpoint, if you have holdings in domestic manufacturing, hydrogen, and energy storage companies, you are expected to benefit from the infusion of cash into these industries from the IRA.  You can also use the tax incentives and rebates in the IRA, which can add up to $28,500 to switch to efficient electric home appliances, install rooftop solar, and buy new electric vehicles.  By making such changes, you may also save up to $1,800 per year in energy costs.