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How the Inflation Reduction Act affects corporate net zero goals, according to BofA

The Inflation Reduction Act (IRA) delivers $369 billion in climate-related spending that encompasses clean energy tax credits and investment, carbon capture investment, and a green bank that funds decarbonization projects.

That investment could save corporations $84 billion on their decarbonization efforts, according to a recent Bank of America note, while also bringing a higher tax burden.

According to Net Zero Tracker, more than a third of the world’s largest publicly traded companies have net-zero targets. Another BofA report from April reported that 92% of the 3,400 companies covered by the firm rate net-zero goals as a core part of their decision-making processes.

"Corporates have earmarked capital (BofA estimates >$740B of capex) to meet emission reduction goals over the next decade," the analysts wrote. "The IRA tax benefits could offset >10% of that spend where the benefit to Utilities is seemingly the largest."

Bank of America expects the Inflation Reduction Act to offset some capex on decarbonization but overall be a net negative for companies. (Bank of America)
Bank of America expects the Inflation Reduction Act to offset some capex on decarbonization but overall be a net negative for companies. (Bank of America)

Overall, the analysts found, the Inflation Reduction Act will be a net negative for most corporations due to a higher tax hit from the legislation.

"The math on corporate tax hikes is unequivocally negative, and the hit is bigger than our estimated earnings benefits," BofA stated. "Two caveats: historically, tax impacts are arbitraged away by industry dynamics. Moreover, the direct tax impact is minimal, just 1ppt off of total S&P 500 corporate profits, and represents a sliver of the margin hit from de-globalization. Sectors with lower tax rates (Tech, the biggest S&P 500 sector, has the lowest) are hit hardest. The buyback tax is small."

The IRA stipulates that companies reporting more than $1 billion in profits are subject to a 15% minimum tax. There is also a 1% surcharge on corporate stock buybacks. These provisions will cost businesses around $123 billion, in theory.

FILE - In this July 27, 2018, file photo, the Dave Johnston coal-fired power plant is silhouetted against the morning sun in Glenrock, Wyo. Wyoming's governor is promoting a Trump administration study that says capturing carbon dioxide emitted by coal-fired power plants would be an economical way to curtail the pollution — findings questioned by a utility that owns the plants and wants to shift away from the fossil fuel in favor of wind and solar energy. Supporters say carbon capture would save coal by pumping carbon dioxide — a greenhouse gas emitted by power plants — underground instead of into the atmosphere. (AP Photo/J. David Ake, File)
In this July 27, 2018, file photo, the Dave Johnston coal-fired power plant is silhouetted against the morning sun in Glenrock, Wyo. (AP Photo/J. David Ake, File)

Utility and energy companies are an exception since they can expect the IRA to be a net positive as they stand to benefit from preferential loan rates that more than offset the tax hit.

"The IRA also allocates more than $300bn in loans and guarantees for energy infrastructure," the analysts stated. "Given the expanded loan cap, and as interest rate hikes raise the cost of capital, the incremental cost of debt savings from preferential rates are substantial. We calculate a boost of up to $4bn, by taking into account the difference between the sector spread and investment grade spread (100bps for energy and 23bps renewables) and applying this to the amount of funding dedicated to both energy ($290bn) and renewables ($10bn)."

Grace is an assistant editor for Yahoo Finance.

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