"I'm Kind of a Big Deal" ...said the Inflation Reduction Act

This transcript has been edited for clarity.

Dan Carreno: Thank you for tuning in to Rewilding Wall Street, where we provide insights and analysis into the ever-evolving world of sustainable investing. I'm Dan Carreno

Brittany Damico: And I am Brittany D'Amico. Today, we are going to be focusing on the Inflation Reduction Act. Now, nothing that we will discuss today is necessarily breaking news because there have been numerous reports and articles written about the subject. However, today, we will discuss a specific report from Goldman Sachs, an analysis that came out in May 2023. So, the IRA holds enormous implications for the US economy and investors, so much so that everywhere we look when we hear about this, we see phrases like "revolution" and "transformation," these monumental phrases and terms. So, from an investment standpoint, I think this creates a huge opportunity, but it also creates some risks, and Dan has a deep passion and interest in the subject. So, he will be in the hot seat today as we discuss the analysis and the IRA as a whole. Are you ready to dig in, Dan?

Dan Carreno: This one gets my blood pumping. Yeah, let's go.

Brittany Damico:  So, for folks not closely tracking the IRA, what do you think is not well appreciated by investors?

Dan Carreno: I think for folks that just kind of tangentially are seeing news reports about this, they probably saw when the law was passed in August of 2022 that there was going to be something like $369 billion for various climate provisions, incentives for clean tech, renewable energy, and so on. And since the initial passage, a lot of additional analysis has occurred about the Inflation Reduction Act. And what I think a lot of people need to appreciate fully is that many of the provisions, things like the electric vehicle tax credit, for example, they're not capped. So that means if there's a lot more demand for, say, electric vehicles than what they initially anticipated when they passed the law, then the amount of government spending and the amount of incentives that are put out there are going to be a lot higher than what was initially projected. And that's exactly what Goldman Sachs says in the report that you just referenced, published in May of 2023. There was also a Credit Suisse report that came out at the end of 2022 saying something similar, that ultimately they expect the actual amount of government stimulus to be something like more like $1.2 trillion in incentives for all of the various things like solar, wind, electric vehicles, energy storage, clean hydrogen, carbon capture, the list goes on. Now, on top of that $1.2 trillion that they are anticipating from the government, they also think that it will spur quite a bit of private investment. Goldman, in particular, is projecting an additional 1.7 trillion coming from private investment in all of this. By the way, they're projecting over the next decade through 2032. They are looking at something like $3 trillion of stimulus over the next ten years. And that's just a game-changer, right? That creates enormous dislocation in the economy. And all that dislocation, of course, as you mentioned, will lead to many opportunities for investors. And that's also going to lead to some pitfalls, too. And some risks that people are not fully appreciating and that are certainly not baked into the market right now.

Brittany Damico: Really interesting. When we start talking about trillions of dollars coming into the economy, it's no wonder that we're using words like revolution and transformation. All right, so it's been just over a year since it was passed. What kind of movement have we seen thus far?

Dan Carreno: Things change from day to day. Different plans are announced, and we've seen some plans for Ford, for example, lately, that they're saying they're not going to move forward. These numbers are fluid, but hopefully, this will give listeners a pretty good idea of what's happening. Over the last year, we've seen something like 80 new renewable energy manufacturing facilities announced since the law's passage. Another 31 manufacturing facilities specifically related to batteries. We have the American Clean Power Association saying that ultimately accounts for about $270 billion worth of investment. That, of course, is just in the first year. So we're talking big numbers here, and ultimately, that's going to lead to job creation as well. These numbers are also a bit fluid, but most projections I've seen say that there's been something like 114,000 clean energy jobs created over that period. So, the law went into effect. It certainly did not have any impact. It's certainly been spurring much of that private investment that Goldman Sachs referenced in their report. So we're seeing all of these projections from the big think tanks out there happening in real-time.

Brittany Damico: So we can now analyze what companies and sectors have been benefiting from all of the investment and all this demand you've been referring to that happened over the past year. Let's talk about risk. Where do you see the most potential for risk?

Dan Carreno: A lot could be said here. This is a relatively short podcast, so I'm going to drill in on one particular topic. It's one that I am somewhat passionate about, but when we specifically talk about the changes occurring in the transportation sector, a lot of those changes are certainly not priced into the market right now. So, I will layer in some additional research that came out recently from the Rocky Mountain Institute. It's a renewable energy clean tech think tank based here in Colorado. And they were specifically looking at this issue, and some interesting numbers are again coming out of this. We're all seeing more and more electric vehicles on the road. On average, each of those you see drives past you going to work in the morning, displacing about 11 barrels of oil per year. And we are anticipating, or at least the Rocky Mountain Institute is expecting, that EV sales market share is going to be something like 75% by the year 2040. And in the 2040s, we will start to see the amount of oil consumed by light-duty vehicles, right? Cars, pickup trucks, and what we mostly see on the roads will start falling close to zero. And ultimately, that's like 25% of all of the demand for oil in any given year. So when we start thinking about markets, which are forward-looking discounting mechanisms, and if markets start to say, Hey, it's unlikely that the growth of electric vehicles will stall or retrench, right? It is unlikely that people will sell their electric vehicles and start returning to internal combustion engine vehicles. That means that it's likely that we will start seeing a meaningful deterioration in oil demand in the 2030s and, then again, approaching zero sometime in the 2040s. And that's going to have real implications for the commodity markets. And, of course, the energy sector as a whole. This is one that people need to pay attention to. And, investors, when we think about fossil fuel exposure, exposure to the energy sector, there will be big repercussions there. 

Brittany Damico: As we were doing our notes preparing for this podcast, one of the things that came up was the idea that the EV markets are not going down because there's an element of human psychology behind that. So do you want to speak to why you think this will be moving forward, why we think there will be a more uptick in adoption if we look at it from that human psychology perspective?

Dan Carreno: The Rocky Mountain Institute report focuses on its economics. And I can speak to that as well. Admittedly, I'll put my own biases out there. I've been driving an electric vehicle since 2015, and the economics of it are just irrefutable, right? The electric vehicle that I'm in right now is at about a hundred thousand miles. On any internal combustion engine car I've ever had at around a hundred thousand miles, that's when issues start popping up, right? The timing belt needs to be changed. I had to get a new transmission. Things start to deteriorate around that mark. At a hundred thousand miles in my electric vehicle, it's running exactly as it was the day I picked it up from the dealer. So, that's amazing, right? And I look back over those a hundred thousand miles, the amount of money that I've saved in maintenance costs, the amount of money that I've saved in fuel. There's no way I could ever justify financially going back to an internal combustion engine car after this experience. So Rocky Mountain Institute is certainly correct in that framing that yes, when, as we're approaching price parity with traditional internal combustion engine cars, people will almost always want to favor an electric vehicle for the financial part of it. But to your point, and there's a social dynamic that goes on here, and every single electric vehicle that appears on the road is an additional incentive for somebody to go out and buy another electric vehicle, right? Ultimately, we are social animals. Study after study shows that social proof, what our neighbors do, what our friends do, and what our coworkers do, is one of the biggest drivers of human behavior, right? We don't always act rationally, we don't always act on the financials that I mentioned, but we do act on social norms. And when we get to a point where I live on a street, and almost everybody on my street is driving an electric vehicle, and I am not, that's a lot of social pressure people are getting to convert. So I think that that social dynamic is something that's, of course, very, very hard to quantify, and it's certainly not fully baked in, but I think that that's going to lead to something more like, of course, an exponential adoption curve moving forward from here.

Brittany Damico: I agree. It's really interesting. I was on the road today and granted, I live in Bellevue, Washington, outside of Seattle. So, there are a plethora of EVs everywhere. But I noticed in a parking lot that I was in this morning that there were no internal combustion vehicles. It was all Teslas or an EV. So that was interesting, and it made me think of that conversation we had yesterday.

Dan Carreno: So, speaking to the investors who might be listening, it's worth asking oneself the question, what is the most likely path forward from here? Will this trend that has been accelerating, all these new EVs appearing on the road, really stop? Is it going to stall? Is it going to start moving backward? That's highly unlikely. Is it a zero probability? Of course not, but the most likely outcome here is that we continue to see this uptake in EVs, and if you accept that reality, then I think you have to accept the reality that this is going to have a meaningful impact on capital markets and specifically energy markets in the not too distant future.

Brittany Damico: I think that was really well said. When we're talking about a full revolution transformation of the economy, again, these huge phrases, everything can't just be rainbows and butterflies, and it's important that our voice, I think, doesn't fall victim to the trade-off denialism. So, what are some of the challenges we will inevitably face as this transformation continues?

Dan Carreno: Well, as we're recording this podcast, the UAW in the United States is on strike. And a lot goes into why the UAW is on strike. But to say that electric vehicles and the transition to EVs is not part of that story, it would be disingenuous for me to say that. Of course, it's going to be part of it. It's not necessarily helpful when folks in the sustainable investment industry or sustainability writ large engage in, you know, what is sometimes referred to as, you know, sort of trade-off denialism, right? That, hey, everything will be great, and there won't be any downside. You know, as we were talking about before, I mean this amount of money, $3 trillion of investment just in the United States, you know, they're projecting $11 trillion in investment by the year 2050 with numbers that large, it's going to create dislocation, it is going to make issues in some parts of the economy. So, we have to be clear-eyed and sober about that. But at the end of the day, is that something that will ultimately stop this transition, this trend from an investment standpoint? And I think that's highly unlikely, right? Because at the end of the day, we have only so many choices as human beings, right? This year, we've seen some impacts from the climate crisis, and a lot of people are becoming more and more attuned to what's going on there. And as that happens, people say, hey, we have to do something about that issue. It's either that we, you know, go through some hardship and try to figure out the right way to deal with things like union contracts or, you know, supply chain labor and making sure that the extraction of rare earth metals for things like batteries are done in a just and equitable way. You see, it's easier to deal with that issue than it is to deal with a global climate system that's running out of control. And ultimately, that's probably why governments are airing on the side of, hey, we have to deal with the climate crisis, and we're just going to have to, you know, figure out these other issues along the way. But from an investor standpoint, of course, you know, when we think about, you know, who wins and who loses from this story, we have to take that into account. And, you know, only some automobile manufacturers, for example, will benefit from this story equally. And we're seeing that play out in real-time right now with something like Tesla on the one hand and something like, you know, Ford on the other hand, dealing with the UAW strike. 

Brittany Damico: Well, Dan, I can see you have really strong feelings about this. I appreciate all of your opinions. Your insights are helpful and valuable, and I'm sure our listeners will appreciate them. We're coming up on time, so it's about time to begin wrapping it up. 

Dan Carreno: Thank you. I appreciate all the questions, Brittany, and I agree. We have to start wrapping it up, but before we do, we have to engage in our little segment at the end of what we will be doing with all of our podcasts. We call it Around the Campfire. And it's just a moment for us to step out of our role as investment professionals, be human, and share something inspiring or intriguing in our lives over the last few weeks. So I can flip roles here and ask you first, Brittany, when you're sitting around the campfire with friends, and you're, you know, sipping a whiskey or whatever it is you're going to be having around that campfire, uh, what are you going to be talking about? 

Brittany Damico: One of the things that I've been excited about lately is the launch of this new business that we have just embarked on. And that, obviously, with the launch of anything, has been very busy. It's very energetic, it's like very active. We're doing a lot of things; we're talking all day, a lot of moving parts. On the other hand, I am a certified yoga instructor in my other job, and I have found it even more helpful just to come back and find stillness and stop in that chaos. And I want to invite all the listeners to do and take a break. Because we're coming into the holiday season, it's going to be, you know, it always gets high energy. People are doing a million things. It's conference season, beginning to ramp up. So I think just inviting all the listeners, if you have a hectic upcoming schedule, to make sure to carve in time for those things that fuel your soul, whether it's hiking, whether it's getting out on the water, or if it's going to yoga or running, whatever it is. This is a gentle invitation and reminder for everybody to look after themselves, breathe, and take a beat in the upcoming high-energy season.

Dan Carreno: Well, for my around-the-campfire, I am going to just quickly highlight the fact that on October 16th, the new documentary from Ken Burns is coming out on PBS, which is called "The American Buffalo." And, you know, living in the American West, I'm just a huge fan of bison. They're just majestic, beautiful animals. It sounds like this documentary and this story will be powerful. And for those intrigued by the story of the American Bison, I would be remiss not to mention that there is also a great podcast out there that you can listen to, one called "Threshold." It will be available through Apple Podcasts, Spotify, you name it. But season one of "Threshold" highlights the entire story of the American bison, and it's just beautifully done. Full admission: this organization produces "Threshold," I sit on the board of that organization, as does Brittany. So we're intimately familiar with that podcast and the reporters there. But it's worth taking some time to listen to.

Brittany Damico: I love that. And if I may say, after I listened to that first season of the "Threshold" podcast, I went out, and there's a nature reserve up here in Washington with bison. And so I went to see a bison out in nature, which was really special and very cool. So, everybody should listen to the podcast. It's really well done.

Dan Carreno: It's one thing to see a bison and another thing to see a bison after you know their story, which is amazing. I highly recommend both the documentary as well as the podcast. Well, let's wrap it up there. For those interested in more information about us, about oh six Impact Partners, you can go to our website, oh six partners.com. Of course, please feel free to reach out to us through the website, and thank you for tuning in and listening to this podcast; we will be back soon with another episode of Rewilding Wall Street.

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