‘Kill Bill’ – how the new US climate bill will impact investors

New Capital Sustainable World Bond Fund

On August 12th the US House and Senate passed a $467bn bill that targets climate change, healthcare provision, prescription drug supply and tax policies. A key point to note is that $370bn will be dedicated solely to energy security and climate change. 

The US, the world biggest contributor to greenhouse gas emissions, is now targeting a 40% reduction in emissions by 2030 compared to 2005 levels, which will help move the US closer to its goal of a 50-52% cut in emissions under the Paris agreement. 

The impact of the bill on the auto industry 

Although the bill targets many industries, for the purposes of this article, we will focus on transportation sector as it’s one of the largest contributors to C02 emissions and it accounts for approximately 8% of the global high yield market. The bill uses a strong carrot and stick approach when it comes to helping to garner more support and attractiveness of buying “clean” vehicles.  

• Tax credits for new “clean” vehicle purchases have been set at $7,500

o    The tax credit includes both hydrogen and electric vehicles
o    It applies only to households with a maximum income of $150,000 a year

• A tax credit of $4,000 for used “clean” vehicles priced below $25,000

o    Applies to households with a maximum income of $75,000 a year

• $1bn of funding established to provide zero emission school buses, heavy duty trucks, public transports buses and other commercial vehicles.
• The methane emission penalty for exceeding the federal limit has risen to $1,500 per metric tonne from $900 per metric tonne.

We are in no doubt that these incentives will accelerate the ongoing rapid transition by the automobile industry to clean vehicles. The market share of “clean” vehicles remains markedly low in the US. In the second quarter of 2022, fully electric vehicles (BEV) only accounted for 5.6% of new car sales in the US. When combined with plug in hybrids (PHEV) and hybrid vehicles, they still only accounted for 12.6% of new car sales. 

In our view, this climate bill is of paramount importance given the current macroeconomic challenges. The auto industry has not yet fully recovered from the semiconductor shortage caused by the Covid pandemic; supply chain issues impacted deliveries; and rising interest rates and pressure on disposal incomes begin to weigh on demand. 

Positioned for a cleaner future

Given the above, we believe, it will be crucial to be invested in those companies that we believe are aligned with the transition towards a cleaner future, as the bill puts into place strong economic incentives which we believe will accelerate these changes. The outcomes will be bifurcated, with those that are making the right changes likely to be the winners, and those who don’t or can’t make the transition likely to be losers.

As an example, Ford, has already committed around $50Bn to global investments in EVs, including battery production. We think this means they will be well positioned as new tax credits and penalties increase demand for “clean” vehicles increases relative to combustion engine vehicles.

By investing in companies that are forward thinking when it comes to climate change and climate policies, the New Capital Sustainable World High Yield Bond Fund seeks to leverage these “better” ESG companies, while achieving similar returns to traditional high yield funds. 

Source: Democrat Senate, Congressional Budget Office estimate, 2022. Ford Motorcar Company, 2021.