Earth, wind and complier

Summary

The United States is the second-largest emitter of global greenhouse gases, but it's also increasingly becoming part of the solution. U.S. energy transition investment totaled around $140 billion in 2022, an 11% increase from 2021.

Wind currently represents nearly half of renewable energy production in the U.S., but replacing energy generated by fossil fuels is only part of the solution. Electrifying transportation and developing clean manufacturing processes (or ways to offset existing ones) are also a key piece to solving this net zero puzzle.

Proposed regulatory changes and recent legislation are raising the stakes for firms that do not take the transition seriously. Incentives are rising to go green, and this has implications for the entirety of the supply chain.

The current regulatory landscape around corporate reporting of greenhouse gas emissions is sparse, but that may change based on the SEC's proposal, which would require firms to disclose their end-to-end emissions. The proposal can be broken into the following three scopes:

• Scope 1: Direct emissions–those that arise from sources that are controlled and owned by the firm (i.e., emissions created by an automaker's assembly plant).

• Scope 2: Indirect emissions–those associated with the firm's purchase of energy sources (i.e., emissions created from the purchase of electricity needed to run an automaker's assembly plant).

• Scope 3: End-to-end emissions–those that result both upstream and downstream from the firm's direct business activities (i.e., emissions created in the automaker's supply chain and emissions created in the end product of the vehicles produced by the automaker).

The SEC's proposal would increase the transparency of emissions and help in the transition to net zero, but the broad nature of reporting poses challenges.

Recent legislation provides clarity and incentive for firms to invest in clean-energy initiatives. The Bipartisan Infrastructure Law, CHIPS Act and the Inflation Reduction Act provide increased financial incentives for firms to invest in clean-energy initiatives over the next decade.

The Inflation Reduction Act is the most expansive federal package targeted at climate change to date. It includes a little over $200 billion in corporate tax credits to those who make investments in clean energy, transportation and manufacturing, while adhering to specific domestic requirements. This is likely to be felt across the supply chain.

Domestic procurement or manufacturing requirements will likely encourage changes along the supply chain and/or assembly process to qualify for incentives. This will likely contribute to the recent retreat in globalization, leading to increased production in the United States and require more domestic labor to make it happen. Supply chains may also grow more resilient in the process.

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