America is Going Green

The US is pushing to become a leader in the green economy but it will face some challenges.
America is Going Green

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Today's newsletter is a 7 min read:

  • 🇺🇸 America is Going Green: The US is pushing to become a leader in the green economy but it will face some challenges.
  • Plus: Stolen confidential information, ECB to increase rates, KPMG cuts jobs and Fidelity hires more staff.

📰 News Briefing

  1. 🕵️‍♀️ A China-based former employee of semiconductor producer ASML stole data from the company's software system that contains technical information about its machinery. The stolen data is related to the lithography systems, which are essential to creating some of the world's most advanced chips.
  2. 💰 The European Central Bank (ECB) President Christine Lagarde announced that the ECB intends to raise borrowing costs by another 50 basis points at its next meeting in March. This move is in response to inflation pressures, but it is also part of an aggressive monetary-tightening cycle that the ECB is undergoing. This plan will have implications for businesses and individuals who are borrowing money, and they will need to factor in higher interest rates.
  3. 🪓 KPMG is cutting close to 2% of its staff in the US due to a significant slowdown in its consulting business. This move makes KPMG the first of the Big Four accounting firms to make systematic job reductions in response to a weaker economy. Nearly 700 employees will be affected by the job cuts, which were announced internally.
  4. 💼 Fidelity Investments is looking to fill 4,000 new positions by midyear. These positions will focus on customer service and technology. In contrast, other big investment companies are trimming their headcount amid economic uncertainty and softening financial markets. BlackRock plans to cut about 2.5% of its global workforce, while AllianceBernstein has already eliminated more than 100 jobs.

🤿 Deep Dive

America is Going Green

In brief:

  • The US has launched new subsidies and tax incentives to become a leader in green industries but it will face some challenges on the way.

Tax Incentives and Subsidies

The US is leading the charge towards decarbonisation with the help of the Inflation Reduction Act (IRA) and its tax incentives that have attracted billions of dollars of private investment in green industries.

The IRA offers a huge $369bn in subsidies, grants, loans and tax credits to developers that meet certain criteria. Not only that but the credits can be sold, giving investors the chance to purchase them and help get projects off the ground even faster.

These tax breaks have made previously marginal projects suddenly economically viable, offering up to 50% of the headline costs for battery plants that meet certain requirements, including domestic sourcing of materials and being located in fossil fuel communities.

Similarly, the subsidies for green hydrogen, a promising alternative to natural gas, wipe out about half the project cost, making the US the most attractive destination for investment.

Credit: FT

Not all good news

There are some challenges the US will face on the way. A key problem is the lack of domestic supply of raw materials. Precious stuff like lithium, nickel and cobalt for batteries; rare earth materials for solar panels are a must-have if the US wants to lead in this industry.

Problem is China and Europe produce more than 80% of the world’s cobalt, while North America makes up less than 5% of production. China also accounts for 60% of the world’s lithium refining.

It's not all bad news for the US - some progress is being made. Last month, GM announced $650mn to develop the Thacker Pass mine in Nevada, the US’s largest known source of lithium. Honda, Hyundai, BMW and Ford have all announced multibillion-dollar plans to build batteries in the US following the IRA’s passage. The US will boost internal production but it's hard to imagine it becoming self-sufficient without supplies from China or Europe.

How does this Impact Law Firms and their Clients?

Note: In this section, we consider how law firms' clients may be affected by the story we discussed. We then explain how law firms can help, and which particular legal departments could see an increase in work and why.

💼 What does this mean for law firm's clients?

Renewable Energy Companies: Renewable energy companies and developers hugely benefit from the tax incentives offered by the IRA. The credits can cover up to 50% of a project's headline costs, making it easier for developers to secure capital for previously marginal projects. However, securing permits for green energy projects is a challenge that could slow down their progress. Developers may need legal help to navigate the permitting process, comply with environmental regulations, and advocate for more streamlined permitting processes.

Investors: The tax breaks have made the US an irresistible destination for investors, attracting $90bn of capital to new projects since the IRA's passage last year. Investors can find opportunities to invest in companies developing green projects (e.g. electric battery manufacturers, wind turbine producers or even solar panel suppliers). These investors could benefit from buying up the IRA credits as a way to get more capital to developers they support.

Manufacturers: Manufacturers of materials needed for renewable energy projects could benefit from the increased demand for green technology in the US. These include lithium batteries, blades for wind turbines or modules for solar panels. The boom in new green developments driven by IRA subsidies should also push up demand for materials needed for the projects. Manufacturers will also be eyeing up the opportunities to secure materials they need to produce their own products in the US (e.g. the development of the Thacker Pass mine in Nevada, the US's largest known source of lithium).

Governments: For the US government, the IRA offers a way to spur private-sector investment and accelerate the country's decarbonization efforts. On the flip side, the IRA poses a threat to Europe as it pushes companies in the sector to choose the US as the place to scale their operations thus decreasing jobs availability and innovation in the EU. Meanwhile, China will be keeping an eye on the developments in the US. Nonetheless, the country will remain a leader in the green sector's production line as it produces the majority of the world’s batteries and solar modules, as well as being the largest investor in the energy transition.

⚖ Which legal departments would this impact?

Environmental

Advising companies on compliance with environmental laws and regulations: Given the focus on decarbonization, it is essential that companies invest in projects that comply with environmental laws and regulations. The environmental legal department can advise on the permits and approvals required to proceed with a project, as well as any potential environmental impact assessments that need to be carried out.

  • Example: The department may advise a company that is planning to build a battery plant on the permits and approvals they need to obtain to ensure compliance with environmental regulations.

Advising on the environmental impact of the projects: The environmental legal department can also advise on the potential environmental impact of the projects that may benefit from the subsidies. This could include advice on reducing greenhouse gas emissions, mitigating the impact on natural habitats, and protecting endangered species.

  • Example: They may advise a company that is planning to invest in green hydrogen production on the environmental impact of their project, including the potential impact on water usage and waste generation.

Tax

Advising companies on the tax implications of selling tax credits: The IRA offers $369bn of tax credits. The IRA generally allows for the transfer of renewable tax credits between taxpayers provided the tax credits are paid for in cash and provided the amount paid is neither taken into income by the seller nor deducted by the buyer. The tax legal department would advise companies on the tax implications and procedures for selling these tax credits.

  • Example: The department may advise a battery plant developer on the tax implications of selling credits to a wealthy investor to get more capital. They may also advise investors on transferring any credits they own to other investors or companies.

Advising investors on structuring their investments to maximize tax benefits: The tax legal department would also advise investors on how to structure their investments to maximize tax benefits under the IRA.

  • Example: They may advise on how to structure an investment in a green hydrogen project to take full advantage of the tax credits, grants, loans, and subsidies offered under the IRA. They may also advise on the tax implications of investing in a battery plant, taking into account the tax breaks offered under the IRA.

Corporate

Structuring companies: Corporate lawyers will be advising on the best legal structure for investments that can take advantage of the IRA's tax incentives. They can provide advice on the type of entity that investors should establish to maximize the tax benefits of the IRA. This could include how to structure any partnerships or joint ventures in a way that is most advantageous for their clients.

  • Example: If a company wants to invest in green hydrogen production and partner with another company to build the plant, the corporate legal department would advise on the legal structure that best suits their needs.

Regulatory requirements: Corporate lawyers will also advise on compliance with corporate governance and regulatory requirements. The department would advise companies and investors on the rules and regulations that they need to comply with to receive the benefits of the IRA. They would also advise on the risks associated with non-compliance and how to mitigate those risks.

  • Example: Corporate lawyers would advise companies and investors on the corporate governance and compliance requirements for investing (for example advising GM on their investment in the Thacker Pass mine in Nevada). They would also advise on how to mitigate the risks associated with non-compliance with environmental regulations.

Employment

Employment lawyers can also expect an increase in demand for their advice as the US will probably face some trouble in getting enough workers to actually build out renewable energy projects. The US will need to add half a million more construction workers in 2023 on top of the normal hiring pace to meet demand: a sign that clean energy is creating jobs but an alarming prospect for the developers who may end up with not enough workers and paused projects.

Employment lawyers can advise on employment laws and regulations they need to comply with when hiring construction workers to meet the demand created by the IRA's subsidies. This may include advice on wage and hour laws, anti-discrimination laws, and workplace safety regulations. This may become crucial as some of the IRA tax credits also depend on paying prevailing wages and including apprenticeships in the workforce.

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