Financial Market Reactions to the 2022 Inflation Reduction Act: A Global Perspective

Abstract

The Inflation Reduction Act (IRA) of 2022 is the most ambitious climate policy in U.S. history. The law introduces significant subsidies for green companies to combat climate change while also focusing on securing domestic production and reducing reliance on foreign supply chains, particularly from China. In this thesis, we conduct an event study to analyze the market reactions in the U.S., Europe, and Asia following the announcement of the IRA.

Our findings show that U.S. industries focusing on renewable technologies experienced significant positive abnormal returns, reflecting optimism surrounding the IRA’s provisions. Despite hard criticism from EU and Asian leaders accusing the IRA of violating WTO trade rules, our results reveal a more nuanced picture. In Europe, we observe positive market reactions in several renewable-focused industries, suggesting optimism linked to increased global demand for renewable technologies and perceived strengthened competitiveness relative to Asia. In contrast, we observe limited reactions in Asian industries, except in the EV industry, which saw a significant negative reaction.

Our findings provide valuable insights into how financial markets adapt to climate policies and protectionist regulations, offering a valuable perspective for shaping future climate regulations and international trade agreements.