President Joe Biden has a dream — and it’s about to turn into a nightmare for American taxpayers.

The Challenge of Limiting Global Warming

America is “willing to do the hard work to limit global warming to 1.5 degrees Celsius,” he declared at April’s Major Economies Forum on Energy and Climate Change.

To hit this target, per the scientists with the president’s ear, greenhouse gases must peak before 2025 and fall 43% by 2030.

Yet fossil fuels account for around 77.6% of US primary energy production.

The Inflation Reduction Act and Carbon Emissions Reduction

So how does the president intend to reach his dream of “net zero” carbon emissions by 2050?

“I’ve signed a thing called the Inflation Reduction Act,” he said in his speech, “the single largest investment in fighting climate change in history, which will reduce annual carbon emissions by 1 billion tons by 2030.”

Biden let the cat out of the bag: The act has very little to do with inflation, much less about reducing it.

Rather, with $6 allocated to renewable-energy projects for every $1 allocated to American manufacturing, the IRA is a big fat green-energy bill masquerading as industrial policy.

The Repackaged Green New Deal

It’s not too much of a stretch to say the IRA is simply a repackaged version of the Green New Deal Democrats touted in the 2020 presidential-election campaign.

But Biden’s signature piece of domestic legislation is coming under pressure from Wall Street. The green bubble is about to burst.

While some might accuse the IRA as smacking of socialism, this is not quite true.

The legislation does pick winners and gives them tax breaks and subsidies. But these tax breaks and subsidies do not last forever.

At a certain point, the industries the bill subsidizes must be tested in the free market.

Because of the subsidies, however, these industries tend to be fragile when subjected to market pressures.

The Rise and Fall of Renewables Stocks

But when the IRA was passed in August 2022, the markets still seemed excited about the prospects for renewables firms.

This enthusiasm took off when the economy came out of lockdown.

Everyone was glad to finally get out of the house, and investors started to look around for the next big thing.

They thought that since the government was willing to intervene so aggressively in response to the COVID-19 outbreak with society-wide lockdowns, maybe the next big intervention would be in response to climate change.

Buoyed by this enthusiasm and ever-larger gobs of money the Federal Reserve forced into the system, renewables stocks took off like a rocket.

At its peak in January 2021, the S&P 500 Global clean energy Index had risen by around 325%.

The Burst of the Green Bubble

It was against the backdrop of a soaring market for renewables stocks that Team Biden drew up plans for the IRA.

But everything has changed.

As interest rates have risen and excess money gets removed from the financial system by the Federal Reserve, markets are waking up to the fact many renewables’ companies are hothouse plants addicted to cheap credit.

The S&P clean energy Index is down 31% since the start of 2023 — and 59% since its early-2021 peak.

In 2023’s third quarter, global renewable energy funds have seen a record $1.4 billion in outflows.

The big green party on Wall Street is over, killed off by the party-poopers at the Federal Reserve.

The Fragility of IRA Investments

Yet the IRA investments are just getting started. The bill aims to release its $891 billion in spending over 10 years.

There is no reason to believe interest rates are coming down any time soon with the Federal Reserve messaging that they will be “higher for longer.”

Chairman Jay Powell just said Thursday more rate hikes could be on the way.

The most likely outcome: Much of the spending goes to companies that won’t be able to survive without it.

Once these brittle businesses run out of Biden bucks, they will probably keel over and die.

Much was made of the bankruptcy of the green-energy company Solyndra in 2011 after it received $535 million in loans from the Obama administration’s 2009 American Recovery and Reinvestment Act stimulus.

But ARRA only allocated $27.2 billion to renewables, while the IRA allocates around $300 billion to the sector — not to mention the fact the stimulus spending took place in an environment of low interest rates.

It’s therefore likely we’ll see many more Solyndras in the coming years.

The Gamble of the IRA

Overall, it looks like the IRA was a giant gamble by the Biden administration.

Those who put the bill together were looking at markets flush with cheap cash going all in on renewables stocks and tried, like greedy speculators, to get in on the action.

But now they’re seeing those markets collapse, as the fragilities of the sector are revealed by being exposed to higher interest rates.

Warren Buffett once said: “Only when the tide goes out do you learn who’s been swimming naked.”

The politicians who backed the IRA better make sure their swimwear is firmly fastened because the tide is going out on the bill at a rapid pace.

Philip Pilkington is a macroeconomist and investment professional.