The Latest on the Clean Energy Tax Incentives in the Inflation Reduction Act

The Environmental and Energy Study Institute (EESI) held a briefing about the status of the wide range of clean energy tax incentives enacted as part of the Inflation Reduction Act (IRA). Effective implementation of tax incentives for home energy efficiency and electrification, electric vehicles, sustainable fuels, clean and renewable energy, and energy storage—plus the game-changing “direct pay” option—will deliver many benefits to families and communities, including lowering household utility bills and expediting the transition to a decarbonized clean energy economy.

This briefing highlighted both individual- and industry-oriented tax credits, which will provide the bulk of the law’s emissions reductions. Panelists discussed eligibility and timelines for the IRA tax incentives, implementation status, and the role Congress can play in overseeing and supporting these programs.

Highlights

KEY TAKEAWAYS

The Inflation Reduction Act (IRA) (P.L. 117-169) is the single biggest investment in clean energy in U.S. history. The IRA improves three main tax incentives for making buildings more energy efficient. They cover new construction and existing building retrofits and can be found in sections 25C, 45L, and 179D of the Internal Revenue Code (IRC). The consumer-facing electric vehicle tax credits are IRC sections 30D, 45W, and 25E. Direct pay, also referred to as elective pay, is a new financial mechanism provided by the IRA that allows tax-exempt entities to receive direct payments from the federal government equal to the value of a tax credit. Twelve of the IRA’s tax credits are eligible for direct pay. The IRA made important adjustments to the Investment Tax Credit (ITC) and the Production Tax Credit (PTC). The long-term extensions of both credits provide more business certainty for clean energy developers. Key biofuel provisions in the IRA affect the Biodiesel Blending Credit (IRC 40A), Sustainable Aviation Fuels Blending Credit (IRC 40B), Clean Fuel Production Credit (IRC 45Z), and Carbon Capture Tax Credit (IRC 45Q). The IRA allocated $13 billion for clean hydrogen production. This number also includes investments in clean vehicles when hydrogen is included as a transportation fuel. The 45U tax credit, or the Zero-Emission Nuclear Power Production Tax Credit, aims to prevent premature closure of existing nuclear facilities in the United States. The 45Q tax credit is for the capture of qualified carbon oxide from industry, power, or direct air capture for storage or reuse. The 48C Advanced Energy Project Investment Tax Credit provides $10 billion for a 30% investment tax credit for facilities that manufacture clean energy technologies. The 45X Advanced Manufacturing Production Tax Credit provides a per-unit production incentive for clean energy technologies that are domestically manufactured.

 

Sen. Ron Wyden, U.S. Senator (D-Ore.)

• The Inflation Reduction Act (IRA) (P.L. 117-169) is the single biggest investment in clean energy in U.S. history.
• Since the IRA was passed in 2022, thousands of new jobs have been created and manufacturing has increased across the country.
• The most important outcomes of the IRA will be cutting greenhouse gas emissions and facilitating the transition to clean energy.
• Transitioning to a clean energy future and creating jobs for Americans are not mutually exclusive.

 

Ben Evans, Federal Legislative Director, U.S. Green Building Council

• The U.S. Green Building Council is a mission-based nonprofit focused on advancing green buildings. It is responsible for the Leadership in Energy and Environmental Design (LEED) rating system, which is a leading global green building certification system used around the world.
• To meet the U.S. goal of net-zero greenhouse gas emissions by 2050 from solar power alone, the United States would need to build 800 megawatts of new solar power per week for 30 years, which would be a difficult goal to meet. However, energy efficiency can make this goal more attainable and should be considered as a cornerstone in fighting the climate crisis.
• Buildings account for about 40% of U.S. energy consumption and one-third of U.S. greenhouse gas emissions.
• The IRA addresses residential and commercial buildings, new construction, and existing building retrofits. The IRA has three main tax incentives for buildings, found in sections 25C, 45L, and 179D of the Internal Revenue Code (IRC).
• The Section 25C Tax Credit for Home Energy Efficiency now allows homeowners—and, in some cases, renters—to use this tax credit on an annual basis and it can cover up to 30% of eligible purchases (such as insulation, windows, and duct sealing) with a maximum annual credit of $3,200.
• The Section 45L Tax Credit for New Home Construction now provides a $2,500 tax credit to homebuilders for meeting ENERGY STAR standards and $5,000 for meeting Department of Energy (DOE) Zero Energy Ready Home standards. This includes multi-unit buildings, so homebuilders can access the tax credit per unit built.
• The Section 179D Tax Deduction for Commercial Building Energy Efficiency is for new and existing buildings and now provides a $2.50-5.00 per square foot deduction for energy efficiency improvements to buildings. This is an area where the U.S. Green Building Council believes that more progress can still be made.

 

Shannon Baker-Branstetter, Senior Director, Domestic Climate and Energy Policy, Center for American Progress

• The Infrastructure Investment and Jobs Act (IIJA) (P.L. 117-58) and IRA both contained transportation investments, including for electric school buses and advanced manufacturing loans.
• The IRA created a set of consumer-facing electric vehicle tax credits. There are three main tax credits, found in sections 30D, 45W, and 25E of the IRC.
• Section 30D, the Tax Credit for New Clean Vehicles, is still $7,500, but is more restrictive than the pre-IRA tax credit. Both battery sourcing and critical mineral extraction, processing, and recycling will determine if the buyer gets the full amount of the tax credit. These requirements will be stricter over time, requiring that at least a certain percentage of the battery be sourced from—and critical minerals be extracted, processed, or recycled in—the United States or Fair Trade Agreement partner countries.
• The U.S. Treasury Department is finalizing rules on how the tax credit will be affected if battery components or critical minerals are sourced from foreign entities of concern (i.e., China, Russia, North Korea, and Iran).
• The IRA also added income eligibility requirements for the new EV tax credit as well as limits on how expensive the vehicles can be to still qualify.
• The 45W Tax Credit for Commercial Clean Vehicles is up to $7,500 for traditional vehicles and $40,000 for medium- or heavy-duty vehicles. This tax credit is mutually exclusive with 30D.
• The new 25E Tax Credit for Previously Owned Clean Vehicles gives a tax credit of 30% of the sale, up to $4,000. It has income and sale price limitations.
• Starting in 2024, car dealers will be able to offer the tax credits at the point of sale once they have registered with the Internal Revenue Service (IRS).

 

Judy Sheahan, Assistant Executive Director, U.S. Conference of Mayors

• Direct pay, also referred to as elective pay, is a new financial mechanism in the IRA that allows tax-exempt entities (e.g., local governments, nonprofits, tribes, and universities) to receive direct payments from the federal government equal to the value of a tax credit.
• Twelve of the IRA’s tax credits are eligible for direct pay, as of December 31, 2022.
• Direct pay provides local governments and other tax-exempt entities the opportunity to better achieve their climate goals by making carbon reduction and resilience projects more cost effective.
• Entities can increase the value of some tax credits by paying prevailing wages, using registered apprentices, locating projects in low-income and energy communities, and/or meeting domestic-content requirements.
• Direct pay is expected to reduce project costs anywhere from 6% to 70%.
• The IRS is finalizing the rules now and the timeline seems to be that they will be ready by the end of 2023. Tax-exempt entities are looking for more information on how to successfully apply for direct pay and concrete examples of how direct pay would reduce project costs.

 

Daniel Wolf, Legislative Director, American Council on Renewable Energy (ACORE)

• The American Council on Renewable Energy (ACORE) is a national nonprofit dedicated to accelerating the renewable energy transition.
• The Investment Tax Credit (ITC) is a credit for certain energy-related properties, equivalent to a certain percentage of the total cost of constructing the property.
• The Production Tax Credit (PTC) is a tax credit based on the amount of electricity generated from a project and is awarded on a per-kilowatt-hour basis.
• The IRA made important adjustments to the ITC and PTC. Stand-alone energy storage is now eligible for the tax credits, utility-scale solar can now claim the PTC, and hydropower is now at parity with other technologies. Most notably, the IRA extends both these credits at full values (i.e., 30% for the ITC and 2.6 cents per kilowatt-hour for the PTC, indexed for inflation). The ITC and PTC were extended until 2025 in their current form. In 2025, the tax credits become technology neutral and they run until 2032 or when electricity generation contributes 25% or less of annual greenhouse gas emissions compared to 2022 levels. This provides more business certainty for developers.
• Developers must pay employees prevailing wages, and, starting in 2024, 15% of total labor hours must be performed by qualified apprentices, to get the full value of the tax credit.
• Congress also introduced numerous bonuses, stackable structures that can increase the tax credit. They include a domestic-content bonus, an energy-community bonus, and a low-income bonus.

 

Chris Bliley, Senior Vice President of Regulatory Affairs, Growth Energy

• Growth Energy is the nation's largest association of biofuel and ethanol producers.
• The IRA’s incentives for biofuels increased the biofuel industry’s motivation to produce low-carbon biofuels and drives innovation both at plants and on farms.
• Some of the key biofuel provisions in the IRA include the Biodiesel Blending Credit (section 40A of the Internal Revenue Code), Sustainable Aviation Fuels Blending Credit (40B), Clean Fuel Production Credit (45Z), and Carbon Capture Tax Credit (45Q).
• Among these credits, the new 45Z is of most interest to the biofuel industry and is driving investments to implement low-carbon-intensity practices.
• There are two models that the federal government is considering using to assess the life-cycle carbon intensity of fuels. This is particularly important for the 40B tax credit. One is the International Civil Aviation Organization’s (ICAO’s) life-cycle emissions of sustainable aviation fuels model and the other is the Argonne National Lab’s Greenhouse Gases, Regulated Emissions, and Energy Use in Transportation (GREET) model.

 

Roxana Bekemohammadi, Founder and Executive Director, United States Hydrogen Alliance

• The United States Hydrogen Alliance is a trade association advocating for hydrogen and fuel cell technology.
• IIJA allocated $9.5 billion to hydrogen funding, including $8 billion for clean hydrogen hubs. Of that $8 billion, $7 billion will go to hub funding recipients and $1 billion will go towards end-uses. One billion dollars is allocated to research and development on technologies such as electrolyzers, and the remaining half billion is for manufacturing.
• The IRA allocated $13 billion for clean hydrogen production. This number also includes investments in clean vehicle deployment that includes hydrogen as a transportation fuel.
• There is a direct tax credit for fuel cell generators, specifically for small-scale stationary fuel cells provided to large-scale power producers.
• The hydrogen production tax credit is awaiting IRS guidance. Right now, the tax credit is for a maximum of $3 per kilogram of hydrogen, depending on the carbon intensity of the hydrogen production.

 

Alan Ahn, Senior Resident Fellow, Climate and Energy Program, Third Way

• Third Way is a national think tank, and its Climate and Energy Program focuses on setting the United States on the fastest and fairest path to net-zero greenhouse gas emissions by mid-century.
• The IRA’s Zero-Emission Nuclear Power Production Tax Credit (Section 45U), aims to prevent premature closure of existing nuclear facilities in the United States. This credit is available to facilities that were in service prior to the IRA and facilities not eligible for 45J as established by the Energy Policy Act of 2005.
• The credit is 0.3 cents per kilowatt-hour and up to 1.5 cents per kilowatt-hour if prevailing wage requirements are met. The credit is adjusted for inflation. It starts in 2024 and will end in 2033.
• Nuclear energy is the largest source of carbon-free electricity in the United States, and when nuclear plants close, historically that energy demand has been met by fossil fuels, not renewable energy.
• The IRA provided $700 million for the DOE’s high-assay low-enriched uranium program, but more funding is needed to move the United States away from dependence on Russia for nuclear fuel needs.
• The Accelerating Deployment of Versatile, Advanced Nuclear for Clean Energy (ADVANCE) Act of 2023 (S.1111), included in the Senate version of the 2023 National Defense Authorization Act (NDAA), would start to address the key challenge of licensing new nuclear power plants, including by making the U.S. Nuclear Regulatory Commission a more effective, efficient, and versatile regulator.

 

Jessie Stolark, Executive Director, Carbon Capture Coalition

• The Carbon Capture Coalition is a nonpartisan collaboration of more than 100 companies, labor unions, and nonprofits working to enact economy-wide deployment of carbon management technologies, including capturing emissions at industrial facilities and power plants as well as direct air capture.
• The United States currently has 14 projects that capture 21.4 million metric tons of carbon dioxide per year. The International Energy Agency projects that globally 1.6 billion tons of carbon dioxide needs to be captured per year by 2030 and over 7 billion tons of carbon dioxide per year by 2050 to meet mid-century climate goals.
• The 45Q tax credit is for the capture of qualified carbon oxide from industry, power generation, or direct air capture for storage or reuse. The projects capture carbon oxide from an eligible facility, demonstrate secure long-term geologic storage for the captured carbon based on Environmental Protection Agency regulations or show that the captured carbon is reused to make valuable products that result in a net reduction in greenhouse gas emissions.
• The IRA changes the 45Q tax credit to reduce the annual captured emissions required to qualify for the credit, so more and different types of facilities can install capture technology.
• Projects can now claim the tax credit for up to 12 years.
• The IRA increases the tax credit level to up to $85 a ton for entities that capture and store emissions from industrial power facilities in permanent geological storage. It provides up to $180 a ton for facilities using direct air capture. Projects must meet wage and labor requirements to receive the full value of the tax credit.
• For-profit entities may use direct pay for the first five years of the tax credit, and then seek alternative financing. Nonprofits may access the full 12 years of tax credit using direct pay.

 

Steve Capanna, Technology Policy Director, Department of Energy

• The IRA provides an additional $10 billion for the 48C Advanced Energy Project Investment Tax Credit, a 30% credit for facilities that manufacture clean energy technologies; facilities that reduce their emissions by at least 20%; and facilities that work in critical minerals processing, refining, and recycling.
• Forty percent of the funding for the credit is directed to coal communities, defined as communities where a coal plant or mine has closed within the last 10-20 years.
• The demand for the 48C tax credit is exceeding the supply.
• The 45X Advanced Manufacturing Production Tax Credit is a new concept in the United States. It provides a per-unit production incentive for clean energy technologies that are domestically manufactured. Eligible technologies include solar, wind, battery storage components, as well as a suite of critical minerals.
• DOE released a report on the one-year anniversary of the IRA’s passage, which highlights the transformative impact of all the credits mentioned in this panel on reducing carbon emissions. The report concludes that the IRA could get the United States to 40% emissions reduction by 2030 relative to 2005 levels, to 80% clean electricity by 2030, and to 50-65% of new vehicle sales from zero-emission vehicles in 2030.
• The long-term policy certainty provided by the IRA is critical.

 

Q&A

 

Q: What are one or two things that you are anticipating in the near term that will have an impact on the deployment of tax incentives?

Evans

• The guidance on the 45L new home construction tax credit came out yesterday.
• The IRA is still in the pre-season. People are not going to make multimillion-dollar investments in infrastructure until it is clear exactly how to obtain these tax credits.

Baker-Branstetter

• Commercial vehicle tax credits are already available. The used vehicle tax credit is available; however, it is not yet possible for dealers to provide it directly.
• For 30D, we are currently waiting on guidance on sourcing requirements for critical minerals and batteries. This will have a huge impact starting in 2024.
• The list of eligible vehicles will be updated at the beginning of each year.

Sheahan

• After the final guidance is released, a massive campaign will be needed to educate people on how to take advantage of the tax credits and put them to use.

Wolf

• Transferability is a mechanism in which developers can sell tax credits on the open market. This is important because developers do not have sufficient tax liability to claim the credits themselves.
• Before, developers needed to partner with big financial institutions and engage in complex and expensive transactions. Often smaller players got left out because of this structure.
• We are waiting on the Treasury Department for final guidance, though they have already produced a roadmap and guardrails.
• With the combination of direct pay and transferability, it is possible that the market for renewable energy projects will double in the coming years.

Bliley

• We are waiting on guidance on 40B for sustainable aviation fuels. A key piece of the guidance will be which life-cycle model of carbon intensity of fuels will be used. Guidance could make or break whether U.S. biofuel and sustainable aviation fuels will be made and—if so—what feedstocks will qualify.

Bekemohammadi

• The guidance for the hydrogen tax credit is necessary so that the United States can increase investment in the hydrogen space, which will have impacts at the global, national, and local levels.

Ahn

• The Zero-Emission Nuclear Power Production Tax Credit (PTC) goes into effect at the end of 2023.
• The IIJA established the Civil Nuclear Credit Program, which has a similar goal to the nuclear PTC. It will be interesting to see how the programs proceed side-by-side.
• After financial stress, the greatest threat to the operation of nuclear plants is fuel availability. Russia controls much of the global uranium conversion enrichment capacity. They are the only commercial source of high-assay low-enriched uranium, which is the fuel that many of the new U.S. innovative advanced reactors would need. There is a lot of uncertainty surrounding long-term supply.

Stolark

• The direct pay and transferability provisions will be transformational across the tax credits.
• Individual and institutional investors could bring in trillions of dollars to reach our mid-century climate goals because of transferability.

Capanna

• Assistant Secretary of the Treasury for Tax Policy Lily Batchelder recently announced that Treasury expects to provide guidance by the end of 2023 on the vehicles credit (specifically on what qualifies as a foreign entity of concern), manufacturing production tax credit, sustainable aviation fuels, the hydrogen production tax credit, and the base investment tax credit on renewable energy.

 

Q: Will the guidance be simple enough for small entities to take advantage of the tax credits?

Sheahan

• The National League of Cities and the U.S. Conference of Mayors have joined together to create local infrastructure hubs with “bootcamps” for small communities to walk them through the process to access the tax credits.

Capanna

• The federal government struggles with clarity. It is really important that the government gets information out that is as simple as possible.

 

Q: What would be your advice for smaller, newer companies just starting in the market to take advantage of these credits?

Capanna

• DOE has some programs tailored to early-stage companies, including commercialization programs, lab-to-market programs, and loan programs to support innovative technologies. There is also the entire Office of Technology Transitions. DOE is very aware of the “valley of death” that new companies face.
• These credits make it a lot easier to enter the market, but there are still barriers to entry.

 

Q: Can direct pay be used by nonprofit owners and operators of low-income housing?

Sheahan

• Yes, nonprofit owners and operators of low-income housing should be able to use direct pay.

 

Q: Are there things missing from IRA and IIJA you want to add or are there things you would alter or take out?

Wolf

• An investment tax credit for high-voltage transmission was cut from the IRA at the last minute, and it was a missed opportunity because transmission is challenging to plan, permit, and site, and it faces a number of regulatory, political, and financial barriers. At the same time, it is essential to decarbonization.

Bekemohammadi

• More direction and guidance is needed on how renewable natural gas can be included in the energy transition because it is one of the most important feedstocks for hydrogen.

Baker-Branstetter

• More of the IRA money could have been attached to improving labor standards.
• There are still a lot of subsidies for fossil fuels that are counter to addressing climate change and building out clean energy.
• Because the IRA passed through the budget reconciliation process, it was not able to include limitations on the kinds or levels of pollution fossil fuel companies emit.

Stolark

• The IRA does not provide parity between carbon reuse and carbon storage.
• 45Q does not begin indexing for inflation until 2026, so the value of the credit is already eroding due to inflation.

Capanna

• The industrial sector still needs more policy support at all levels.

Sheahan

• The Energy Efficiency and Conservation Block Grant Program in IIJA gave a lot of capacity to local governments to help them staff up in order to meet these opportunities.
• One of the worst things that can happen is lack of certainty of funding for the future. It is important to know that this funding can be counted on for the next 10 years.

Bliley

• Large-scale projects are hard to do in a short amount of time and the clean fuel production credit is only available for three years.

Ahn

• On nuclear energy, the IRA got the industry off to a good start with maintaining existing facilities, but significant investment of at least $2 billion is needed to build out domestic fuel infrastructure to produce high-assay low-enriched uranium.

 

Compiled by Laura Gries and Zoe Antonoff and edited for clarity and length. This is not a transcript.

 

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