Tax Credits for Clean Electricity in the Inflation Reduction Act
Bea Meyer
Introduction
The Inflation Reduction Act (“IRA”) marks an important milestone in the fight against climate change. It outlines a multifaceted approach to tackling the ongoing climate crisis, as well as commits over $369 billion to supporting various climate initiatives. The wide variety of these initiatives is one of the strengths of the bill, however, the provision that includes tax credits for producers of clean energy will be particularly impactful.
Tax Credits for Clean Energy Production
This important provision of the IRA is discussed in Section 13701: tax credits for producers of clean electricity. These tax credits aim to support a growing clean energy sector by providing financial incentives to producers.
In order to receive these credits, a firm must be a “qualified facility.” The IRA requires producers to meet three criteria to be considered a qualified facility: (1) produce electricity; (2) begin service after December 31, 2024; and (3) maintain net zero greenhouse gas emissions. Firms must also produce electricity within the United States in order to qualify. The IRA also provides two new provisions to help monetize the credits: taxpayers can choose to treat the credits as a direct payment, or they can transfer the credits.
Benefits and Issues
The benefits of this provision are likely to be extensive. By reducing the financial burden of running new facilities, these tax credits encourage both new firms to develop and existing firms to expand their clean energy infrastructure. The IRA will also support the industry by allowing firms to monetize these credits in different ways. The primary way that firms can utilize these credits is by simply offsetting the taxes they owe. However, this bill also includes two alternative ways for firms to make use of these credits. With the direct payment option, firms can elect to treat the credit as a tax payment for the applicable year. This option allows firms to benefit from these credits, even if they do not make a profit (and thus do not owe taxes to offset) in their initial years of operation. This makes these benefits more accessible to new firms and firms that are just branching out into clean energy production. With the option to transfer credits, this bill gives clean energy producers a new way to drive investment. Qualified facilities have the option to transfer these credits to another party, so firms can offer them as a bargaining chip to attract potential investors. These financial incentives are likely to drive significant growth and investment in the clean energy sector.
However, there are potential issues with the timeline of these credits. For one, these tax credits will not be made available to producers until 2025. This means that firms may be tempted to wait to pivot to clean energy until they can reap these benefits. At a time when climate change demands immediate action, this hesitation is far from ideal. These benefits may also begin to phase out as soon as 2032. This could stunt the clean energy sector before it has time to fully develop. Luckily, the bill does attempt to account for this with a stipulation: if by 2032, more than twenty-five percent of domestic electricity generation still produces net positive greenhouse gas emissions, the timeline for these credits can be extended.
Conclusion
The IRA makes some of the boldest moves that have been seen in recent decades to protect the climate. The Clean Energy Production tax credit is only one mechanism of many that it will use to support the transition to renewable energy, but it will have a significant impact on both new and existing clean energy producers. The changes outlined in this bill will strengthen the clean energy sector and reassert the US as a leader in the global fight against climate change.