Summary of the New US Climate Bill
After months of wrangling and negotiations, US Congress passed the Inflation Reduction Act of 2022 (the "IRA") last month. The bill contains ground-breaking climate change measures and is projected to lead to USD 370 billion in government investment in renewable energy and climate change programs in the next 10 years. These measures are likely to open significant business opportunities for companies operating in the renewable energy sector.
Much has been written about the political importance of the IRA, but the true success of the IRA turns on whether its energy and climate provisions are attractive enough to spur activity in US renewable energy and climate projects.
Broadly speaking, the energy and climate provisions in the IRA fall into two categories: Tax credits and government spending programs. The tax credits are generally structured so that every dollar of tax credit that an eligible party receives allows it to reduce its income tax bill by an equal amount. The government spending programs call for the US federal government to use budgeted funds to make certain types of purchases and investments in renewables and climate change technologies.
This update provides an overview of the energy and climate tax credits and government spending programs most relevant for businesses and investors.
1 TAX CREDITS
1.1 Tax Credits for Investors and Power Producers
The IRA includes four key tax credit provisions designed to appeal to clean energy investors and power producers.
1.1.1 Production Tax Credit
The first provision extends and modifies an existing tax credit for electricity produced from renewable resources (the "Production Tax Credit" or "PTC"). The PTC is now available for facilities that begin construction before 1 January 2025, as opposed to the previous cut-off date of 31 December 2021. Furthermore, the PTC is now available for solar energy production facilities, in addition to the existing coverage for biomass, geothermal, hydropower, municipal solid waste, marine and hydrokinetic, and wind energy production facilities. The value of the credit itself ranges from a base of USD 0.013 per kilowatt hour to USD 0.026 per kilowatt hour, depending on the characteristics of the facility, and is subject to inflation adjustments.
Beginning in 2025, the PTC will be modified so that it becomes "technology neutral", which is to say available for any technology that produces electricity without emitting greenhouse gases and for some technologies that have low greenhouse gas levels.
1.1.2 Investment Tax Credit
The second tax credit provision extends and modifies the existing energy investment tax credit ("ITC"), making it applicable for renewable energy facilities that start construction before 1 January 2035. The ITC now offers tax credits ranging from 6 to 30% of the cost of acquiring or constructing eligible facilities, with additional bonuses of between 10 and 20% available for facilities that are built in or benefit low income or historically marginalized communities.
As with the PTC, the ITC will be amended in 2025 so that it becomes technology neutral.
1.1.3 Carbon Capture Tax Credit
The third tax credit extends and expands an existing credit program available for carbon capture. Carbon capture facilities that begin construction before 1 January 2033 will now be eligible. Furthermore, the minimum annual capture amount required for a facility to receive the credit has been lowered. Facilities that are built solely to capture carbon oxides can be credit eligible if they capture 1,000 metric tons or more per year, while power plants will need to capture at least 18,750 metric tons per year. Other types of facilities with carbon capture capabilities will need to meet thresholds between these two extremes. The value of the credit varies significantly depending on the type of facility and the amount of carbon oxide captured. The minimum credit value is USD 12 per metric ton, while the maximum can reach USD 180 per metric ton.
1.1.4 Nuclear Power Tax Credit
The final tax credit designed for clean energy investors and power producers is directed at existing nuclear power plants and applies for electricity they produce between 1 January 2024 and 31 December 2032. The value of the credit ranges from 0.3 to 1.5 cent per kilowatt hour of electricity produced, although it is subject to certain clawbacks if electricity prices increase.
1.2 Tax Credits for Clean Fuels
The IRA also includes two new tax credits to encourage consumers to use cleaner fuel.
1.2.1 Sustainable Aviation Tax Credit
The first of these credits is for sustainable aviation fuel sold or used between 31 December 2022 and 31 December 2024. The IRA defines aviation fuel as sustainable if it produces greenhouse gas emissions that are at least 50% lower than traditional jet fuel. The credit ranges from USD 1.25 of 1.75 per gallon of fuel used or sold.
1.2.2 Clean Hydrogen Tax Credit
Perhaps more interestingly, the IRA creates a new tax credit for clean hydrogen produced in the US. The credit will be available for hydrogen produced from facilities that start construction before 1 January 2033. Depending on the greenhouse gas emissions generated from the hydrogen production process in question, the credit is worth between USD 0.60 and 3.00 per kilogram of hydrogen produced. Alternatively, hydrogen producers can elect to receive a credit of between 6 and 30% of the value of their investment in the production facility.
1.3 Tax Credits for Clean Vehicles
The IRA contains four tax credits to encourage the use of cleaner vehicles.
1.3.1 Clean Vehicle Tax Credit
The clean vehicle tax credit offers individuals a dollar-for-dollar reduction on their federal income taxes of up to USD 7,500 if they put a new electric vehicle into service before 1 January 2033. The credit is only available, however, for vehicles that are assembled in North America and that contain a certain percentage of US components.
1.3.2 Credit for Previously Owned Clean Vehicles
A second tax credit is available for previously owned clean vehicles. The value of the credit is the lower of USD 4,000 and 30% of the price of the vehicle. The credit is available to cars with a maximum sale price of USD 25,000, and only applies to the first resale of the car.
1.3.3 Credit for Qualified Commercial Clean Vehicles
The third vehicle credit offers tax breaks for the acquisition of clean commercial vehicles. The credit is equal to the lesser of (a) 30% of the cost of the vehicle and (b) the incremental cost of the vehicle compared to one powered by an internal combustion engine. It is capped at USD 7,500 for vehicles weighing less than 14,000 pounds and at USD 40,000 for vehicles at or above this weight.
1.3.4 Alternative Refueling Property Credit
The fourth vehicle credit is the alternative refueling property credit. This credit allows businesses that build electric, natural gas, or hydrogen refueling stations in low-income or rural areas to receive a reduction on their federal income taxes. The value of the reduction ranges from six to 30% of the cost of acquiring and/or constructing the property, up to a maximum of USD 100,000.
1.4 Tax Credits for Investment in Clean Energy Manufacturing and Energy Security
1.4.1 Advanced Energy Project Credit
The IRA also expands the reach of the existing advanced energy project credit, a credit worth from six to 30% of the investment that a tax-paying entity makes in facilities that build components for use in renewable energy production and climate change mitigation. The credit is now available for a broader range of facilities. It is granted through a competitive application process, with the US Department of Treasury responsible for allocating credits from a USD 10 billion fund.
1.4.2 Advanced Manufacturing Production Credit
Likewise, the IRA expands the scope of the existing advanced manufacturing production tax credit, which will now be available for a wider variety of components used in the production of clean energy. The credit allows entities that manufacture these components to reduce their taxable income by an amount equal to up to 25% of the value of the components they produce. As with the advanced energy project credit, the advanced manufacturing production credit is awarded through a competitive application process.
In addition to offering tax incentives to invest in and use renewable energy and climate change technology, the IRA provides the federal government with billions of dollars to spend on renewable energy and green initiatives. For example:
- The US Department of Agriculture will be given approximately USD 40 billion to spend on greenhouse gas reduction, the purchase of electricity from renewable sources, and the use of hydrogen and fuel cell technologies in farming and rural areas.
- USD 27 billion will be allocated to a Greenhouse Gas Reduction Fund, which will be used to provide financing to renewable energy projects at the state and local level.
- USD 3 billion will be given to ports to allow them to purchase low-emission technology and equipment.
These provisions and others will make the US federal government a major consumer and investor in green industries, creating significant business opportunities for actors in the renewable energy and climate change sectors.