The Inflation Reduction Act (IRA) included a major—forthcoming—refresh for one of the biggest policy drivers of the nation’s clean energy transition to date: tax credits subsidizing the deployment of clean electricity resources.
These incentives aren’t just historically important. Across multiple analyses, they’ve been repeatedly identified as one of, if not the, single most impactful incentives coming out of the IRA for delivering future emissions reductions, too, by supporting the deployment of hundreds upon hundreds of gigawatts of renewable resources.
Yet, for how pivotal these tax credits are, exactly how the refresh plays out is still to be determined.
While the changes are slated to go into effect for facilities placed in service on or after January 1, 2025, the Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) still have some complex—and deeply consequential—issues left to resolve.
Most prominently, because the approach is changing from rewarding specific technologies to rewarding anything that meets the greenhouse gas (GHG) emissions threshold of “clean”—hence the “tech-neutral” label—exactly how the government goes about determining whether or not something is actually eligible will be enormously important.
This past June, Treasury and the IRS issued proposed rules getting at just that.
While many of the proposed requirements are clear cut and without controversy, a handful of pending issues will determine whether or not this tax credit can be co-opted by the exact polluting facilities it was intended to drive the shift away from.
Indeed, if loopholes related to lifecycle analysis and book-and-claim accounting are allowed through, incentives meant to drive the deployment of clean technologies could end up subsidizing some of the dirtiest options instead, including gas-fired power plants and waste incinerators.
That would be a staggering catastrophe for climate, for environmental justice, and for public health. It’s also entirely avoidable, so long as Treasury and the IRS finalize rules with the right decisions in place.
Here is a summary of how the new tax credits will work and a spotlight on five of the key issues to track as the rules are finalized. (For more detailed commentary, see technical comments submitted to the docket by the Union of Concerned Scientists (UCS) as well as accompanying public testimony.)
From technology-specific to technology-neutral
Policymakers have historically incentivized clean energy resources within the US tax code on a technology-by-technology basis, with individual tax credits for wind, solar, energy storage, and so on.
The new approach will streamline these sprawling technology-specific incentives into a single pair of “technology neutral” tax credits: the section 45Y clean electricity production credit (“45Y”) and the section 48E clean electricity investment credit (“48E”). The former rewards eligible clean generation on a per-kilowatt-hour (kWh) basis; the latter provides a one-time credit for a share of eligible facility investment. Energy storage technologies, including electric storage and a subset of thermal and hydrogen storage, are also eligible for 48E.
At the same time, to avoid repeats of prior destructive stop-start policy lapses while simultaneously signaling a long-term incentive off-ramp, policymakers scheduled the tax credit to begin phasing out for resources coming online in 2033 or after power sector emissions are below 25% of 2022 levels, whichever is later. In practice, this gives investors the certainty they need about availability of the tax credit and ensures the credits are available for as long as the country’s power sector emissions remain high. And that’s critical, given that a cleaned-up power sector is foundational to delivering emissions reductions across all the other sectors of the economy—and clean electricity tax credits are foundational to cleaning up the power sector.
What’s “clean,” and how is it measured?
The underlying statute defines “clean” to mean that the facility GHG emissions rate—i.e., the GHGs emitted into the atmosphere by a facility in the production of electricity—is not greater than zero. The tax credits do not consider other fundamental dimensions of “clean,” such as emissions of health-harming pollution like nitrogen oxides or particulate matter.
Exactly which GHG emissions are included in the evaluation of facility emissions depends on whether a facility produces electricity through combustion or gasification (“C&G facility”), or not (“non-C&G facility”):
- For non-C&G facilities, the GHG emissions rate is solely based on the emissions directly produced by the fundamental transformation of the input energy source into electricity. Meaning for non-C&G facilities, such as wind or solar farms, the only emissions are those occurring at the point of electricity production—and as a result, the emissions rate is zero.
- For C&G facilities, the GHG emissions rate is a net rate determined by a lifecycle analysis, taking into account lifecycle GHG emissions, here including direct and significant indirect emissions. So for something like a gas-fired power plant, which counts as a C&G facility as it generates electricity by combusting, or burning, gas, the emissions rate would include smokestack emissions as well as the emissions associated with the production, processing, and transport of the gas ultimately burned in the plant, too.
Once the GHG emissions rate is calculated, Treasury and the IRS include it in an Annual Table setting forth the GHG emissions rates for “types or categories” of facilities, which is what ultimately establishes eligibility.
If a taxpayer’s specific type or category of facility is not represented by an entry in the Annual Table, they go through an alternative process to establish a “provisional emissions rate,” or PER.
Key outstanding issues
However, the compactness of the organizing framework belies the complexity of issues buried within. Let’s look at some of the critical questions prompted by the statute, how Treasury and the IRS are considering resolving them, and the implications of getting it wrong:
1. What is a “C&G” facility?
The significant difference in approach for assessing C&G versus non-C&G facility emissions rates turns facility classification into a matter of great consequence.
In the June proposal, Treasury and the IRS proposed to define C&G facilities as those that produce electricity through combustion or through use of an input energy source produced via combustion or gasification. That would mean, for example, that if a fuel cell, which does not use combustion to produce electricity, runs on hydrogen produced via gasification or combustion-powered electrolysis, it would be covered by the proposed C&G facility definition.
The bounds of this proposed definition have been the subject of intense debate, especially by the interest groups that would fall out of eligibility if they were classified as C&G.
While the definition may shift in the final rule, it will need to continue speaking to a key issue from the underlying statute that Treasury and the IRS identified when explaining their proposed definition: Electricity is not produced via gasification—but gasification is very clearly included in the statute in classifying “combustion or gasification facility.” That means for the “or gasification” part of “combustion or gasification facility” to have independent significance, the definition’s scope must be broad enough to capture gasification activities, too.
2. What assumptions and inputs will lifecycle analyses rely on?
For C&G facilities, eligibility hinges on calculation of a net greenhouse gas emissions rate, meaning the structure of, and implementation choices around, the underlying lifecycle analysis (LCA) are of central importance.
The statute points to section 211(o)(1)(H) of the Clean Air Act to define lifecycle greenhouse gas emissions—exactly as was done for the simultaneously passed section 45V Clean Hydrogen Production Credit. Most notably, this reference covers direct and significant indirect emissions.
In the proposed rules for 45Y and 48E—just as in the proposed rules for 45V—Treasury and the IRS have overwhelmingly resorted to asking questions before moving forward with a final proposed approach. Some of the major issues at hand, and UCS’s take on the right resolution, include:
- Counterfactuals and fugitive greenhouse gas emissions. LCAs must be based on rigorous carbon accounting, including comprehensive reporting of fugitive greenhouse gas emissions from fuel production (or feedstock generation) through point of use and credible counterfactuals. Counterfactuals provide the baseline against which the policy scenario is compared, meaning selection is enormously impactful in terms of how comparatively beneficial use of a given fuel or feedstock appears. Counterfactuals should be based on the best climate alternative; methane venting is not a credible counterfactual.
- Offsets. Treasury and the IRS rightly specify that facility eligibility cannot be achieved via offsets. The statute clearly requires eligibility of the facility itself, not by subsidizing—often dubious—greenhouse gas emissions reductions in other parts of the economy.
- Fuel blending. Facility eligibility cannot be premised on blending of positive and negative carbon intensity fuels. Using a blend of negative carbon intensity fuels to analytically balance out emissions from positive carbon intensity fuels is a form of offsetting and thus must be disallowed.
- Feedstock eligibility. Feedstock eligibility requirements, such as first productive use, are vital safeguards to defend against perverse incentives driving an increase in harmful waste generation, as well as to ensure the tax credits do not simply subsidize pollution shifting as opposed to true emissions reductions.
- Precautionary approach. In the face of uncertainty over input assumptions, analytical boundaries, and/or counterfactuals that have the potential to fundamentally shape the analytical outcome, a conservative approach is appropriate to ensure the tax credits do not inadvertently subsidize a net-harmful outcome for the climate.
Ultimately, how Treasury and the IRS resolve these issues will mean the difference between widespread polluter greenwashing and truly clean generation. Moreover, the facilities likeliest to sneak through only under cover of such loopholes—gas-fired power plants, waste incinerators, and biomass-burning power plants—are simultaneously major emitters of health-harming pollutants.
The stakes are incredibly high for getting these rules right.
For much more on this topic, refer to pages 5-13 of the UCS comments here, as well as related blog posts addressing similar issues within the 45V context here and here.
3. For non-C&G facilities, which emissions are in, and which emissions are out?
In contrast with C&G facilities, non-C&G facilities are only to be evaluated on the basis of GHGs emitted into the atmosphere in the production of electricity itself, as in, directly from the transformation of the input energy source into electricity. In the proposed rule, Treasury and the IRS included a non-exhaustive list of emissions to be excluded as a result of this boundary:
- emissions from hydropower reservoirs and operations;
- emissions of non-condensable gases from underground reservoirs during geothermal operations;
- emissions from a step-up transformer that conditions the electricity into a form suitable for productive use or sale; and
- emissions occurring due to activities and operations occurring off-site, such as land use change from siting or changes in demand.
Following the facility emissions boundary-setting, Treasury and the IRS then proposed a list of types and categories of non-C&G facilities with GHG emissions rates not greater than zero and thus eligible, including:
- wind facilities,
- hydropower facilities (including retrofits adding power production to non-powered dams, conduit hydropower, hydropower using new impoundments, and hydropower using diversions such as a penstock or channel),
- marine and hydrokinetic facilities,
- solar facilities (including photovoltaic and concentrating solar power),
- geothermal facilities (including flash and binary plants),
- nuclear fission and fusion facilities, and
- waste energy recovery property (WERP) that derives energy from any of the above energy sources.
However, some of the emissions proposed to be excluded in the list above may be inappropriately so.
In the case of hydropower, for example, while certain emissions would have occurred regardless of whether a hydropower facility was operating, others—such as degassing—may not, or not to the same extent. Moreover, hydropower facilities relying on new impoundments to create the potential energy required to ultimately spin turbines are inextricably linked with the emissions arising from those reservoirs.
Treasury and the IRS will need to resolve these issues in the final rule.
4. Will eligibility via book-and-claim accounting be allowed?
Book-and-claim accounting can be used in two different ways: 1) as a means of documenting and tracking information about a given energy resource, and 2) as a means of decoupling use of a resource itself from use of just the environmental attributes associated with that resource.
For 45Y and 48E, whether or not book-and-claim systems are allowed solely as a means of documentation and tracking is entirely contingent on whether a given system is able to adequately track the data required by the tax credits and whether it has sufficient safeguards in place to ensure no double-counting of attributes. In the proposal, Treasury and the IRS note that they are considering finalizing rules that would permit the use of book-and-claim accounting to substantiate and verify fuel use and/or electricity production, provided there are “sufficient assurances that the energy attributes claimed under such system are verifiable and not susceptible to double counting.”
On the other hand, allowing book-and-claim accounting as a means of indirect use of environmental attributes would be entirely inconsistent with the statute’s design, where eligibility is clearly and explicitly premised on a facility’s emissions rate. Decoupling “clean” attributes from use of the resource and allowing facilities to claim them as their own to qualify for the tax credit would be unreasonable. Indeed, if that were the intent of policymakers, the statute could have been readily and easily shaped to support use of decoupled attributes. It was not.
Interest groups representing resources looking to sell their “clean” attributes as well as polluters looking to greenwash through use of those attributes are pressing hard to open this loophole. Thus far Treasury and the IRS have rightfully kept it closed; we will be looking to ensure it stays closed in the final rule.
5. For how long must a “clean” facility stay clean?
With C&G facilities only eligible for the tax credits based on procurement of “clean” fuels or use of add-on infrastructure like carbon capture, there is a very real risk that tax credits will be awarded to facilities that 1) fail to actually meet the standard, and/or 2) revert to fully polluting facilities as soon as the substantiation period is over.
For the 45Y PTC, eligibility is based over the 10-year credit window. For the 48E ITC, there is a 5-year recapture period; separately, Treasury and the IRS have proposed to require “objective indicia,” i.e., proof, that such facilities will maintain an eligible emissions rate for a 10-year period, though there would be no ability to recapture the credit after the first 5 years have passed.
Without rigorous rules from the outset, Treasury and the IRS are at real risk of subsidizing what are, within mere years, the exact heavily polluting electricity generating facilities these tax credits were intended to incentivize the shift away from.
That would be counter to the intent of the statute and a staggering affront to the drive toward clean energy progress.
Ultimately, Treasury and the IRS have the foremost responsibilities of rewarding those facilities that are clearly eligible and rejecting those that are ineligible. If Treasury and the IRS cannot sufficiently resolve whether a facility is or will continue to be eligible, they must then deem them ineligible from the start.
What comes next
The public comment period closed on August 2, and public testimony took place August 12 and 13. Now, Treasury and the IRS will be pouring through all that feedback to resolve lingering questions and finalize their approach.
Based on comments submitted and testimony provided, their task will not be an easy one. Industry is clamoring for the inclusion of wide-ranging loopholes all in service of just one aim: enabling polluting power plants to suddenly count as “clean.”
But the law is clear: 45Y and 48E are intended to spur innovation around and drive deployment of truly clean resources to shift the power sector away from running on heavily polluting fossil fuels.
Treasury and the IRS must set rules that do just that. Clean must mean clean, meaning no polluter loopholes, and no polluter giveaways.