The Implementation of Biden’s Climate Law Sparks a Surge in Green Tax Credit Market

The Growing Market for Clean-Energy tax credits

President Biden’s climate law has paved the way for companies to engage in the buying and selling of clean-energy tax credits, according to newly released data from the Treasury Department. This presents a unique opportunity for startups to secure funding for renewable energy projects like wind farms and solar installations.

The market also opens doors for large corporations and financial institutions to capitalize on these initiatives.

The Treasury Department’s latest report reveals that over 500 companies have registered approximately 45,500 new clean-energy projects with the IRS to take advantage of the tax incentives introduced in the 2022 Inflation Reduction Act. This legislation represents the government’s most substantial financial commitment to reducing fossil fuel emissions and combating climate change.

Projects registered with the Treasury encompass a wide range of sizes, from individual wind turbines to large-scale advanced battery factories. The primary focus has been on wind and solar energy projects, with registrations spanning all 50 states and the District of Columbia.

These numbers underscore the broad impact of the climate law and the innovative mechanisms it has established for companies to leverage its incentives.

Empowering Emissions-Reducing Technologies

The legislation aims to stimulate increased production and rapid deployment of emissions-reducing technologies by offering tax credits to companies involved in manufacturing or installing these technologies nationwide. These tax incentives have proven to be lucrative, with solar manufacturers crediting them for significantly reducing production costs and enhancing the competitiveness of American-made panels against their Chinese counterparts.

Traditionally, accessing tax incentives required companies to have substantial revenue and profits to generate significant federal tax liabilities, posing a challenge for small businesses, startups, and others facing profitability issues. To address this, the authors of the Inflation Reduction Act introduced two workaround mechanisms that necessitate project registration with the IRS to support these businesses.

One mechanism allows select entities like nonprofit hospitals and local governments to receive direct payments from the government equivalent to the value of tax credits, promoting activities such as solar panel installations.

Another mechanism enables companies to trade the value of their tax credits on an open marketplace. This system allows corporations with substantial tax liabilities to purchase credits from startups generating them, providing a financial boost for production. Financial intermediaries typically facilitate these transactions, offering a cost-effective alternative to borrowing funds for production underwriting.

Enhancing Financial Liquidity and Oversight

Last month, the nonpartisan Congressional Research Service highlighted that “businesses in need of liquidity can sell their credits instead of taking out loans,” especially beneficial during periods of high-interest rates.

Project registration serves as an initial screening process to detect potential fraud in claiming tax benefits, though it does not guarantee eligibility for credits. Officials anticipate data on the number of credits claimed in the law’s inaugural year to be available in the fall.

The surge in project registrations, exceeding 45,500 in total, represents a significant increase from January, with over 98% expected to enter the tax-credit marketplace. Deputy Treasury Secretary Wally Adeyemo praised the law for enabling companies to access incentives for financing capital-intensive projects and advancing clean energy initiatives.

Mr. Adeyemo also noted positive outcomes from the legislation, including increased funding for the IRS to enhance its technological capabilities for efficient data collection related to tax-credit registrations.