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The power of clean energy tax credits: A 10-year, $1 trillion opportunity

Under the Inflation Reduction Act, sustainability professionals can tap into tax credits to boost sustainability budgets.

A solar panel array from above

Transferable tax credits can support renewable energy development while helping corporations reduce their tax bills. Source: Pexels.com/Kelly

The Inflation Reduction Act promises to establish a new tool for sustainability professionals: the ability to buy and sell tax credits.  

Clean energy tax credits are themselves not new. But the credits in the IRA are unlike those provided in the 2005 Energy Policy Act, which first established tax credits for electricity generation from renewables such as wind, biomass, geothermal and solar.

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This is one of a series of articles looking ahead to the trends, innovations, opportunities and challenges that will define the business of sustainability in 2024.   

The IRA’s tax credits are transferable, offering corporations a refreshingly uncomplicated sustainability business case: Support clean energy development, reduce federal tax liability and (let's hope) channel tax savings to further corporate sustainability goals.  

Given that it’s still early days in what could be a trillion-dollar flood in uncapped tax credits, this market is likely to expand in the year ahead. 

Taking advantage of transferability

The transferability of the IRA’s tax credits makes buying tax credits "not quite like buying a commodity, but a lot closer to it," said Dean Granoff, head of business development at Basis Climate, a marketplace for clean energy tax credits. That is, it’s a lot simpler than past tax equity plays readers may be familiar with. 

Instead of having to buy a piece of a clean energy project as a direct investor — which involves substantial due diligence, legal team hours and risk — companies can purchase tax credits and apply the value to offset their tax bill. 

How does this work? Simply put, clean energy companies and project developers get the credits from the government. But, as many don’t make a profit, they don’t pay taxes — so they monetize their earned credits by selling them to companies with sizable tax bills, and the company then applies them to their tax liability. 

The market mechanics aren’t too complex. The developer earns the tax credit and sells to a corporate buyer at a discount. The pricing Basis sees is about 90 cents on the dollar, Granoff said; in other words, if the value of the tax credits is $1 million, they would sell for $900,000.

Unlike voluntary carbon offsets, found to be largely ineffective in reducing or avoiding carbon emissions, these tax credits are tied to verifiable renewable energy projects.

Upstarts such as Basis Climate, founded in 2022, are building managed marketplaces for these clean energy tax credits to allow corporate buyers and developer sellers to transact with confidence. The platform was co-founded by a former product manager of leading electrification nonprofit Rewiring America and the former head of corporate finance for a renewable energy developer, and enables renewable energy developers to monetize tax credits without the burden of negotiating long-term partnerships.

Corporations could see a 6-20 percent return on investment, and developers small and large can access a market of vetted and interested buyers. This could provide a major boon to increased renewable energy development given the clear path to monetization.

Corporate tax directors may be especially open to exploring this opportunity, as federal tax bills are expected to come in around $539 billion — up from $425 billion in 2022 — for U.S. corporations this year following the IRA’s implementation of a corporate minimum tax

A tale of tax savings?

So what could get in the way of such a win-win? 

"Power purchase agreements have worked well … ‘We’re buying renewables through the grid’ is a good story," said Sean Drygas, global lead of ESG & Impact at commercial real estate firm Colliers International. "With tax credits, the story isn’t as clear to tell." 

But as corporate sustainability leads become more familiar with this opportunity — and more familiar with their own tax teams — the story will likely become a compelling one. 

The market may take time to figure out how to tell this sustainability story. But with $1 trillion in IRA tax credits sold at a roughly 10 percent discount to corporations, there’s plenty of fodder for a good story. And it’s a story that will likely include many new characters and plot lines through 2024.

Correction: A previous version of this article misstated the year that Basis Climate was founded.

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