Can tax policy be a catalyst for positive change? A US perspective on green incentives

Around the world, we’re seeing more national programmes emerging that use tax policy as a lever to decarbonise the economy. Green tax credits, grants and incentives have become an important part of business decision-making. Businesses of all sizes are showing real interest and the discussion is no longer limited to the Tax department. Now, Operations, Innovation and HR are taking a seat at the green tax table, while Board members are often the ones initiating the conversation.

Rather than act with hindsight, businesses are trying to get ahead of the game when it comes to green investments. But, with so many different countries and regions introducing schemes, and plenty of interested stakeholders, the landscape is becoming increasingly complex to navigate.

In this new series of blogs, we’ll be demystifying initiatives from the US, EU and UK. Here, with my colleague Laura Ray, we look at the national programme in America, the Inflation Reduction Act (IRA).

The Inflation Reduction Act – what is it?

The IRA was signed in law a year ago, in August 2022. Never before has the US had a policy so focused on the environment, offering around US$370 billion to support action on climate change and cut greenhouse gas emissions by up to 42% by 2030. It aims to dramatically increase the production of clean energy in America, with the hope that it will make up around 40% of the country’s electricity generation by 2030.

In all, 300 of the 725 pages of the IRA legislation address clean energy credits and incentives proposals. Most fit into four buckets – manufacturing, transportation and fuel, hydrogen/carbon capture, and renewable energy. Businesses involved in power, transport, industry, buildings, and agriculture and land use are likely to benefit the most.

There are also direct pay and transferability options. Direct pay provisions effectively make credit refundable, even if the company isn’t liable for taxes. The transferability options, meanwhile, allow the originator to sell their tax credits to a company that can use them. That means those not paying federal tax, like start-ups, can still benefit.

The IRA doesn’t just encourage investment in a green economy, it incentivises businesses to create jobs in America because, if they meet wage and apprenticeship requirements, they get more tax credits. IRA incentives are only available if production takes place in the US, so this has provoked some concerns over so-called anti-trade clauses.

The sustainability credits and incentives to watch

·      Companies planning to invest in green manufacturing can take advantage of the Qualified Advanced Energy Project, an investment tax credit equal to 6% or 30% of the investment, provided through a competitive application process.

·      Also on offer for manufacturers is a tax credit for the production of certain eligible components, including solar and wind energy parts, inverters, qualifying battery components and critical minerals.

·      Up to US$100,000 in investment tax credits is available for businesses transitioning to a greener transport fleet, whether that’s by going electric or installing chargers for employees and visitors.

·      Businesses planning on installing carbon capture equipment, or that capture carbon in their products, could be eligible for production tax credits of up to US$180 per metric tonne of captured carbon.

·      Firms producing – or planning to produce – clean hydrogen in America could be eligible for a production tax credit of up to US$3 per kg of clean hydrogen over a 10-year period.

·      Available production and investment tax credits could lower the cost and risks of producing renewable energy for businesses. There are also reduction tax credits for putting the energy back on the grid.

Conclusion

With businesses starting to consider credits, grants and incentives when deciding where to make ESG investments, the IRA is a multibillion, brand new programme, that offers clarity on the criteria for each scheme.

Businesses should familiarise themselves with the incentives on offer and prepare for the application process to seize opportunities to speed and scale efforts to reduce their greenhouse gas emissions. Collaboration at an organisational level is crucial, with engagement needed from Regulatory, Sustainability, and Tax teams, as well as buy-in at Board level.

Ultimately, there are valuable opportunities for companies, particularly those in the sectors mentioned, to take advantage of cost-saving incentives, while helping America to hit its net zero targets – something that will have a huge impact across the globe.