Biden’s climate law has created a growing market for green tax credits

The climate law that President Biden signed in 2022 has created a large and growing market for companies to buy and sell clean energy tax credits, new data from the Treasury Department shows, creating opportunities for start-ups ups to raise money for projects such as wind farms and solar energy. panel installations.

The market also offers new opportunities for large companies and financial institutions to make money.

Treasury officials will report Tuesday that more than 500 companies have registered a total of 45,500 new clean energy projects with the Internal Revenue Service to take advantage of tax breaks in the 2022 law. That law, the Inflation Reduction Act, is the most expensive attempt by the federal government ever to reduce fossil fuel emissions and combat global warming.

The projects registered with Treasury vary greatly in size. They can be as small as a single wind turbine or as large as a new, advanced battery factory. Treasury officials say their focus so far is on wind and solar energy, with projects registered in all 50 states and the District of Columbia.

The figures reflect both the broad scope of the climate law and the new mechanisms it has created for companies to capitalize on its incentives.

The law aims to encourage more production and faster deployment of emissions-reducing technologies, in part by offering tax breaks to companies that produce or install these technologies across the country. The credits are lucrative: Solar manufacturers, for example, say the incentives have significantly lowered the cost of U.S. production and helped U.S. panels compete with those from China.

To cash in on tax benefits, U.S. companies generally must have sufficient revenues and profits to generate a significant federal tax liability. That has made it difficult for small businesses, startups and others struggling to turn a profit to take advantage of the climate law. So the authors of the Inflation Reduction Act created what are essentially two solutions to help the law boost those businesses, both of which require projects to be registered with the IRS.

One mechanism allows a handful of groups, such as nonprofit hospitals and local and tribal governments, to do this receive direct payments from the government for the value of tax breaks – for activities such as installing a series of solar panels.

A more comprehensive mechanism essentially allows companies to buy and sell the value of their tax credits on an open marketplace. For example, a large corporation with a significant tax liability might pay $900,000 to a start-up that has generated $1 million in tax credits for wind turbine production. The start-up receives a cash injection to help finance production. The large company reduces its tax bill with a discount.

Normally, financial intermediaries skimp on facilitating the transaction, but experts say the cost for many companies is still lower than the cost of borrowing money to guarantee production.

“Companies that need liquidity can sell their credits instead of taking out loans,” says the nonpartisan Congressional Research Service. wrote last month“which is especially important when interest rates are high.”

Finance ministry officials say the registration of projects is an initial screening to detect possible fraud in claiming tax benefits. It does not guarantee that the registered projects will be eligible for credits. Officials don’t expect the first wave of data on the number of credits claimed last year, the first full year of the law’s stimulus, to be available until the fall.

Still, the number of projects now registered is an increase from January, when the Treasury Department reported just over 1,000 registrations for direct payments or eligibility for the new tax credit market. Of the total of 45,500 registrations, more than 98 percent are intended for the market, officials said.

“Before the Inflation Reduction Act, it was more challenging for companies to access tax breaks to finance projects and deploy new clean energy,” Wally Adeyemo, deputy secretary of the treasury, said in a written statement. “Meeting our economic and climate goals depends on companies’ ability to finance capital-intensive projects such as building new factories, and the early data is encouraging.”

Mr. Adeyemo said the data also suggested that another part of the Inflation Reduction Act was working as intended: an increase in funding for the IRS, part of which is dedicated to modernizing the agency’s technological capabilities and enabling that it easily collects information, such as tax returns. -credit registrations.