In Biden’s climate law: a boon for green energy and Wall Street

The Climate Act of 2022 has accelerated investment in clean energy projects in the United States. It has also delivered financial windfalls for major banks, lawyers, insurance companies and start-up financial companies by creating an expansive new market for green tax credits.

The law, signed by President Biden, essentially created a financial trading market that helps smaller companies access financing, with Wall Street cutting back. Analysts said it could soon facilitate as much as $80 billion a year in transactions that spur investment in technologies aimed at reducing fossil fuel emissions and fighting climate change.

The law created a wide range of tax incentives to encourage companies to produce and install solar, wind and other low-emission energy technologies. But the Democrats who drafted the proposal knew that these incentives, including tax credits, would not help companies that were too small — or not profitable enough — to pay enough taxes to benefit from them.

So lawmakers have come up with a solution that has rarely been used in federal tax policy: They have allowed companies that make clean energy investments to sell their tax credits to companies that do have large tax liabilities.

That market already supports large and small transactions. Clean energy companies will receive money to invest in their projects, but they will receive less than the value of the tax credits they qualify for after several financial partners took a piece of the deal.

Clean energy and financial analysts and major market players say large companies with significant tax liabilities are currently paying between 75 and 95 cents on the dollar to reduce their federal tax bills. For example, a buyer in the middle of that range might spend $850,000 to purchase a credit that would save him $1 million in federal taxes.

The costs of these tax credits depend on various factors, including the risk and size. Larger projects have a higher percentage. The seller of a tax credit will see its value further diluted by the fees charged to lawyers, banks and other financial intermediaries who help broker the sale. Buyers are also increasingly insisting that sellers obtain insurance in case the project does not work out and does not deliver the promised tax benefits to the buyer.

The prospect of a booming market and the chance to capture some of those transaction costs has increased excitement in financial circles about the Inflation Reduction Act (IRA). A new cottage industry of online start-up platforms has quickly emerged that aims to connect buyers and sellers of the tax credits.

An annual conference on renewable energy tax credits hosted by Novogradac, a financial firm, drew a record number of attendees to a Washington hotel ballroom this month, with multiple panels devoted to the intricacies of the new market. The entrepreneurs behind the online buyer-seller exchanges include a former Biden Treasury official and several tech industry people with no experience in clean energy or tax credits.

Tax professionals and clean energy groups say the market has significantly expanded financing options for companies working on emissions-reducing technologies and increased private sector oversight of climate investments.

But these deals also enrich players in an industry that Biden has sometimes criticized, while allowing big companies to reduce their tax bills in a way that runs counter to his pledge to make corporate America pay more.

“I wouldn’t call it irony. I would call it a kind of unexpected brilliance,” said Jessie Robbins, director of structured finance at financial firm Generate Capital. “While it may be fraught with friction and transaction costs, it does bring sophisticated financial interests, investors” and companies into the world of green energy financing, she said.

Biden administration officials say many cleantech companies will save money by selling their tax credits to raise capital, rather than borrowing at high interest rates. “The alternative for many of these companies was to take out a loan, and taking out that loan would be much more expensive” than using the credit marketplace, Wally Adeyemo, the deputy treasury secretary, said in an interview.

Some climate law advocates wanted an even more direct alternative for these companies: government checks equivalent to the tax credits their projects would have qualified for if they had had enough tax liability to make the credits usable. It was rejected by Senator Joe Manchin III of West Virginia, a moderate Democrat who had the casting vote on the bill.

Before the climate law was passed, there was already a modest federal marketplace for certain tax credits, such as those for affordable housing. But getting that credit was complicated and indirect, so annual transactions were less than $20 billion — and big banks dominated the space. The Climate Law expanded the market and attracted new players by making it much easier for a taxable company to buy another company’s tax credit.

“There were no brokers in this space, you know, a year ago or 14 months ago before the IRA came out,” says Amish Shah, a tax attorney at Holland & Knight. “There are a lot of real estate agents in this area now.” Mr Shah said he expected his company to be involved in tax credits worth $1 billion this year.

“The discussion goes like this,” said Courtney Sandifer, a senior executive in the renewable energy tax credit revenue generation practice at investment bank BDO. “’Are you aware that you can purchase tax credits at a discount as a central feature of the IRA? And how would that work for you? For example, is this something you would be interested in?’

Financial advisors say they have had interest from corporate buyers as diverse as retailers, oil and gas companies and others who see an opportunity to reduce their tax bills while making good on public promises to help the environment.

Experts say big banks still dominate the largest transactions, with projects being larger and tax credits more expensive to buy. For the rest of the market, entrepreneurs are working to create online exchanges, which essentially work like Match.com for tax credits. Companies record the breakdown of their projects and tax benefits, including whether they are likely to qualify for bonus tax benefits based on location, what wages they will pay and how much of their content is made in America. Buyers bid on credits.

To sell tax breaks under the law, companies must register their credits with the Ministry of Finance, which this month created a pilot registration website for these projects. The online platforms to connect buyers and sellers of credit are not regulated by the government.

Alfred Johnson, who previously served as deputy chief of staff under Treasury Secretary Janet L. Yellen, co-founded Crux, one of the online exchanges, in January. The company has raised $8.85 million through two rounds of funding.

Mr Johnson said his company had helped replace the “low-margin” administrative work that is simply necessary to facilitate deals. Lawyers and advisors will still be involved for the more complicated parts of the deal.

“It just requires more companies to enter the market and participate,” he said. “And if that doesn’t happen, the law won’t work.”

Seth Feuerstein last year created Atheva, a transferable credit exchange. He has no experience in clean technology, but he has brought in green energy experts to help get the exchange started.

Atheva already has tens of millions of dollars in projects available for tax credit buyers to view on the site, and hundreds of millions more are in the pipeline, he said. The site allows buyers to browse credits by their estimated value and download documentation to help assess whether the projects will actually pay off. Mr Feuerstein said transparency has helped ensure taxpayers are supporting valid clean energy investments.

“It’s a new market,” Mr. Feuerstein said. “And it’s growing every day.”