On Deck for Treasury: The Inflation Reduction Act’s New Approach to Clean Electricity Tax Credits

Aaron Bergman and Kevin Rennert
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Kevin Rennert: Resources for the Future

No 24-02, RFF Issue Briefs from Resources for the Future

Abstract: For decades now, the heart of US federal policy support to reduce greenhouse gas (GHG) emissions has been a set of tax incentives for producing clean electricity and putting into service new clean electricity generators. These tax credits, along with state-level policies to require renewable and low-carbon electricity, are widely credited as the fundamental driver of emission reductions in the United States over the past decades. But they’ve always had some issues. They were inconsistent, being extended for short periods and at times expiring completely, leading to considerable investment uncertainty for developers. The credits themselves varied by technology and could be hard to monetize. And the rules were pretty inflexible: in order for a new technology to be eligible for the credit, it had to be named in the statute, requiring an act of Congress. The Inflation Reduction Act (IRA) sought to address many of these issues by transitioning in 2025 to a new set of technology-inclusive credits for electricity: the “clean energy production credit” (26 USC 45Y) and the “clean energy investment credit” (26 USC 48E). Instead of listing various technologies, in these new provisions, the IRA allowed technologies to qualify if they satisfy one seemingly simple condition: that their emissions are at most zero. Multiple model projections of the IRA (see here and here) have suggested that these tax credits are the single most important driver of IRA-attributable emissions reductions over the next decade, so much of the success of the IRA in reducing emissions hinges on their successful implementation by the US Department of the Treasury. Despite this significance and the looming deadline for the transition, however, there has been relatively little public discussion around their implementation, even as there are some potentially complicated issues for Treasury to work through. This situation stands in contrast to the robust conversation that’s been had over design of the 45V production tax credit for hydrogen, among others. In this issue brief, we give an overview of the tax credits and some potential challenges we see for their implementation in the hopes of stimulating timely discussion on issues Treasury will likely need to address in its forthcoming guidance.

Date: 2024-05-01
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