Why "transferable" tax credits are such a big deal
Apr 19, 2024
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CEO Alfred Johnson of Crux Climate discusses how the Inflation Reduction Act has created a market for selling clean energy tax credits, driving billions in new investments. Topics include challenges faced by businesses, the evolution of tax credit pricing, IRS guidance, and the impact on renewable energy projects and corporate tax burdens.
Small firms can now sell clean energy tax credits under new system, boosting investments.
Tax credit system changes aim to create a robust market for tax equity investment.
Pricing of tax credits varies with size and risk, showing promising growth potential.
Deep dives
Impact of Transferable Tax Credits on Clean Energy Financing
Transferable tax credits under the Inflation Reduction Act have revolutionized clean energy financing. The act extended existing credits for wind and solar and introduced new credits for various clean energy technologies. Small and medium-sized firms, especially startups, who couldn't benefit from these tax credits due to low tax burden can now sell them under the new system, resulting in the full value of credits being utilized.
Creation of a Robust Market for Tax Equity Investment
Changes in the tax credit system aim to create a robust market for tax equity investment. The new system makes it easier to sell tax credits to a broader range of buyers, facilitating the creation of a market for tax equity investment that optimally utilizes the tax credits value. Crux Climate, led by Alfred Johnson, aims to simplify the buying and selling of tax credits, making it accessible even for smaller firms.
Market Dynamics and Pricing of Transferable Tax Credits
The market for transferable tax credits has witnessed rapid growth and unexpected levels of activity. Pricing of tax credits reflects size and risk, with larger credits commanding better prices. Various technology categories perform differently in the market, with production tax credits demonstrating premium pricing compared to investment tax credits. The market is poised to expand further, building a deep, liquid marketplace for tax credit transactions.
Benefits of Transferable Credits and Market Progress
Transferable tax credits have significantly impacted the renewable energy market, driving investment into projects and advanced manufacturing in the United States. The guidance issued by the IRS in June 2023 on transferable credits has provided market stability, allowing for increased confidence and activity. The projected final rulemaking in April is expected to further solidify how transferable credits are treated by the IRS, potentially introducing nuanced changes that benefit the market.
Chaining Direct Pay and Transferability for Tax Exempt Entities
The concept of chaining in tax credits enables tax-exempt entities like non-profits, churches, and schools to sell their direct pay tax credits to buyers who can redeem them from the IRS. This facilitates cash management for non-profits, allowing them to receive cash associated with tax credits upfront. While corporates are major players in the market, expanding participation to tax-exempt entities through chaining could enhance the market's efficiency and accessibility.
The Inflation Reduction Act made it much easier for companies to sell clean energy tax credits that they cannot make use of themselves. In this episode, CEO Alfred Johnson of Crux Climate explains how this seemingly wonky tweak has created a market that is already providing billions in new clean-energy investment.
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