The Swiss Army Knife of Clean Energy Tax Credits Goes Into Effect Next Year

Before and for the first year or so after the Inflation Reduction Act, clean energy in the United States was largely developed under the aegis of two tax credits: the Production Tax Credit, which primarily useful for wind power, and the Investment Tax Credit, which is primarily used for solar power. (The actual eligibility for each tax credit for each technology has changed various times over the years, but that’s the gist.)

Starting in 2025, however, and lasting (absent any change in the law) through at least 2032, that tax credit regime will be made “technology neutral.” Goodbye, existing credits with their limited applicability. Hello, new tax credits that apply to “any clean energy facility that achieves net-zero greenhouse gas emissions,” according to a release issued Wednesday by the Treasury Department.

“For too long, the U.S. solar and wind markets have been hampered by uncertainty due to the on-again-off-again nature of key tax credits,” Treasury Secretary Janet Yellen said on a call with reporters. “Periods of indecision and the credits being repeatedly allowed to elect to lapse made it too difficult for companies to plan and invest in clean energy projects.”

About that “at least”: The tax credits only start to phase out when Treasury determines that electricity-related greenhouse gas emissions have been reduced 75% from their 2022 levels or in 2032, whichever comes later, making this the rare tax code provision with an outcome-based timeline.

In preparation for the new Clean Electricity Production Credit and Clean Electricity Investment Credit, a.k.a. sections 45Y and 48E of the U.S. tax code, to go into effect, Treasury proposed guidance outlining what would qualify for the tax credits and soliciting comments on forms of power generation whose true carbon abatement potentials are more in doubt. The notice and subsequent publication in the Federal Register kicks off a 60-day public comment period, after which Treasury and the Internal Revenue Service will write the final rules.

The new list of eligible technologies includes “hydropower, marine and hydrokinetic, nuclear fission and fusion, geothermal,” along with “certain types of waste energy recovery property” as among the technologies that will be “categorically” eligible for the new tax credits. The point here isn’t to create more exclusivity, but rather to “provide clarity and certainty to developers,” Treasury said in the release. Yellen added that, “for the first time, these incentives are tied explicitly to electricity generation with zero emissions instead of specific technologies.”

What this announcement does not clarify, however, is what to do about energy sources that involve combustion, such as biomass or harnessing methane emitted from landfills. Here is where the Treasury Department is asking for help from outside — many of the questions included in the proposed rulemaking are devoted to figuring out exactly how these forms of energy might or might not be made zero-emission.

Many environmental groups are skeptical of any combustion-based energy sources, and Treasury said that generation methods which “rely on combustion or gasification to produce electricity” will have to “undergo a lifecycle greenhouse gas analysis to demonstrate net-zero emissions.”