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Turning commitment to action: Implementing the Inflation Reduction Act

May 30, 2023

The passage of the Inflation Reduction Act last fall was a monumental feat. The landmark law commits more than $369 billion to boost deployment and commercialization of a variety of climate and clean energy solutions, representing the largest climate investment in U.S. history. 

Notably, the law overhauls and expands federal clean energy tax credits, providing incentives for businesses and consumers to deploy zero-carbon energy and other climate-protecting technologies. But passing these landmark tax credits is only the first step toward deploying technologies on the ground that will help the U.S. reach its climate goals. And we will only get there if the greenhouse gas accounting used to allocate tax credits are based on robust assessments that accurately estimate the tons of carbon removed or reduced by a given fuel or technology over its entire lifecycle. Moreover, the law’s economic, environmental, and public health benefits should be distributed equitably and efficiently – and that’s where communities, NGOs, industry, and other stakeholders come in.  

Open for public comment: Federal agencies seek input to implement tax credits

Following the passage of the Inflation Reduction Act, the U.S. Department of the Treasury (Treasury) released the first series of requests for public comment on a handful of climate and clean energy tax credits in the law, including those for clean hydrogen production, direct air carbon capture, clean vehicles and fuels, and clean energy generation. CATF experts provided input and recommendations around these four key areas and are continuing to engage in the implementation of these tax provisions. Treasury and IRS are currently working to develop and issue related guidance and proposed regulations on a rolling basis. This guidance will affect how the tax credits are implemented. Our recommendations aim to ensure this guidance is fair and honors the intent of the Inflation Reduction Act. 

45V clean hydrogen production tax credit (Notice 2022-58):

What it is: The 45V tax credit incentivizes clean hydrogen production, which will help provide cleaner, cheaper, and more secure energy for difficult-to-decarbonize sectors including aviation, heavy-duty vehicles, marine shipping, and heavy industry. Treasury and IRS are expected to release draft guidance on which hydrogen projects qualify for the 45V tax credit in early summer 2023, with final guidance expected to be released in mid-August 2023. 

Why it matters: Low-emissions hydrogen will play an important role in global decarbonization, particularly for sectors of the economy that are hard to decarbonize and in sectors that already require hydrogen such as refineries and fertilizer production.  

What we recommend: Section 45V clean hydrogen production tax credit must create incentives for hydrogen production with the lowest possible greenhouse gas emissions impact. To do this, CATF recommends:  

  • Strict guardrails requiring the three pillars of additionality (i.e., new zero-carbon electricity supply), regional geography-matching, and hourly temporal-matching for the purchase of Energy Attribute Credits (EACs) such as renewable energy credits (RECs), if EACs are to be used in calculating the carbon intensity of hydrogen produced using grid electricity. 
  • Independently verified and rigorous, full upstream lifecycle analyses (LCAs) and emissions recordkeeping for implementing the tax credit.  
  • Close coordination between Treasury/the Internal Revenue Service (IRS) and Department of Energy/Environmental Protection Agency.  
  • Provisional emission rates based on verifiable, project-specific documented information. Credits should only be allocated to taxpayers based on real emissions data.  

Read the full comment here.  

45Q direct air capture credits (Notice 2022-57): 

What it is: The Inflation Reduction Act expanded and extended the 45Q tax credit, which incentives investors and developers to use carbon capture, utilization, and storage technology. The 45Q direct air capture (DAC) provisions are the most significant carbon dioxide removal (CDR) deployment policy enacted to date, which can generate high-wage jobs and help mitigate climate change.  

Why it matters: DAC is a carbon removal process that captures carbon from the atmosphere and stores it permanently. It’s especially important for reducing legacy emissions and emissions from heavy industry. Read more from CATF on how transformative the 45Q enhancements are here

What we recommend: CATF’s comments build on the continuation of policy solutions for DAC and other important technologies for CDR. We recommend:  

  • Limiting the $180 45Q credit for DAC to actions that qualify as DAC as defined by statute and in the final Treasury guidance of 2021. 
  • Under the statute, Treasury can only provide the credit for removal of carbon dioxide from ambient air regulated by subpart PP, with storage pathway under subpart RR.    
  • DAC facilities can be built in conjunction with point-source carbon capture. Treasury and IRS need to recognize those two processes can co-exist at the same facility and should allow each capture process to receive the appropriate credit.  

Read the full comment here

45W credits for qualified commercial clean vehicles (Notice 2022-56): 

What it is: 45W provides a credit to businesses and individuals who purchase a qualified clean vehicle for business use. The 45W credit will achieve significant emissions reductions through widespread deployment of zero-emission technologies within the medium- and heavy-duty sectors. By helping to establish and scale markets for these clean commercial vehicles, section 45W can be a major step toward addressing the public health burdens, environmental injustices, and climate dangers caused by commercial vehicles powered by internal combustion engines. 

Why it matters: The global transportation sector accounts for an estimated 15% of total GHG emissions, and given the wide array of vehicles, decarbonizing the industry is going to take a variety of climate technologies – from electrification to alternative fuels like hydrogen – essential. More on transportation decarbonization and the Inflation Reduction Act here

What we recommend: CATF’s comments intend to encourage credits to be issued at the maximum value allowable under 45W to maximize the uptake of clean commercial vehicles. Specifically, we recommend:  

  • Considering both weight and cargo load capacity when determining incremental costs with a comparable gasoline or diesel vehicle under 45W(b)(3).  
  • Interpreting “significant degree” in section 45W(c)(3)(A) to mean that qualifying battery-electric vehicles should be designed to be powered at least 50 percent by electric motor

Read the full comment here.  

Section 30C on alternative fuel vehicle refueling property (Notice 2022-56): 

What it is: 30C provides tax credit for installing alternative fuel vehicle refueling property, including electric vehicle charging stations or hydrogen fueling stations, for example. 30C intends to encourage the use of alternative fuel vehicles by incentivizing the development of alternative refueling infrastructure.  

Why it matters: As more electric and hydrogen-fueled vehicles get out on the road, it’s also important to have the infrastructure needed to charge and refuel them. And consumers and industries need to know these refueling stations will be abundant if they’re going to make the switch.   

What we recommend: CATF’s comments are aimed at interpreting the tax credit in a way that includes a variety of hydrogen refueling infrastructure to support the widespread deployment of clean vehicles as quickly as possible. Our recommendation is to:  

  • Defining “any single item” (as used in section 30C(c)(1) regarding hydrogen refueling stations) to include, among other items: hydrogen storage tanks, hydrogen compressors, hydrogen dispensers, and associated safety and monitoring equipment

Read the full comment for 45W and 30C here

45Y clean energy generation tax credit (Notice 2022-49): 

What it is: Under Section 45Y, qualified facilities that produce electricity with zero GHG emissions are eligible for the clean electricity production credit.  

Why it matters: Burning forest biomass for electricity can provide carbon benefits in limited instances but typically the total net lifecycle emissions from logging, transporting, drying, processing, and combusting forest biomass are not zero, often exceed those of fossil fuels, and persist in the atmosphere even after accounting for forest regrowth. Therefore bioenergy facilities should not be treated as presumptively zero-emitting and their eligibility should be determined through a comprehensive life-cycle assessment. 

What we recommend: Climate beneficial bioenergy will play a role in decarbonization, but safeguards are needed to prevent detrimental outcomes. CATF supported a letter led by Natural Resources Defense Council and Southern Environmental Law Center that focused on the treatment of forest-derived biomass electricity under section 45Y. The letter demonstrates that power plants that burn forest-derived biomass do not automatically meet the zero-emissions criterion in Section 45Y, therefore they should not automatically qualify for the clean energy generation tax credit. We agree that: 

  • The clean energy generation tax credit should only be available for zero-emitting facilities based on full life-cycle greenhouse gas accounting that considers transportation and process-based emissions. Combustion and gasification facilities that break down woody biomass should not automatically qualify.  

Read the full letter here

The work of IRA implementation is just getting started, and CATF will be there every step of the way

Expert input and recommendations are essential to supporting the implementation of the Inflation Reduction Act. Federal agencies, including Treasury and the IRS, the Department of Energy, and the U.S. Environmental Protection Agency are looking to communities, NGOs, and others to contribute their expertise and help ensure the Inflation Reduction Act can fully realize the promise of its economic, environmental, and public health benefits. And CATF is doing just that. We will continue working with stakeholders and the federal government to unlock funding, develop guidance, and enact regulations which, coupled with year-over-year appropriations and the implementation of the Infrastructure Investment and Jobs Act, will support efforts to reduce emissions and meet our climate goals.    

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