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American Inflation Reduction Act Signed Into Law, Committing $370 Billion On Climate And Energy (Part 4) – Renewables



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Yesterday, we continued reviewing the key energy and climate
provisions of the American Inflation Reduction Act of 2022. Today,
in this fourth and last instalment, we address the Act’s focus
on Tax Credits, and provide a conclusion to this bulletin
series.

L. Tax Credits.

Some of the most transformative aspects of the IRA operate
through the tax code, with a series of new, expanded, or otherwise
modified tax credits to incentivize zero-carbon energy and energy
efficiency. For many of these tax credits, a “direct pay”
provision would authorize payment of the tax credit directly to the
taxpayer in situations where a taxpayer doesn’t have sufficient
tax liability to fully utilize the tax credit. The current system,
which provides tax credits to specific energy production
technologies transitions to a new technology-neutral system
starting in 2025, which will continue until the emissions from the
nation’s electricity sector reach 25% of 2022 levels. Some of
the most significant tax changes are as follow:

  • Changes to the Section 45 production tax credit
    (PTC).
    The IRA amends the tax code to rework and expand
    the Section 45 PTC. It extends the eligibility date to facilities
    that begin construction by January 1, 2025 (the current program
    expired on January 1, 2022). The base credit amount of 1.5
    cents/kWh would be provided only to facilities that pay prevailing
    wages for construction, repair, or expansion of the facility and
    meet apprenticeship requirements. (Other facilities get a lower 0.3
    cents/kWh.) The amount of the tax credits increases even more if
    the manufacturer uses American-made steel and components, and can
    go higher still for projects constructed in “energy
    communities” (e.g., brownfields and communities that have or
    had significant employment in the fossil fuel industry or which
    have experienced the closure of a coal mine or coal-fired plant).
    Another bonus PTC (10-20%) is available for wind or solar
    facilities constructed on low-income housing or Indian lands, with
    some limits on capacity for eligibility. The PTC would also be
    fully available for new hydropower added to non-power dams or
    incremental increases in hydropower production from existing
    hydropower projects, for marine hydrokinetic technology, and for
    generators placed in irrigation or domestic water pipelines.

  • Changes to the Section 48 investment tax credit
    (ITC).
    The IRA extends the sunset dates to encompass most
    projects that begin construction by January 1, 2025.
    Groundwater-sourced heat pumps and cooling systems are eligible for
    longer. As with the PTC, the full tax credits are now provided only
    for technologies that meet prevailing wage and apprenticeship
    requirements. (Otherwise the tax credits are substantially lower.)
    And as with the PTC, energy properties that meet specified domestic
    content requirements receive a bonus credit (2-10%), and further
    bonus credits are available for energy projects in the same
    “energy communities” discussed with the PTC. Other
    technologies that had previously only been eligible for a 10% ITC
    are now eligible for the standard 30% ITC, including geothermal,
    energy storage systems, microgrids, combined heat and power
    systems, small wind systems, certain fuel cells, facilities that
    convert biomass into methane for commercial use, building heating
    and cooling systems that store thermal energy, and others. The ITC
    can also be used for interconnection facilities, not just the
    relevant energy projects.

  • Key changes to the Section 45Q credit for carbon
    capture and sequestration (CCS).
    The IRA would
    significantly extend the eligibility date to facilities that begin
    construction before January 1, 2033. More facilities would now be
    eligible for the CCS tax credit as well. Smaller-scale direct air
    capture facilities could also now qualify, as long as they capture
    at least 1,000 metric tons per year. The qualifying thresholds for
    CCS associated electricity generators and other industrial
    facilities are also reduced. The IRA would enact new baseline
    credits for each metric ton of carbon captured, including for
    direct air capture. And just like with the PTC and ITC, the
    potential tax credits increase substantially (in the Section 45Q
    case, by 5x) for projects that meet prevailing wage and
    apprenticeship requirements.

  • New Section 45U tax credit for nuclear power.
    The IRA would also create a new “zero-emission nuclear
    power” credit of 0.3 cents/kWh of electricity sold from
    existing nuclear reactors. The tax credit would last through
    December 31, 2032. It does not apply to reactors that qualify for
    the advanced nuclear tax credit, and it also is increased by 5x if
    the taxpayer meets prevailing wage requirements.

  • New 45Y technology-neutral PTC. The IRA would
    create a new technology-neutral tax credit structure for facilities
    that produce zero-GHG electricity (on a net basis) and that are
    placed in service after December 31, 2024. The base credit would be
    0.3 cents/kWh, but that would rise to 1.5 cents/kWh if the producer
    meets prevailing wage and apprenticeship requirements (subject to
    inflation adjustments). The tax credit would be 10% higher for
    generators located in “energy communities,” and another
    10% higher if the generator meets domestic content requirements.
    The credits are available for 10 years after electricity production
    begins. The technology-neutral credit would begin to phase out in
    2032, or earlier if before then the electric power sector achieves
    25% reductions in GHG emissions compared to 2022 levels.

  • New 48D technology-neutral ITC incentivized for
    environmental justice communities.
    The IRA would create a
    technology neutral ITC for net-zero electric generators and energy
    storage facilities placed in service after December 31, 2024. As
    with the technology-neutral PTC, the tax credit could be up to 5x
    higher if the facility meets prevailing wage and apprenticeship
    requirements, with additional bonus credits for investments in
    energy communities, and for facilities meeting domestic content
    requirements.

  • The phase-down structure would also track the
    phase-down for the 45Y technology-neutral PTC.
    A bonus
    credit of 20% would be available on a limited basis for facilities
    that are constructed in environmental justice communities (although
    halved if the facility does not meet prevailing wage and
    apprenticeship requirements).

  • Tax credits for buildings. The IRA would
    expand or change numerous tax credits related to buildings:

    • Clean energy and energy efficiency tax credits for
      individuals.
      The IRA would extend certain energy
      efficiency tax credits through 2032, including those related to
      installation of energy efficient doors, windows, roofs, etc.; the
      installation of heat pumps and biomass stoves; and for home energy
      audits. Individual tax credits for residential renewable energy
      systems (e.g., rooftop solar) would be extended through 2034,
      although with phase-down beginning in 2032. Home battery storage
      systems would also be eligible for tax credits.

    • Commercial building energy efficiency. Tax
      credits would be available on a per square-foot basis (up to
      $1/square foot) for buildings that that achieve certain energy cost
      savings over a baseline. Those tax credits can be even higher (up
      to $5/square foot) if the building was installed with labor paid
      prevailing wages and meeting apprenticeship requirements.

    • Energy efficiency credit for new homes. The
      IRA would extend the sunset date of this tax credit through the end
      of 2032. Tax credits of $500–$5,000 would be available for
      new construction of residential homes, based on the level of Energy
      Star rating achieved. As with many other tax credits under the IRA,
      the base rate could be increased substantially (up to 5x) if
      construction practices meet prevailing wage and apprenticeship
      requirements.


  • Tax credits for vehicles and fuels. In recent
    years mobile sources like cars and trucks have surpassed the
    electric power sector as the largest source of GHG emissions in the
    U.S. The IRA would enact or expand numerous tax credits related to
    vehicles, particularly credits that would incentivize
    electrification of the sector.

    • Clean vehicle tax credit. The IRA would amend
      existing provisions of the tax code to establish a baseline tax
      credit of $7,500 per vehicle and extend the availability of the tax
      credit through 2032. Half of that credit ($3,750) would be
      available only if the vehicle’s battery meets critical minerals
      [The critical minerals in question are listed in the IRA:
      Aluminum, Antimony, Barite, Beryllium, Cerium, Chromium, Cobalt,
      Dysprosium, Europium, Fluorspar, Gadolinium, Germanium, Graphite,
      Indium, Lithium, Manganese, Neodymium, Nickel, Niobium, Tellurium,
      Tin, Tungsten, Vanadium, Yttrium.
      ] limits that get more
      restrictive between now and 2027.

    • The other half of the credit would depend on whether the
      battery was manufactured or assembled in North America and the
      degree to which the automaker’s fleet manufactures batteries in
      the U.S. This requirement would initially require the automaker to
      use batteries made or assembled in North America for 50% of its
      electric vehicle fleet, increasing gradually to 100% North America
      requirement by 2029.

    • Critically, the IRA eliminates the per-manufacturer limit on
      credits, which had previously limited companies like Tesla, GM, and
      Toyota that had either exceeded the limit on qualifying electric
      vehicles (EVs) or were at risk of soon exceeding that limit.

    • The IRA would also provide a new tax credit for used EVs of up
      to $4,000 (although not greater than 30% of the sales price).

    • There are various exceptions where the tax credits would not be
      available. Beginning in a few years, certain EVs would not be
      eligible for the tax credit if their batteries contain critical
      minerals or components associated with an “entity of foreign
      concern.” Taxpayers with an adjusted gross income above
      $150,000 (or above $300,000 for married couples) would not be
      eligible. And vehicles with a manufacturer’s suggested retail
      price (MSRP) above certain thresholds would also not be
      eligible.

    • The IRA would also expand vehicles eligible for tax credits to
      include vehicles powered by fuel cells.

    • New 45W credit for commercial clean vehicles.
      The IRA would create a new tax credit for clean vehicles purchased
      by commercial entities, limited to $7,500 for smaller vehicles
      (less than 14,000 pounds gross vehicle weight) and $40,000 for
      larger vehicles. This tax credit would sunset at the end of
      2032.

    • Tax credit for alternative fuel refueling stations in
      rural or low-income areas.
      The IRA would raise the limit
      on tax credits for alternative fuel refueling stations and add
      further credits if the facility meets prevailing wage and
      apprenticeship requirements. These refueling stations would have to
      be constructed in either a rural census tract or a low-income
      census tract. EV charging stations would be authorized to provide
      bi-directional charging equipment so that electricity can be
      delivered from the EV battery to the grid as well as from the grid
      to the recharging battery.

    • Extension of renewable and alternative fuel tax
      credit.
      The IRA would extend tax credits for biodiesel,
      renewable diesel, alternative fuels, and second generation biofuels
      to the end of 2024.

    • New 40B tax credit for sustainable aviation
      fuel.
      The IRA would create a new credit for use of
      sustainable aviation fuel, starting at $1.25 per gallon, and
      sun-setting at the end of 2024. The new tax credit would increase
      by 1 cent for each percentage point above 50% that the sustainable
      aviation fuel reduces life-cycle GHG emissions compared to
      traditional aviation fuel. The credit can be used in conjunction
      with other alternative fuel, and airlines could deduct the credit
      directly from their gross income.

    • New 45V clean hydrogen tax credit. The IRA
      would establish a new tax credit for production of “clean
      hydrogen” (i.e., hydrogen produced with no more than 4
      kilograms of CO2E emitted per kilogram of hydrogen). These 45V tax
      credits range from $0.012 to $0.60 per kg, depending on the GHG
      intensity of hydrogen production. A significant multiplier is
      available if the hydrogen fuel is produced in a U.S. facility that
      meets prevailing wage and apprenticeship requirements. The 45V can
      be used in conjunction with the PTC and ITC (e.g., the PTC if
      renewable energy is used to produce clean hydrogen).

    • New 45Z clean fuel production tax credit. The
      IRA would establish a new production tax credit for clean fuels
      depending on the GHG intensity of the fuel. The rate for most clean
      fuels would begin at $0.20 per gallon (adjusted by the GHG
      intensity), but would begin at $1 per gallon if the fuel producer
      meets prevailing wage and apprenticeship requirements. Renewable
      aviation fuels receive a base rate of 35 cents per gallon, adjusted
      to $1.75 per gallon if prevailing wage and apprenticeship
      requirements are met. These credits would sunset at the end of
      2027.

  • Manufacturing.

    • Extension of advanced energy project tax
      credit.
      The IRA would allocate $10 billion for advanced
      energy project tax credits, with at least $4 billion allocated to
      “energy communities” (current allocation is $2.3
      billion). These include recycling facilities and certain
      manufacturing facilities like those that manufacture hydropower
      equipment; that make or blend low-carbon fuels; that produce hybrid
      and fuel cell vehicles or components; existing manufacturing
      facilities that are re-equipped with CCS equipment, zero- or
      low-carbon process heat systems, energy efficiency, or waste
      reduction processes; and facilities for the production or recycling
      of critical minerals.

    • New 45X advanced manufacturing production
      credit.
      The IRA would create a new production tax credit
      for advanced manufacturing of a variety of specific solar, wind
      energy, and battery components.

    • Extension of the Superfund tax. The bill would
      reinstate the Superfund tax on certain crude oil and petroleum
      products, and increase the tax rate to 16.4 cents per barrel (up
      from 9.7 cents). The reinstated portion of the tax would apply to
      crude oil received at a U.S. refinery and to petroleum products
      entering the U.S. for consumption, use, or warehousing. That tax
      rate could increase further beginning in 2023 based on a new
      provision that provides for inflation adjustment. The bill would
      also allow companies to make advances to the Superfund itself for
      the first time in 27 years.




The “Superfund” is the name commonly given to a U.S.
law passed in 1980 whose full name is the Comprehensive
Environmental Response, Compensation and Liability Act, a federal
law designed to clean up industrial sites contaminated by hazardous
waste.

The term Superfund Tax refers to an excise tax on chemicals.

Conclusion




Canadian Conclusion From Fasken


The effect of the IRA for Canadian businesses is its impact to
act as a non-tariff barrier to accessing the US market: Canadian
governments and industry will need to be more cognizant of US
standards of production to reduce GHG emissions and adopt similar
programs and standards or risk being shut out of the US market.
Alternatively, industry may decide to cross over the US green wall
and locate manufacturing capacity there to specifically address the
US market. In light of the clear, concerted effort by the US to
pump billions into the US market to reduce GHG emissions to
specified targets, several considerations for Canadian businesses
arise:


  • The threat of carbon border adjustments mechanisms (CBAMs).
    There may be noticeable advocacy and pressure on the US federal
    government to prevent carbon leakage or the importation of
    competing products that have been manufactured without similar
    standards by using CBAMs such as a border tax as a way to limit
    offshore production and subsequent import of inputs manufactured
    under processes that do match the objectives and GHG standards
    supported by the IRA.

  • As a corollary to CBAMs, closely integrated Canadian border
    industries including the electric vehicle industry may be subject
    to the possibility of having restrictions on their products from
    being used to complete various car components or in the production
    of these vehicles unless standards of production are considered to
    meet similar or identical GHG or other environmental emission
    reduction standards. This raises the issue of government
    disagreement on whether standards are the same and creates space
    for US domestic political advocacy to have Congress and the
    President in their various jurisdictional capacities to set the
    standards that Canadian industry must meet as a condition of use in
    the US.

  • Particularly for the forest industry, agriculture and various
    advanced manufacturing, the IRA is likely to provide legislative
    and policy support for a trend that is already gaining momentum:
    the requirement by both US federal and state procuring agencies to
    require in any RFP/RFQ that as a condition of qualification, US
    companies must not use inputs that, for example, are harvested in a
    way that do not make use of carbon sequestration or that do not
    protect old growth forests according to US standards or that do not
    implement technology to accelerate GHG reductions in the
    manufacture of say, various plastic inputs. This situation
    currently exists and under the IRA will continue to create pressure
    on US suppliers to US government procuring agencies to procure
    their own inputs from US markets to remove any doubt regarding
    potential disqualification.


We invite you to reach out to the authors or your relationship
contact at Fasken for more information on these issues, or for
assistance or advice in designing a strategy for your business to
navigate these fluid requirements for US market access.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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