06/06/2024 - Inflation Reduction Act - Methane Regulation

Treasury and IRS Release Technology-Neutral Clean Energy Tax Credit Proposal

The Inflation Reduction Act (IRA) included extensions of the clean energy production tax credit (PTC) and investment tax credit (ITC) for projects starting before 2025. For projects beginning construction in 2025, the IRA introduced new technology-neutral tax credits, Section 45Y and Section 48E, to take the place of the PTC and ITC. Under the IRA, these credits are available until 2032 or until certain greenhouse gas reduction targets are met, at which time they will be phased out over three years. The IRA states that the credits are available until: “the later of – (A) the calendar year in which the Secretary [of the Treasury] determines that the annual greenhouse gas emissions from the production of electricity in the United States are equal to or less than 25 percent of the annual greenhouse gas emissions from the production of electricity in the United States for calendar year 2022, or (B) 2032.”[1] For a complete summary of the IRA clean energy tax credits, see EELP student Sam Strimling’s analysis here.

In June 2024, the Department of the Treasury and the Internal Revenue Service (IRS) issued the proposed regulations implementing the 45Y and 48E tax credits. The proposal sets out the regulations for the technology-neutral tax credits, including how to determine project eligibility, how the credit rates are set, how greenhouse gas (GHG) emissions rates are determined, and how the credit will be phased out. The 45Y tax credit provides a base credit of 0.3 cents per kilowatt hour of energy produced, with an alternative rate of 1.5 cents available for projects meeting the prevailing wage and apprenticeship requirements. The 48E tax credit provides a 6 percent base credit, with an alternative rate of 30 percent if the project meets prevailing wage and apprenticeship requirements. Both credits offer bonuses if projects meet certain conditions, for example being located in an energy community and meeting domestic content requirements.

Under the 45Y production tax credit, qualified facilities include any facility for which the GHG emissions rate is not greater than zero. The proposal identifies some types of facilities that will be categorically included, including wind, hydropower, marine and hydrokinetic, solar, geothermal, and nuclear. For combustion and gasification technologies, the proposal details how to calculate GHG emissions by conducting a lifecycle analysis. The 48E investment tax credit covers certain energy storage technologies as well.

Following Congress’s direction in the IRA, the proposed rule also lays out the credit phase-out, including how it proposes to determine whether the emissions reduction goal laid out in statute is met. In the proposal, Treasury explains its approach for calculating annual GHG emissions from US electricity production using both the Energy Information Administration’s (EIA) Electric Power Annual and Monthly Energy Review and EPA’s Inventory of U.S. Greenhouse Gas Emissions and Sinks (GHGI). The proposal describes other government GHG datasets that it could use for making this annual emissions calculation and requests comment on its proposed approach.

The Treasury and IRS request comment on a wide range of issues related to the tax credits, including how certain technologies are defined, how to conduct lifecycle analysis, how to determine annual GHG emissions from the electricity sector, and what additional information should inform its final rule.

Comments must be submitted within 60 days of publication in the Federal Register.

[1] 26 U.S.C. §§ 45Y(d)(2)–(3), 48E(e)(2)–(3).