The climate law of 2022 has led to an increase in investments in clean-energy projects throughout the United States. It has also resulted in financial gains for major banks, law firms, insurance companies, and emerging financial firms by establishing a broad new market in green tax credits.
This legislation, authorized by President Biden, has effectively created a financial trading space that enables smaller companies to access funding, with Wall Street taking a share. Analysts predict that it could soon facilitate up to $80 billion in annual transactions to drive investments in technologies aimed at reducing fossil fuel emissions and combating climate change.
The law has introduced various tax incentives to encourage companies to produce and install solar, wind, and other low-emission energy technologies. However, the lawmakers were aware that these incentives, including tax credits, would not benefit companies that were too small, or not profitable enough, to owe sufficient taxes. To address this, a workaround was devised, allowing companies making clean-energy investments to sell their tax credits to companies with significant tax liability.
This market is already supporting both large and small transactions. Clean-energy companies receive cash to invest in their projects, but they receive less than the value of the tax credits for which they qualify, after various financial partners take a portion of the deal.
The cost of these tax credits depends on factors such as risk and size. Larger projects command a higher percentage. Additionally, the seller of a tax credit will see its value diluted further by fees for lawyers, banks, and other financial intermediaries involved in brokering the sale.
The prospect of a flourishing market and the opportunity to capture a portion of those transaction costs have generated enthusiasm for the Inflation Reduction Act, or I.R.A., in finance circles. A new industry of online start-up platforms that aim to connect buyers and sellers of tax credits has quickly emerged.
An annual renewable energy tax credit conference hosted by Novogradac, a financial firm, drew a record number of attendees to a hotel ballroom in Washington this month, with multiple panels dedicated to the complexities of the new marketplace.
Tax professionals and clean-energy groups affirm that the marketplace has significantly expanded financing opportunities for companies working on emissions-reducing technologies and introduced private-sector scrutiny to climate investments.
However, these transactions are also enriching players in an industry that President Biden has at times criticized, while enabling large companies to reduce their tax bills in a manner that contradicts his pledge to make corporate America pay more.
“I wouldn’t call it irony. I would call it, sort of, this unexpected brilliance,” said Jessie Robbins, a principal of structured finance at the financial firm Generate Capital. “While it may be full of friction and transaction costs, it does bring sophisticated financial interests, investors, and corporations into the world of funding green energy,” she said.
Biden administration officials argue that many clean-tech companies will save money by selling their tax credits to raise capital, instead of borrowing at high interest rates. “The alternative for many of these companies was to take a loan, and taking that loan was going to be far more costly” than using the credit marketplace, stated Wally Adeyemo, the deputy Treasury secretary, in an interview.
Some supporters of the climate law had sought a more direct alternative for these companies: government checks equivalent to the tax benefits their projects would have qualified for if they had sufficient tax liability to utilize the credits. However, this proposal was rejected by Senator Joe Manchin III, a moderate Democrat who was the swing vote on the law.
A modest federal marketplace of certain tax credits, like those for affordable housing, existed before the climate law was enacted. However, acquiring these credits was complex and indirect, resulting in annual transactions of less than $20 billion, predominantly dominated by large banks. The climate law expanded the market and attracted new players by making it much easier for a company with tax liability to buy another company’s tax credit.
Financial advisers note that they have received interest from a diverse range of corporate buyers, including retailers, oil and gas companies, and others looking to reduce their tax bills while fulfilling public commitments to help the environment.
Experts suggest that large banks still dominate the largest transactions, where projects are bigger and tax credits are more expensive to purchase. For the rest of the market, entrepreneurs are striving to establish online exchanges, effectively functioning as a “Match.com” for tax credits. Companies present the specifications of their projects and tax credits, and buyers place bids for credits.
In order to sell tax benefits under the law, companies must register their credits with the Treasury Department, which recently introduced a pilot registry website for these projects. The online platforms connecting buyers and sellers of the credits are not regulated by the government.
Alfred Johnson, who previously served as deputy chief of staff under Treasury Secretary Janet L. Yellen, co-founded Crux, one of the online exchanges, in January. The company has raised $8.85 million through two rounds of funding.
Mr. Johnson stated that his business helped to replace the “low-margin” administrative work involved in facilitating deals. Lawyers and advisers will still be engaged for the more complex aspects of the deal.
“It just requires more companies coming into the market and participating,” he said. “And if that doesn’t happen, the law will not work.”
Seth Feuerstein founded Atheva, a transferable credit exchange, last year. While he lacks clean-tech experience, he has brought in green-energy experts to assist in launching the exchange.
Atheva already has tens of millions of dollars in projects available for tax-credit buyers to browse on the site, with hundreds of millions more in the pipeline. On the site, buyers can review credits by their estimated value and access documentation to assess whether the projects will yield returns. Mr. Feuerstein emphasized that transparency reassured taxpayers that they were supporting valid clean-energy investments.
“It’s a new market,” Mr. Feuerstein said. “And it’s growing every day.”
Focus Keyword: climate legislation
