Clean fuel incentives in the Inflation Reduction Act of 2022

Executive summary: Clean fuel provisions

Energy and climate initiatives are a focal point of the Inflation Reduction Act of 2022, which provides for $369 billion of spending on climate-related provisions. The act, which President Joe Biden signed into law on Aug. 16, 2022 intends to facilitate the administration’s commitment to reducing economy-wide greenhouse gas emissions by 50%-52% of 2005 levels by 2030.  

Subtitle D of the Act contains 29 energy-related tax and credit provisions with a historic $271 billion of tax incentives on climate-related provisions. The provisions fall into nine broad categories:

1. Clean electricity and reduce carbon emissions
2. Clean fuels
3. Clean energy and efficiency incentives for individuals
4. Clean vehicles
5. Investment in clean energy manufacturing and energy security
6. Superfund excise tax
7. Incentives for clean electricity and clean transportation
8. Credit monetization and appropriations
9. Other provisions

This alert discusses the clean fuels provisions and how they will affect the renewable fuels industry. Please see our previous alert on the energy provisions for general information on the clean energy provisions. 

Inflation Reduction Act of 2022 – Subtitle D: Energy Security

The Act provides massive incentives for investment in the domestic renewable energy industry. It contains a wide array of tax credits to incentivize significant renewable project development. Achieving energy security and reduction of carbon emissions via growth of the clean energy sector with tax incentives is a centerpiece of the bill. These tax credits will affect businesses across industries including energy, manufacturing, construction, private equity and consumer products. 

Senator Ron Wyden of Oregon, in a floor speech on Aug. 6, 2022, described the climate policy goals as investing in clean energy and jobs. The intent of the provisions is to use the tax code to reward efforts to reduce greenhouse gas emissions and increase energy efficiency by eventually replacing the existing energy tax credits with emissions-based credits that incentivize investment in clean electricity, clean transportation and energy conservation. 

In essence, the Act extends and modifies existing and expired renewable energy credits through 2024, adds new credits for additional technology and energy sources generally effective beginning in 2023, and then provides a switch in 2025 to three technology-neutral credits. The framework is the result of a compromise negotiated between the House and the Senate. 

For a number of the provisions, the Act requires additional qualifications for taxpayers to achieve a “bonus rate” on credits as opposed to a “base rate”: Those qualifications include:

• Apprenticeship requirements. The apprenticeship requirements requires the taxpayer to guarantee that an increasing percentage of labor hours for the project are performed by “qualified apprentices.” The term “qualified apprentice” means an individual who is employed by the taxpayer or by any contractor or subcontractor and who is participating in a registered apprenticeship program.
• Prevailing wage requirements. In circumstances where the bill provides for “bonus rates,” to claim this additional rate with respect to a project, the taxpayer must ensure that any laborers and mechanics employed by contractors and subcontractors are paid prevailing wages during the construction of the project. This means the taxpayer must ensure that any laborers and mechanics employed by the taxpayer or any contractor or subcontractor in the alteration or repair of such facility are paid wages at rates not less than the prevailing rates for alteration or repair of a similar character in the locality in which such facility is located as most recently determined by the Secretary of Labor.

Additionally, increased credit rates may apply if specific domestic content requirements are met. This encourages taxpayers to use steel, iron or products manufactured in the United States.

To facilitate investment in renewable energy projects where a project developer may not have taxable income, the Act provides two new mechanisms for monetization of certain nonrefundable income tax credits. 

In limited circumstances, the Act provides for an election to essentially treat certain credits as refundable through a “direct pay” mechanism. This provision allows for direct pay for exempt organizations, state and political subdivisions, the Tennessee Valley Authority, and Indian tribal governments for most of the renewable energy credits. It also provides for direct pay for all taxpayers with respect to three credits – section 45Q carbon capture and sequestration, section 45V clean hydrogen production and section 45X advanced manufacturing production tax credit.

Clean fuels

Part 2 of Subtitle D of the Act focuses on the clean fuel provisions. Below is a summary of the applicable provisions.

Additional incentives to lower carbon emissions

In addition to the clean fuel credits, renewable fuel producers may be eligible for other tax credits.  In some cases, these credits can further reduce a fuel’s carbon intensity, which would increase the value of the fuel in low carbon fuel standard markets such as California, and potentially increase the amount of the clean fuel credit.  These credits are described below.

Consumer incentives for renewable fuel

To support consumers, with respect to fuels and vehicles, the Act provides the following credits:

• Electric vehicle credits of up to $7,500 per vehicle under section 30D
• Creates a new $4,000 credit for previously owned “clean vehicles”
• Creates a new credit for certain commercial “clean vehicles”

Excise taxes

With respect to fuels, the Act will:

• Reinstate the section 4611 Hazardous Substance Superfund financing rate imposed on crude oil and petroleum products and increase the tax rate to 16.4 cents per barrel, adjusted for inflation. This change increases section 4611 taxes to 25.4 cents per barrel.
• Make permanent the section 4121 excise tax on coal, which funds the Black Lung Disability trust fund.

Methane Emissions Reduction Program

While not part of the Subtitle D tax incentives, it should be noted that the Act includes a methane fee to reduce methane pollution from the oil and gas sector. The provision provides that certain petroleum and natural gas facilities would be subject to a “waste emissions charge” starting in 2024. The amount of the charge increases from $900 per ton in 2024 to $1,500 per ton in 2026.

The Act also provides incentives for methane mitigation and monitoring. These include grants, rebates and loans of up to $1.55 billion. Certain exemptions from the fee may apply if the emitter otherwise complies with Environmental Protection Agency methane regulations.

Washington National Tax takeaways

The provisions outlined above are a major expansion of existing clean energy incentives in the tax code. Clean fuel producers should evaluate all potential credit opportunities and may need to model out different scenarios, such as whether it would be more beneficial to claim a nonrefundable clean fuels credit, sell the credit under the transferability provision or claim a section 45Q carbon capture direct payment.  Additionally, companies building facilities with new technologies or renewable fuel, such as SAF, may want to evaluate whether to apply and submit an application for an allocation of funding from the advanced energy project credit.

Additional guidance will be critical for taxpayers, specifically with respect to the proposed direct pay and transferability of credits, requirements governing apprenticeship hours; prevailing wages; domestic contents and the so-called “stacking rules” that limit the ability to claim multiple credits at one facility. 

It will be important for affected parties to identify areas of uncertainty and raise these issues as soon as possible with their tax advisor. The Treasury Department will be developing rules for implementation of these provisions over the next few months and will be considering comments from affected parties during the rulemaking process.