As 2023 Dawns, Guidance On The Technology-Neutral Tax Credit Under The Inflation Reduction Act (IRA) Is Needed

Among the many provisions of the Inflation Reduction Act (IRA) signed into law by President Joe Biden on August 16, 2022, one of the most significant is the replacement of the existing clean-energy Investment Tax Credit (ITC) and wind Production Tax Credit (PTC) with a new technology-agnostic Clean ITC and Clean PTC. These new tax credits will apply to any “net zero” energy producing facility placed into service on or after January 1, 2025. The law, which aims to achieve a 40% reduction in greenhouse gas (GHG) emissions over 2005 levels by 2030, upends 30 years of clean-energy policy by switching from a system that supports specific technologies to one that prioritizes outcomes. From here on out, it’s the destination, not the journey.

Rishabh Agarwal, an industry veteran and the author of an upcoming book on clean energy production technologies, explained the importance of the change: “The Clean ITC and PTC promises to level the playing field between various low-carbon energy technologies such as solar, wind, bioenergy, nuclear, batteries, carbon capture, and others by encouraging investments in the most impactful technology. This incentivizes continued innovation in multiple technology verticals instead of a less efficient one-size-fits-all framework.”

The devil is in the details, however, and the specific mechanisms and standards required to implement Clean ITCs and PTCs in the IRA are yet to be defined. The act directs the U.S. Department of the Treasury to utilize a cradle-to-gate “lifecycle analysis” (LCA) approach to calculate and publish an annual list of emission rates for various technologies. While the LCA is an effective tool to enable apples-to-apples comparisons between different electricity production pathways, reliance on LCA results for ITC and PTC qualification leads to difficult measurement, reporting, and verification (MRV) challenges. Norms around boundary conditions, data collection processes, and other factors make the execution of an LCA-based policy politically and technologically complex. For example, the emissions resulting from indirect land use changes caused by biofuel production is tabulated in some regulatory regimes and excluded in others, such as the EU’s Renewable Energy Directive.

These details matter and can make or break the ability of a wide variety of technologies to qualify for credits. As we enter 2023, the lack of guidance on the outline of the incentive program, including emissions rates for a variety of technology sets, adds uncertainty to the deployment of many novel and impactful technologies. Although the introduction of these credits in 2025 may seem far off, the development and construction of new energy facilities can easily take two or more years. Planning needs to start now, and without guidance, many good projects will be forced to wait on the sidelines for longer than necessary to clarify their incentive status.

A roadmap for policymakers in Washington is available on the opposite side of the country: California’s successful Low Carbon Fuel Standard (LCFS) program, Implemented in 2011 and still in operation today, the LCFS is aimed at reducing emissions through a technology-agnostic approach similar to that of IRA, with a key difference being that California’s program is specifically aimed at its transportation sector. At its core, the LCFS program uses LCAs to estimate “well-to-wheel” GHG emissions for a particular fuel or technology by tabulating the aggregate amount of GHGs released while producing, refining, transporting, and ultimately using a specific fuel or technology. The result, the so-called “carbon intensity” (CI) of the fuel or technology, allows for a technology-agnostic comparison. Lower CI solutions receive more credits, and therefore are more incentivized, than less impactful alternatives. Dirtier fuel producers with CI scores above mandated levels must buy credits to offset their emissions, creating a market.

The program has been highly successful, spurring investment in a wide variety of technologies ranging from dairy biogas, second-generation biofuels, direct air capture, solar, battery storage, and hydrogen, with only minimal cost impacts at the pump. The technology agnostic nature of the LCFS is evidenced by the fact that nearly 20 million metric tons of credits generated in 2021 were spread homogeneously across ethanol, biodiesel, renewable diesel, biomethane, and electricity. Given its success, Oregon, Washington, British Columbia, and Canada have already implemented or will soon implement LCFS-style programs, while many other countries and US states are considering similar policies.

In order to successfully implement IRA’s technology-agnostic policies, the federal agencies tasked with drafting the regulations around the Clean ITC and PTC programs should look to the LCFS for guidance. Innovations in the California program, including a reliance on a standardized LCA process (normalized with the GREET model used for carbon accounting) provide a good starting point. The mechanisms to verify individual project emissions through an established network of 3^rd party LCA verifiers can similarly be based on California’s successful program. The time to start work on these important regulatory structures is now: an accurate and expedient process for calculating and qualifying clean ITCs and PTCs will help attract investment to a diverse set of clean technologies, making long-term net-zero goals more feasible and affordable.