From the Wall Street Journal, September 14:
A brand-new market for green tax credits is taking shape as bankers and advisers figure out how to funnel tax breaks from energy companies that generate them to profitable corporations eager for smaller tax bills.
The market is forming because Congress last month expanded renewable-energy tax credits and made them transferable in the law known as the Inflation Reduction Act, which also lowers prescription drug prices and imposes new taxes on large corporations.
The tax-credit sales mark a shift in the U.S. strategy for attracting public and private capital to renewable-energy projects, and they will happen alongside existing climate-finance markets such as carbon offset purchases. The deals won’t start in earnest until 2023, but lawyers and financiers are already structuring transactions. They are discussing arrangements in which credits would be sold at discounts from face value, and they are determining how to cushion tax-credit buyers against potential risks.
“The conversations are happening. The market making is happening right now,” said Nicholas Knapp, senior managing director at CohnReznick Capital in New York. Within a year or two, it could be easy for a corporation with no direct renewable-energy investment—a profitable retailer, pharmaceutical maker or high-tech company—to purchase tax credits. Because of the expected discounts, companies could earn an instant profit, paying $90 or $95 for a $100 coupon off their income-tax liability.
These transferable credits, however, expose a potential dilemma for Democrats. The party aimed to raise corporate tax bills and prevent large, profitable companies from paying too little. But the tax-credit transfers open a new avenue for many of those same companies to pay less. “They can basically purchase the tax credits, advance their ESG goals and get certain economics from the credits without taking any construction or operational risk of the project,” said Hagai Zaifman, a partner at Sidley Austin LLP in New York who helps structure renewable-energy deals.These transferable tax credits break with policy makers’ longstanding reluctance to create anything like a liquid market in tax breaks. The program contains echoes of a 1981 law that effectively let companies sell investment tax breaks—a feature that Congress repealed the following year amid concerns it went too far.
Lawmakers designed transferable climate credits to deal with a problem inherent in the generous subsidies Congress is providing for wind and solar energy as well as carbon sequestration, nuclear power, certain advanced manufacturing and other technologies.
Companies in those industries typically don’t have enough profit and thus tax liability to use all of the tax credits they generate, so tax credits alone don’t work well as an incentive.
Initially, many Democrats and renewable-energy advocates wanted a different approach called direct pay, where companies generating tax credits would get checks from the government after they zeroed out their income-tax liability.But Sen. Joe Manchin (D., W.Va.) blocked that idea and Democrats pivoted. They relented on objections to transferring credits and added some safeguards, said a Senate Democratic aide. The final version of the law limits direct pay to publicly owned power companies and other tax-exempt entities. Direct pay is available temporarily and more broadly for some tax credits, including those for hydrogen and carbon capture....
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