Enhancing corporate sustainability with transferable tax credits

August 23, 2023

The passage of the Inflation Reduction Act (IRA) in 2022 introduced a new investment tool for corporate taxpayers enabling them to save money on taxes while simultaneously supporting environmental goals. This new mechanism, whereby developers of clean energy projects are able to sell, or transfer, their tax credits to other corporate taxpayers at a discounted rate allows companies across industries and of all sizes to participate in clean energy development. At Crux, we refer to these transferable energy tax credits as TTCs.

In fact, the energy transition, in many ways, will depend upon how widespread adoption of TTCs will be among corporate taxpayers. Independent analyses of the economic impact of the IRA indicate that TTCs and their predecessor, tax equity, could account for $83 billion in annual investment in clean energy by 2031, meaning that roughly 1/6th of all corporate taxes must be offset by tax credits for supply to meet demand. 

Cash savings from TTC transactions create opportunities for companies to support their environment, social, and governance (ESG) and other sustainability initiatives without expanding their net budgets. New criteria for clean energy projects — including use of domestically produced equipment and competitive wages for workers — can be incorporated into companies’ sustainability narratives and demonstrate how TTC investments support American manufacturing and jobs. In this piece, we discuss the importance of transferability and the role it plays in supporting sustainability and ESG goals.

Why is transferability necessary?

Transferability and investment in TTCs is necessary for the clean energy industry to expand rapidly enough to meet the United States’ decarbonization goals. A recent study by Bloomberg New Energy Finance (BNEF) projected that the IRA will lead to a 40% reduction in greenhouse gas emissions by 2035, and a 55% reduction by 2050. BNEF’s analysis, along with estimates put forth by Credit Suisse, Goldman Sachs and others, indicates that this investment in tax attributes must increase many times over in order to catalyze those emissions reductions.  Meanwhile, in the tax equity markets, through which project developers have historically monetized their tax credits, 40-50 credit buyers account for some $20 billion in clean energy investment in a typical year. This market will need to scale by orders of magnitude - to thousands of corporate buyers and tens of thousands of projects — in order to fully capitalize on the opportunity presented by the IRA. 

How can transferability support sustainability?

Companies and executives today are embracing sustainability as a key priority for their businesses, driven by shareholders, customers, and employees, yet few companies are able to dictate the sources of energy that they consume. Power and fuels — whether from the grid or at the pump — are an essential part of the economic engine for virtually every company. While some firms may desire cleaner energy sources, it can be impractical, expensive, risky, or simply not attainable at this time, to deviate from conventional energy supply chains. Enter: TTCs. 

TTCs are direct cost saving for companies, allowing them to direct funds already reserved for federal tax liabilities to purchase credits at a discount to their face value. The question is not whether to invest in a new factory or TTCs – companies cannot elect to skip their taxes, and the vast majority of firms we speak with set aside funds for their tax liabilities annually or quarterly. In addition to cost savings, TTC transactions boost the supply of clean electricity, fuels, and manufacturing, without requiring that a company serve as a direct offtaker for these products.  

TTCs provide vital capital to support the energy transition and maximize the economic opportunities in the IRA, giving companies a way to pursue sustainability goals without having to reinvent their energy supply chains. 

We see three important sustainability goals that corporations can support by investing in TTCs:

  1. First, as detailed above (but it bears repeating), purchasing TTCs is an essential part of achieving the energy transition Congress set in motion with the passage of the IRA. Many CFOs and tax executives already have their nose to the grindstone identifying ways that investing in TTCs can improve their companies’ effective tax rate and overall profitability. Just as important, however, are the sustainability implications from participating in the TTC market.
  2. Second, the IRA introduces new criteria for project developers which can support a TTC buyer’s overall sustainability priorities. Before the IRA, all projects of a certain type (i.e. wind or solar) were entitled to receive the same tax credits as one another. Now, however, the IRA disproportionately rewards those projects which pay their workers a competitive wage, use domestically produced materials, and/or are located in low income or historic energy communities. Projects that meet these criteria must show documentation which creates a demonstrable record that TTC investments are paying dividends in communities, supporting environmental justice areas, and US manufacturing.
  3. Finally, many companies are choosing to earmark all or part of the savings from purchasing TTCs to support other sustainability initiatives. TTCs can liberate a substantial portion of a company's tax liability (~5-10% is typical at today’s market rates), creating a sizeable pool of capital to support emissions reduction goals, including through purchases of renewable energy certificates (RECs), carbon offset credits, direct emissions reductions, or a wide range of other sustainability and community investment initiatives.

We’re at the Crux of sustainable investing in tax credits

There are no new restrictions on how savings from a TTC transaction can be redeployed to support sustainability. Our team is excited to share how our clients are using TTCs to boost their investments in their communities, employees, and corporate sustainability programs. Get in touch with us today!

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