The expansion of energy and emission-related tax credits under the Inflation Reduction Act (IRA) has expanded incentives for a number of green initiatives. The IRA modified a number of credits governed by Section 45 of the Internal Revenue Code, including by allowing certain entities to receive a “direct pay” cash payment and allowing the sale or transfer of credits to third parties.
45Q, 45U, 45V, 45X, 45Y, 45Z
45Q credits are available for taxpayers that own carbon capture equipment that captures qualified carbon oxide from an industrial facility, and sequester or use carbon for certain purposes are entitled to a credit for each metric ton of qualified carbon oxide captured and sequestered, with the credit value depending on the method of capture and the use of captured carbon.
45U credits incentivize zero-emission nuclear power production. The amount of the credit is equal to 0.3 cents per kWh (adjusted for inflation) of electricity produced by the taxpayer at a qualified nuclear power facility that is sold to an unrelated person.
45V credits are available for clean hydrogen power production. The amount of the credit ranges from $0.12 to $0.60 per kilogram of qualified clean hydrogen produced by a clean hydrogen facility.
45X credits can be claimed for solar and wind energy components, inverters, qualified battery components, and certain critical minerals produced in the US and sold by the manufacturer to an unrelated person, with the amount varying depending on the type of component and component quality.
45Y credits incentivize the production of clean electricity, providing tax credits based on the amount of electricity generated from renewable sources with a greenhouse gas emissions rate not greater than zero (including through the use of carbon capture equipment).
45Z credits are available for the domestic production of clean transportation fuels, including sustainable aviation fuels. The amount of the credit ranges from $0.20/gallon to $0.35/gallon depending on the type of fuel, and may be multiplied by an emissions factor.
45Q credits reward companies capturing and storing carbon emissions, offering financial incentives for permanent geological storage, enhanced oil recovery, or CO2 utilization.
The credit amount varies based on capture method and CO2 utilization, aiming to spur investment in carbon emission reduction technologies.
By merging the financial advantages from 45Q with purchases of voluntary carbon credits, credit buyers can reduce the effective price paid per credit.
Purchasers of voluntary carbon credits, by supporting 45Q-backed projects, can meet and exceed their Environmental, Social, and Governance (ESG) targets, while also showcasing their commitment to pioneering carbon capture endeavors.
Incorporating 45Q-supported projects into a carbon credit portfolio offers a balanced mix of regulatory incentives and market-driven advantages, ensuring stability and growth.
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