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Perspectives
Driving energy equity and sustainability with the IRA
Unlock tax incentives for a clean energy transition
Amid economic uncertainties, the Inflation Reduction Act (IRA) offers a clear path forward, directing billions towards clean energy initiatives. Through IRA’s climate provisions and renewable energy investment tax credits, the IRA is not just accelerating the clean energy transition but is also addressing energy equity. For businesses committed to sustainability, understanding these opportunities is not just wise—it's essential.
The Inflation Reduction Act's commitment to cleaner energy and cleaner communities
Sustainability-related tax provisions incentivize clean energy deployment and cleaner communities
David Yaros and Jaime Park
As highlighted in the recent Deloitte report, Advancing Energy Security: Sustainability-related tax provisions in the Inflation Reduction Act, a significant goal of the Inflation Reduction Act of 2022 (IRA) is to expand renewable energy investment tax credits and incentives. With hundreds of billions of dollars of incentives anticipated to be claimed over the next 10 years, the IRA clearly intends to accelerate the clean energy transition. At the same time, the IRA aims to amplify the benefits to society by incentivizing investments that address what some supporters say are historic and emerging inequities.
“Many of the clean energy tax provisions provide bonus credits to projects that pay prevailing wages, are located in disadvantaged communities, or meet domestic content requirements,” says Carl Obradovich, partner, Deloitte Tax LLP. “These credits not only provide direct benefits to businesses investing in climate change initiatives, but they are intended to spur investments that bring indirect benefits to society overall.”
Deloitte Tax LLP’s Credit & Incentives team and its Tax Sustainability, Climate & Equity practice are collaborating to unpack how the IRA and other provisions leverage tax policy to drive to a cleaner climate and cleaner communities. One example of how businesses may use IRA climate provisions in their efforts to be more purposeful is by investing in electric vehicle charging stations that must be located in certain census tracts, generally in low-income or non-urban areas. In another example, a business placing a solar project into service may capitalize on the renewable energy investment tax credit and could see its IRA tax credit increase from 6% to 30% if laborers’ and mechanics’ earnings meet prevailing wage requirements and other apprenticeship requirements.
A deeper dive
In a closer look at these community-focused components of the IRA, two credits exemplify the overarching policy of promoting what sponsors view as environmental justice: both section 48C, the Qualifying Advanced Energy Project Credit, and section 48E, the Energy Investment Credit, award bonus credit for certain solar and wind facilities that provide benefits to low-income communities. Under section 48C, the IRS, in consultation with the Department of Energy, allocates total credits of $10 billion in a competitive application process to projects that re-equip, expand, or establish manufacturing or industrial facilities to produce products or components that are likely to be used in renewable energy or other greenhouse gas reduction measures. Other eligible projects under section 48C include industrial facilities that reduce their own greenhouse gas emissions and facilities that process, refine, or recycle critical minerals. To receive an allocation under these initiatives, a company should consider submitting an application outlining its project plan, including how the plan will support the local workforce and provide transition opportunities for workers to move from coal and other fossil fuel energy companies to renewable energy sectors.
The wage and apprenticeship example noted above provides an increased credit amount for eligible projects under section 48C. Additionally, out of the total $10 billion credit amount, $4 billion is earmarked for projects located in census tracts where a coal mine closed after 1999 or where a coal-fired electric-generating unit was retired after 2009. With this special allotment of $4 billion and the emphasis on the workforce and community engagement, the IRA aims to support federal investments that benefit coal communities to support a smooth and speedy clean energy transition.
Section 48E provides another example of the extent to which the IRA strives to impact both environmental policy and targeted communities. Like section 48C, section 48E requires solar and wind project owners to apply for an allocation of community-enhancement tax credits, entitling them, if awarded, to an additional 10% or 20% of investment tax credits. Interested applicants should consider constructing a solar or wind facility in a low-income community, or on Indian land, or is installed on a low-income residential building whereby such residents receive financial benefits of the new renewable energy generation. With this renewable energy investment tax credit, IRA sponsors hope to leverage IRA climate provisions to support energy equity and accelerate the clean energy transition in disadvantaged communities.
Leveraging IRA tax credits to enhance climate, society, and business value
To take advantage of these and other IRA tax credits, tax leaders can evaluate their sector, business model, and related strategies to determine what is applicable to them. These credits may provide a financial benefit to an organization’s investments, as well as help advance economic resilience, climate adaptability, and equitable sustainability in the years and decades to come.
This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this publication.
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