As 2023 dawns, guidance is needed on technology-neutral tax credits under the Reducing Inflation Act (IRA)

Among the many provisions of the Reducing Inflation Act (IRA), which President Joe Biden signed into law on August 16, 2022, is one of the most significant provisions replacing the existing clean energy Investment Tax Credit (ITC) and wind Can produce tax credits (PTC) Clean ITC and Clean PTC that are not related to new technology. These new tax credits will apply to any “net zero” energy production facility that comes online on or after January 1, 2025. The law aims to reduce greenhouse gas (GHG) emissions by 40% from 2005 levels by 2030, upending 30 years of clean energy policy by shifting from a system that favors specific technologies to one that prioritizes outcomes. From now on, it’s the destination, not the journey.

Rishabh Agarwal, an industry veteran and author of an upcoming book on clean energy production technologies, explains the importance of the change: “The Clean ITC and PTC are committed to creating fairness between various low-carbon energy technologies such as solar and wind. The competitive playing field for bioenergy, nuclear energy, batteries, carbon capture, etc., encourages investment in the most impactful technologies. This incentivizes continuous innovation across multiple technology verticals, rather than a less efficient one-size-fits-all framework.”

However, the details will make the difference, and the exact mechanisms and criteria needed to implement clean ITCs and PTCs in IRAs have yet to be determined. The bill directs the U.S. Department of the Treasury to calculate and publish an annual inventory of emissions rates for various technologies using a cradle-to-gate “life cycle analysis” (LCA) approach. While LCA is an effective tool for making like-for-like comparisons between different electricity production pathways, relying on LCA results for ITC and PTC identification leads to difficult measurement, reporting, and verification (MRV) challenges. Regulations surrounding boundary conditions, data collection processes, and other factors make the implementation of LCA-based policies politically and technically complex. For example, emissions from indirect land-use change caused by biofuel production are tabulated in some regulatory regimes and excluded in others, such as the European Union’s Renewable Energy Directive.

These details are important and can make or break the ability of various technologies to earn credits. As we move into 2023, the lack of guidance on incentive scheme outlines, including emission rates for various technology combinations, adds uncertainty to the deployment of many novel and impactful technologies. While the launch of these credits in 2025 seems far off, the development and construction of new energy facilities could easily take two years or more. Planning needs to start now, without guidance many good projects will be forced to wait longer on the sidelines for clarity on their incentive status.

The roadmap for policymakers in Washington is available on the other side of the country: California’s successful Low Carbon Fuel Standard (LCFS) program, which was implemented in 2011 and is still running today, aims to reduce emissions through a similar technology-agnostic approach Unlike the IRA’s program, the main difference is that California’s program is specific to its transportation sector. At the heart of the LCFS program is the use of LCA to estimate the “well-to-wheels” GHG emissions of a specific fuel or technology by tabulating the total amount of GHG released during production, refining, transportation and final use of a specific fuel or technology. The result, the so-called “carbon intensity” (CI) of a fuel or technology, allows for technology-independent comparisons. Lower CI solutions earn more points and are therefore more motivated than less impactful alternatives. Producers of dirtier fuels with a CI score above the prescribed level must buy credits to offset their emissions, creating a market.

The program has been very successful, spurring investment in a variety of technologies, including dairy biogas, second-generation biofuels, direct air capture, solar, battery storage and hydrogen, with minimal cost impact at the pump. The fact that the nearly 20 million tons of credits generated in 2021 are evenly distributed across ethanol, biodiesel, renewable diesel, biomethane and electricity is a testament to the technology agnostic nature of the LCFS. Given its success, Oregon, Washington, British Columbia, and Canada have implemented or are about to implement LCFS-like programs, while many other countries and US states are considering similar policies.

To successfully implement the IRA’s technology-agnostic policy, federal agencies responsible for drafting regulations for clean ITC and PTC programs should seek guidance from LCFS. California’s planned innovations, including reliance on a standardized LCA process (standardized using the GREET model for carbon accounting), provide a good starting point.Mechanisms to verify individual project emissions through established 3 networks^road Some LCA verifiers can also be based on successful programs in California. Now is the time to start developing these important regulatory structures: accurate and expedient processes for calculating and qualifying clean ITCs and PTCs will help attract investment in a variety of clean technologies, making long-term net-zero emissions targets more feasible and affordable.