Achieving Climate Goals Through Tax Policy: Why Public Interest Stakeholder Input is Important

About three-quarters of the Inflation Reduction Act’s total climate investments are run through the tax code. This post highlights how input from public interest stakeholders can help Treasury and the IRS make better-informed decisions as they prioritize and implement this new law.

By Taylor Cranor and Michael Kaercher

The Inflation Reduction Act (IRA) includes the most significant investment in climate that Congress has ever made. Roughly three-fourths, or $270 billion, of the overall investment, is run through the tax code, and Treasury and the Internal Revenue Service (IRS) will be responsible for implementing these provisions. Neither of these government institutions has previously been charged with building the in-house expertise needed to implement the IRA, such as the capacity for analyzing greenhouse gas emissions and the development and administration of key tax credits that are in many ways set up like grant programs. Getting input from a range of relevant stakeholders will help Treasury and the IRS ensure the IRA meets its goals.

Building off Mike Kaercher’s remarks at the Institute for Policy Integrity’s conference A New Era of Climate & Energy Policy, this post provides a brief overview of the climate provisions, discusses the importance of public interest stakeholder contributions in implementing them, and presents two examples of high-priority projects that could benefit substantially from public interest stakeholder input.

The climate tax provisions

The IRA’s climate-related tax investments are spread across dozens of provisions that fall into a few broad categories:

• Clean energy and storage ($160.9 billion)
• Clean fuels ($21.7 billion)
• Efficiency ($36.9 billion)
• Clean vehicles ($14.2 billion)
• Manufacturing ($36.9 billion)

(For a more comprehensive discussion of the climate tax provisions and other climate measures in the IRA, see this piece from the Bipartisan Policy Center.)

In developing these new climate tax provisions, lawmakers targeted three overarching goals: (1) cutting emissions to meet the United States’ commitment under the Paris Agreement (an international treaty aimed at limiting global temperature increases); (2) expanding access to and affordability of clean technologies, consistent with environmental justice goals (sometimes described as “the fair treatment and meaningful involvement of all people regardless of race, color, national origin, or income, with respect to the development, implementation, and enforcement of environmental laws, regulations, and policies” ); and (3) “ensur[ing] that green jobs are good jobs” while improving domestic supply chains.

Treasury and the IRS’s implementation decisions will determine how successful the law is in reaching these goals, and public interest stakeholders can help ensure that Treasury and the IRS make better-informed decisions.

The implementation process: engaging a full range of stakeholders

Treasury and the IRS are now tasked with implementing and administering these climate tax provisions and, at the same time, building their internal capacity and expertise on emissions analyses, environmental justice, and labor standards. The drafters of many of the provisions initially intended for other agencies to handle parts of the implementation. But as the legislation evolved, the rules of reconciliation in the Senate led to Congress assigning responsibility for implementation to Treasury and the IRS.

Accordingly, Treasury and the IRS will need to make choices about which projects go first, and how to allocate resources, including the $500 million of one-time implementation funding provided to the IRS to carry out the climate subtitle of the IRA. These decisions should be based on how impactful the policy is for the overall climate goals of the legislation, when the provision goes into effect, how much work is required to implement the provision (e.g., guidance, forms, processes, etc.), and stakeholder input, among other criteria.

To prioritize guidance and make substantive policy calls, Treasury and the IRS will likely work with other agencies and departments, such as the Environmental Protection Agency (EPA) and the Department of Energy (DoE), as they have done in the past. Nonetheless, by law, Treasury and the IRS will make the final decisions on guidance and other implementation issues. Treasury and the IRS will also be responsible for administering and enforcing the programs’ rules on an ongoing basis. Congressional committees and other institutions that focus on Treasury and IRS oversight, such as the Senate Finance Committee, the House Ways and Means Committee, and the Treasury Inspector General for Tax Administration, will in turn play an important role.

Public interest stakeholder engagement with the Administration can help policymakers understand what to prioritize and how to implement the law. While there will likely be many tranches of guidance, with formal calls for comments on proposed rules for specific provisions, developers and other industry players are likely already engaging with Treasury to shape ultimate priorities and the substance of guidance. The Administration should help bring public interest stakeholders to the table as they prioritize and implement the IRA, especially given tight deadlines for guidance. It is already signaling some ways that they will do that. Public interest stakeholders in climate, environmental justice, and labor spaces can play a critical role in providing Treasury with the information and perspectives they need to ensure the climate tax provisions reach their potential.

Examples of high-priority provisions where stakeholder input can inform and improve outcomes

We look here at just two examples from the many high-priority climate tax provisions to show how their implementation would significantly benefit from public interest stakeholder perspectives.

Example 1: Increasing the tax credit for renewables in low-income communities.

One way the IRA expands access to clean technologies is by enhancing tax credits for wind, solar, and storage property. For such projects located in low-income communities, or on tribal land, the credit is increased by a third. For projects related to a low-income residential building project or a low-income economic benefit project, the credit is increased by two-thirds. These enhancements could make investments in these communities far more attractive, with the federal government picking up as much as half the overall investment cost (and in some cases, even more).

However, place-based tax incentives like these can carry risks. Take the case of the Opportunity Zone (OZ) program, established in the tax bill passed at the end of 2017, that provides tax benefits to investors who invest in low-income communities. To receive the tax benefits, investors do not have to show upfront whether or how local residents would benefit from the investments. There is no application process, which limits the ability of communities to have a meaningful say in which projects are undertaken and receive the OZ tax benefits. Some research suggests that certain OZ investments have even accelerated displacement.

With such risks as context, the IRA requires an application process with selection criteria to qualify for increased credits. Congress adopted this structure, in part, to ensure the projects are in line with the preferences of low-income communities. In this way, the provision operates more like a grant program than a tax credit. There are other (non-IRA) tax credits allocated for specific purposes with capped amounts of funding; examples include the Low-Income Housing Tax Credit and the New Markets Tax Credit. And there was a capped, allocated tax credit for advanced energy projects included in the American Recovery and Reinvestment Act that was largely allocated by DoE (subject to a Memorandum of Understanding between Treasury and DoE). But this is the first time Treasury and the IRS — rather than another agency or organization — will have the primary responsibility for soliciting, reviewing, and approving applications related to a place-based incentive. It will require significant work to get this novel program up and running effectively.

The legislative text gives Treasury significant discretion to determine how to run the program. The IRA directs the Secretary to “establish a program to allocate [the credit enhancement] to applicable facilities.” The statute does not prescribe what criteria Treasury should use to do so, although the legislative history provides some clues. Analysis and perspectives from public interest stakeholders could help Treasury craft selection criteria that will enable the program to most effectively achieve both emissions and environmental justice goals. For example, such input can help Treasury and the IRS understand how the criteria might address the concern that certain investments that reduce greenhouse gas emissions might generate co-pollutants with negative health impacts for communities; and how the circumstances of a particular community, such as the level of health harm from existing industrial facilities, might factor into whether and how a new investment qualifies for supplemental environmental justice credits.

Environmental justice community input can also help Treasury and the IRS understand how to craft an application process that prioritizes community engagement and is as accessible, inclusive, and free of administrative burden as possible.

Near-term stakeholder engagement on these issues is important: The program goes into effect next year, so Treasury will need to roll out the application process and guidance quickly.

Example 2: Transitioning to a “tech neutral” approach for clean energy and fuels

Currently, several specific fuels and technologies for generating energy are eligible for tax credits — including solar, wind, geothermal, and biodiesel. Starting in 2025, the “tech neutral” approach will deem generation facilities eligible for credits if their emissions profile is net zero or better: that is, on net, the amount of greenhouse gasses that a facility emits is no greater than zero. For fuels, credit eligibility and the credit rate will be determined based on “lifecycle greenhouse gas emissions” analysis of the fuel, meaning the emissions measurement will include all the steps taken in creating the fuel, as well as the ultimate use of the fuel. Therefore, the decisions Treasury makes about measuring emissions (or how to involve other agencies in doing so) will directly impact which technologies are — and are not — eligible for federal investment. In turn, this could lead to investments that are more — or less — effective at quickly reducing emissions.

While the transition to tech neutral occurs in 2025, Treasury needs to make key decisions well before then. For example, the IRA includes a credit for the production of clean hydrogen. The clean hydrogen credit goes into effect in January 2023 and requires a “well to gate” lifecycle emissions analysis. This lifecycle analysis will raise many emissions accounting questions. One example of a complicated question relates to green hydrogen. Green hydrogen is produced when clean electricity is used to split water into hydrogen and oxygen through electrolysis: that is, it consumes clean electricity that might be used elsewhere. How should Treasury account for the fact that green hydrogen might divert clean electricity from other uses? Separately, how should Treasury respond to likely industry requests for the lifecycle analysis to factor in carbon offsets (including accounting for offsetting some emissions by funding other purported emissions reduction or carbon removal)? Similarly, a credit for sustainable aviation fuels (SAF) goes into effect in January. The decisions on how to measure lifecycle analysis for hydrogen and SAF are likely to carry over into the broader fuels regime in 2025. Therefore, Treasury has a short lead time to make these decisions.

To address these issues, and many more like them, Treasury will have to decide to what extent it will build more expertise on these issues or rely more heavily on the expertise that exists in other parts of the government.

Public interest stakeholders may have views on analytical and institutional approaches taken by other agencies with existing expertise analyzing lifecycle emissions, and, therefore, on the extent to which Treasury should rely on or adapt those approaches. And, regardless of how that balance is struck, Treasury will remain the agency ultimately responsible for prioritizing and implementing the climate provisions. Feedback from stakeholders and experts who have deep understanding of the options for lifecycle emissions analysis is critical to building a system where federal dollars are spent in ways that are effective at meeting the IRA’s climate goals.

Conclusion

Public interest stakeholder input can help Treasury and the IRS make more informed decisions about how to prioritize implementing the IRA’s climate tax provisions, how to work with other agencies in doing so, and how to make important regulatory and administration decisions that will impact how successful the IRA’s climate goals are.

Public interest stakeholder input also can help Treasury and the IRS to better understand when and how the climate, environmental justice, and labor and domestic content goals of certain provisions interact and need reconciling. These goals may often be complementary, but in some cases public interest views may differ on the extent to which each of these goals should drive the outcome of an implementation decision. These different perspectives can help the administration better understand the range of issues, and the outcomes they should consider when interpreting and applying the law. Even if they differ among themselves, public interest perspectives are likely to add valuable information that will be missing if industry voices alone dominate the implementation process.

There are many other areas related to implementing the IRA’s climate tax provisions where stakeholders that often give their input to EPA, DoE, and other agencies and departments could now provide valuable expertise and perspectives to Treasury and the IRS. Given the tight statutory deadlines for implementation, the Administration will need to work quickly to encourage and support stakeholders to provide their valuable input.

Such stakeholder engagement could be crucial to ensuring the $270 billion of tax benefits help achieve the IRA’s emissions, environmental justice, and labor goals.

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