On July 27, Senate Majority Leader Chuck Schumer (D-NY) unveiled a budget reconciliation bill entitled the Inflation Reduction Act of 2022 ("IRA"), which would implement core components of President Biden's agenda on healthcare, tax reform, and climate change.1 The bill includes an estimated $369 billion in spending related to "climate change and energy security," including tax and other incentives to promote US production of electric vehicles ("EVs"), renewable energy technologies, and critical minerals, representing the "single biggest climate investment in US history[.]"2 These provisions are intended to put the United States on a path to roughly 40% percent emissions reduction by 2030, but they also reflect economic and geopolitical objectives, including a desire to "lessen our reliance on China, ensuring that the transition to a clean economy creates millions of American manufacturing jobs, and is powered by American-made clean technologies."3
Consistent with these goals, the IRA would significantly expand US tax credits for renewable energy projects such as solar, wind, geothermal, and hydropower facilities. Among other changes, the IRA would revise and extend existing tax credits for investments in renewable energy property and production of electricity from renewable resources. The IRA would also establish new, "technology neutral" production and investment tax credits for facilities that generate electricity with zero carbon emissions. In an effort to bolster domestic production of inputs used in renewable energy projects, each of these new and revised tax credits would provide "bonus" credits for facilities that satisfy domestic content requirements for iron, steel, and manufactured goods. Given the globalized nature of supply chains for clean energy technologies, these requirements would have significant trade implications, and may draw complaints from US trading partners on the grounds that they discriminate against imports in favor of domestic goods. We provide an overview of the tax incentives subject to domestic content requirements below.
The IRA would impose domestic content requirements in connection with four types of clean energy tax credits: (1) the existing tax credit for electricity produced from renewable resources, codified at Section 45 of the Internal Revenue Code ("IRC"); (2) the existing tax credit for investment in energy property, codified at Section 48 of the IRC; (3) a new tax credit for electricity produced from zero-emissions facilities; and (4) a new tax credit for investment in facilities that generate electricity with zero emissions.
Under the IRA, each of these tax credits would consist of a base credit amount (available to all qualifying facilities), and an elevated credit amount equal to five times the base rate for projects that meet prevailing wage and apprenticeship requirements.4 The IRA would make these tax credits refundable for certain eligible taxpayers (i.e., it would allow taxpayers to elect to be treated as having made a tax payment equal to the value of the credit for which they are eligible).5 This "elective payment" option is intended to allow entities with little or no tax liability to accelerate utilization of the credits, rather than carrying them forward to years when their credits can offset their tax liability.
Under the IRA, each of the tax credits described above would include additional "bonus" credits for projects that satisfy domestic content requirements. The domestic content requirements generally consist of (1) a requirement that all iron and steel products that are part of the project at the time of completion are produced in the United States; and (2) a requirement that manufactured products that are part of the project satisfy a domestic content threshold. In addition to being ineligible for bonus credits, projects that do not satisfy domestic content requirements would be partly disqualified (and in some cases completely disqualified) from the elective payment benefit established by the IRA. The bill would permit the Secretary of the Treasury to provide exceptions from the domestic content requirements in certain circumstances where domestic products are unavailable or excessively costly.
The specific domestic content requirements and associated incentives for each provision are summarized below. Other key details of the new and revised tax credits (including the effective dates of the IRA's modifications, the time periods for which the credits would be available, and the schedules for phase-out of certain credits) can vary significantly depending on the credit and type of energy project at issue, and are not addressed here.
Production tax credit for electricity produced from certain renewable resources ("Section 45 PTC")
The IRA would revise and extend the electricity production tax credit codified at Section 45 of the IRC, which allows energy producers to claim a credit for electricity produced from certain renewable resources.6 The revised Section 45 PTC would provide a base credit of 0.3 cents per kilowatt hour ("KWh") of electricity produced and sold by a qualifying facility to an unrelated party. For facilities that satisfy the applicable wage and apprenticeship requirements, the credit rate would be 1.5 cents per KWh. The types of facilities eligible for the revised credit would include wind, solar, biomass, hydropower, and geothermal energy facilities, among others.
Facilities that satisfy domestic content requirements would be eligible for a "bonus credit" equivalent to 10 percent of the value of the Section 45 PTC. The bonus credit would be available only if "any steel, iron, or manufactured product which is a component of such facility (upon completion of construction) was produced in the United States[.]"7 For purposes of this requirement, iron and steel products would be treated as domestic only where "[a]ll steel and iron manufacturing processes . . . take place in the United States, except metallurgical processes involving refinement of steel additives."8 The manufactured products that are components of the facility would be considered domestic if they satisfy a domestic content threshold of 40 percent (or 20 percent in the case of offshore wind facilities). Domestic content would be measured by calculating the total cost of the manufactured products that are "mined, produced, or manufactured in the United States" as a percentage of the total costs across all manufactured products in the facility.
In addition to being ineligible for the 10 percent bonus credit, facilities that fail to satisfy the domestic content requirements would face limitations on the use of the "elective payment" option with respect to the Section 45 PTC. If a facility does not satisfy the domestic content requirements, the amount of the credit that would be eligible for direct payment would decrease by 10 percent, effective with respect to facilities for which construction begins after January 1, 2024.
The IRA would require the Secretary of the Treasury to provide "exceptions" to the domestic content requirements where (1) the inclusion of domestic products increases the overall costs of construction by more than 25 percent; or (2) relevant products are not produced in the United States in sufficient and reasonably available quantities or of a satisfactory quality.
Investment tax credit for energy property ("Section 48 ITC")
The IRA would revise and extend the investment tax credit codified at Section 48 of the Internal Revenue Code, which allows taxpayers to claim a credit for the cost of certain energy property.9 The revised provision would provide base credits ranging from 2 to 6 percent, depending on the type of energy property at issue, and bonus rates of 6 to 30 percent for properties that meet wage and apprenticeship requirements, as shown below.
|Property Type||Base Credit Rate||Bonus Credit Rate|
|Solar energy, geothermal, fiber-optic solar, fuel cell, microturbine, small wind, offshore wind, combined heat and power, and waste energy recovery||6 percent||30 percent|
|Geothermal heat pump10||6 percent||30 percent|
|Microturbine||2 percent||10 percent|
|Energy storage technology, biogas property, microgrid controllers, dynamic glass, linear generators11||6 percent||30 percent|
Properties eligible for the Section 48 ITC would be eligible for an additional bonus credit if they satisfy domestic content requirements similar to those that apply to the Section 45 PTC (described above). The additional credit for domestic content would be 2 percentage points if the property is subject to the base credit rate, or 10 percentage points if the property also satisfies the wage and apprenticeship requirements, and is therefore eligible for the bonus credit rate. For properties that do not satisfy the domestic content requirement, the amount of the credit that is eligible for elective payment would decrease in a manner similar to the Section 45 PTC (i.e., the amount eligible would decrease by 10 percent).
New tax credits for clean electricity production ("clean electricity PTC") and investment ("clean electricity ITC")
The IRA would create new "emissions-based" tax incentives for electricity-generating facilities. These provisions would allow taxpayers to choose between a production tax credit (codified at new Section 45Y) or an investment tax credit (new Section 48D), both of which would be contingent on the carbon emissions of the electricity generated. Power facilities would qualify for the credits regardless of the technology they use, provided that their "greenhouse gas emissions rate" is not greater than zero.12
Clean electricity PTC
The new production tax credit would have a base rate of 0.3 cents per KWh of electricity produced and sold in the 10-year period after a qualifying facility is placed in service. For facilities that meet the wage and apprenticeship requirements, the credit would be 1.5 cents per KWh. Facilities that comply with the following domestic content requirements would be eligible for an additional bonus credit equivalent to 10 percent of the value of the credit:
- All iron and steel products that are components of the facility upon completion of construction must be produced in the United States; and
- The manufactured products that are components of the facility upon completion of construction must satisfy the following domestic content thresholds:
|Year in Which Construction of the Facility Begins||Facility Type|
|Offshore wind||All others|
|2025||27.5 percent||45 percent|
|2026||35 percent||50 percent|
|2027||45 percent||55 percent|
|After December 31, 2027||55 percent||55 percent|
If a facility does not satisfy the domestic content requirements, the amount of the PTC that would be eligible for elective payment would decrease by 15 percent, for facilities that begin construction in 2025. Facilities that begin construction after December 31, 2025 would be ineligible for elective payment of the new PTC, unless they satisfy the domestic content requirements.
Clean electricity ITC
The new investment tax credit would have a base rate equivalent to 6 percent of the qualified investment for the taxable year. For facilities that meet the wage and apprenticeship requirements, the credit would be 30 percent. Facilities that satisfy domestic content requirements would be eligible for an additional bonus credit of 2 percentage points (if the facility is subject to the 6 percent base rate), or 10 percentage points if the facility also satisfies the wage and apprenticeship requirements. The applicable domestic content requirements are similar to those that apply to the Section 48 ITC and the Section 45 PTC: all iron and steel products must be produced in the United States, and manufactured products must satisfy a domestic content threshold of 40 percent (or 20 percent in the case of offshore wind facilities). For properties that do not satisfy the domestic content requirements, the amount of the credit that is eligible for elective payment would decrease in a manner similar to the Section 48 ITC and the Section 45 PTC (i.e., the amount eligible would decrease by 10 percent).
The IRA's passage is not yet assured, but the bill enjoys strong support from President Biden and Congressional Democrats, and there is a strong chance that Congress will approve the bill in the coming weeks. The above-mentioned provisions of the IRA are partly intended to reduce greenhouse gas emissions, but proponents of the bill acknowledge that they reflect other objectives, including to "on-shore clean energy manufacturing."13 The bill's domestic content requirements would encourage US firms to give preference to US suppliers of raw materials and manufactured goods for clean energy projects, potentially placing foreign suppliers at a significant disadvantage in the US market. Unlike the IRA's tax credit for electric vehicles, which would allow vehicles to qualify based on North American content, the abovementioned "bonus" credits for clean energy projects are contingent upon US content only – potentially leading to trade tensions with Canada and Mexico, among other trading partners. If these provisions are enacted in their current form, foreign governments may challenge them through WTO dispute settlement or similar mechanisms provided in US free trade agreements, such as the US-Mexico-Canada Agreement.
1 The text of the legislation can be viewed here.
2 "Summary of the Energy Security and Climate Change Investments in the Inflation Reduction Act of 2022" Senate Majority Leader Chuck Schumer, July 27, 2022, .
4 The wage requirements generally require that the taxpayer ensure laborers and mechanics are paid prevailing wages during the construction of a qualifying project, and, in some cases, for the alteration and repair of the project for a defined period after the project is placed into service. The apprenticeship requirements generally require that the taxpayer ensure that qualified apprentices perform no less than a specified percentage of total labor hours of the project.
5 Taxpayers eligible for the elective payment option are tax-exempt entities, state and local governments (and subdivisions thereof), tribal governments, and the Tennessee Valley Authority.
6 26 U.S.C. § 45.
7 The legislation indicates that domestic content would be determined in a manner consistent with the US regulations governing the application of “Buy America” requirements to transportation infrastructure (49 C.F.R. § 661).
8 The bill stipulates that the domestic content standard for iron and steel products would be applied in a manner consistent 49 C.F.R. § 661.5(b), under which iron and steel products are treated as domestic only if "[a]ll steel and iron manufacturing processes . . . take place in the United States, except metallurgical processes involving refinement of steel additives[.]"
9 26 U.S.C. § 48.
10 The base credit rate for geothermal heat pump property phases down to 5.2 percent for property that begins construction in 2033 and 4.4 percent for property that begins construction in 2034. The bonus credit rate phases down to 26 percent in 2033 and 22 percent in 2034. No credit is allowed for property that begins construction after December 31, 2034.
11 These types of properties would newly be eligible for the Section 48 ITC as a result of the IRA.
12 The bill defines the greenhouse gas emissions rate as "the amount of greenhouse gases emitted into the atmosphere by a facility in the production of electricity, expressed as grams of CO2e per KWh." For facilities that produce electricity through fuel combustion or gasification, the greenhouse gas emissions rate would be "the net rate of greenhouse gases emitted into the atmosphere by such facility (taking into account lifecycle greenhouse gas emissions) . . . expressed as grams of CO2e per KWh."
13 "Summary of the Energy Security and Climate Change Investments in the Inflation Reduction Act of 2022," Senate Majority Leader Chuck Schumer, July 27, 2022, .
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