6 New Climate Tax Credits that Benefit Manufacturers
This summer, the Inflation Reduction Act (IRA) was signed into law, opening $370 billion of investment into initiatives to fight climate change and boost domestic manufacturing. More broadly, this legislation constitutes a profound moment in industrial policy writ large, signaling a renewed commitment to American manufacturing competitiveness and technological innovation.
With billions of dollars of tax credits to incentivize domestic manufacturing, the entire US manufacturing ecosystem – the factories, workers and upstream and downstream partners – stand to benefit.
Here are the top six IRA tax credits for manufacturers to explore and why they are beneficial.
1. The Advanced Energy Project Credit
Any manufacturer considering new investments or involved in advanced energy supply chains should pay attention to this credit, known as 48C, which aims to massively expand domestic production capacity of clean energy technology and equipment. It offers a tax credit of up to 30% on investments into production facilities across a wide range of clean-energy technologies.
In the past, only investments into facilities producing renewable-energy components qualified. The IRA expands eligible investments to include facilities that produce components used in carbon capture, utilization and storage (CCUS), electricity grid modernization, bio- or renewable-fuel generation and refinement, and components of electric vehicles; as well as facilities that recycle eligible components.
2. The Advanced Manufacturing Production Credit
While 48C encourages development of new facilities, the net-new Advanced Manufacturing Production Credit (45X) encourages production. In this case, producers of components and materials required for solar and wind energy devices, batteries and renewable energy and electric vehicle technologies are eligible. The credit encourages innovation because the amount of credit scales up with the efficiency of the component piece (rather than just price).
Even if your business does not invest in or produce clean energy technologies directly, the combined force of 48C and 45X and expected reshoring should have knock-on benefits across the entire domestic manufacturing supply chain.
3. Commercial Electric Vehicle & Biodiesel Tax Credits
The IRA’s tax credits for low-carbon transportation fundamentally change the economics of commercial electric vehicles and clean fuels. They open new pathways to reduce fleet costs and emissions that are worth exploring – no matter the size of your fleet.
The Credit for Commercial Clean Vehicles offers a tax credit of up to 30% on purchases of new heavy-duty electric commercial vehicles, and the Alternative Fuel Refueling Infrastructure Credit offers a 30% credit for charging infrastructure, reimbursing up to $100,000 per facility. As the nonpartisan clean-energy organization RMI notes, “The IRA tax credit makes owning an electric truck cheaper than owning a diesel one in most use cases, with urban and regional electric trucks becoming cost-superior to diesel ones as soon as 2023.”
For diesel vehicles and equipment that aren’t candidates for electrification yet, the Biodiesel Tax Credit provides up to $1.75 per gallon for biodiesel, renewable diesel and other alternative clean fuels.
4. Carbon Capture Tax Credit
If your industrial processes have significant sources of concentrated emissions, this credit, known as 45Q, has the potential to drive new revenue while lowering emissions. Carbon capture usage and storage (CCUS) involves capturing carbon and either sequestering it or using it to produce new products. Past incentives only applied to major operators, but lowered requirements in the Inflation Reduction Act make the credit more mainstream: 12,500 tons of captured carbon rather than 100,000; $85 per ton credit, up from $50; and an easier method of direct payments. As options and affordability increase, CCUS is worth keeping an eye on.
5. Commercial Energy Efficiency Tax Deduction
Anyone who owns property should look into the Commercial Energy Efficiency Tax Deduction, which offers up to $5 per square foot for retrofitting office space or factory floors in ways that increase energy efficiency. Possible improvements include installing high-efficiency lighting, an insulating building envelope and more efficient HVAC equipment. It used to be the case that you had to demonstrate a 50% reduction in energy costs as a result of the retrofits, but with the IRA, that threshold has been reduced to 25% – making it even more achievable. Most commercial real estate owners are aware of this tax deduction, but now it can benefit industrials and manufacturers, too.
6. Green Government Procurement
Anyone selling to public sector and government buyers should take note of the IRA’s $5 billion in incentives to encourage the use of low-carbon building materials in government-owned buildings. Manufacturers of low-carbon building and construction materials will have an advantage in government RFPs. A first step to take here is to measure the embodied carbon of your raw materials to see whether or not your materials are lower than EPA industry averages.
Jay Ruckelshaus is climate strategy lead at Gravity Climate, a company that helps industrial businesses manage their carbon emissions to both protect the environment and enhance their bottom line.
