The Inflation Reduction Act (IRA) is a law of carrots and sticks. The IRA includes lucrative tax credits for companies that sequester carbon, for instance. And it’s the first law that implements a fee— directed at E&Ps — for methane.
Some lawsuits have already been launched against it. Others, it seems, are inevitable.
This was the take on the sweeping 2022 law that experts gave at the Carbon & ESG Strategies conference on Aug. 31.
Despite its moniker, the IRA is chiefly a climate bill with tax credits for carbon storage and sequestration. But those credits are a game changer. Breaking with a long-standing principle for tax credits, IRA credits not only can be sold to other — they can be redeemed with the government for cash, Barbara de Marigny, a tax attorney at Baker Botts, said.
Businesses have already shown tremendous interest in the prospect, but the 274-page law is packed with complexity that lawyers, government bureaucrats and the industry will have to work through.
“The Inflation Reduction Act means something different to everyone because there’s a little bit of something in there for everyone—or against everyone depending on how you think about it,” said Erin Tullos, a chemist and senior advisor at Astra Energy Group.
She said, for example, that the law’s methane fee metric will help dry gas producers in Appalachia. That’s because the methane fee is based on the amount of an E&Ps methane emissions divided by the amount of gas it brings to market.
But for small, marginal oil producers in the Permian Basin that bring little gas to market, it will hurt, she said.
She said the fee is so significant it is effectively an amendment to the Clean Air Act.
Tullos said lawsuits are expected from both industry and nonprofit environmental groups. EPA officials are known to joke among themselves that if they aren’t making both sides angry, then they aren’t doing their job, she said.
James Row, a managing partner with Entoro Capital, said some rules received reaffirmation and greater clarity in June, and the tax credits have turned into their own market because they can be sold for the first time.
“We get multiple calls a day on buying and selling. [We are] actually brokering transactions between buyer and seller transfers of tax credits, which really didn’t exist in the past,” he said. “We’re kind of a source of credits now.”
He said in some projects, businesses can benefit from both tax and carbon credits.
De Marigny said the IRA is a massive shot in the arm for taxes. It greatly increases the existing 45Q tax credit that has existed since 2008 and creates a new credit for clean hydrogen production. Longstanding credits for wind and solar were extended and increased, she said.
“There [is] a whole slew of other tax credits that are designed to encourage and build up manufacturing in the U.S. of clean energy, what I would call widgets like electrolyzers, solar panels and wind turbines,” de Marigny said.
Row cautioned that regulations can change if the political party in charge of the White House switches and new administration officials seek to reverse the policies of their political opponents. He advised companies thinking about using, selling or buying tax credits to do so quickly.
“If anybody’s thinking about doing something, they need to move along,” he said. “I would absolutely accelerate everything you possibly can do.”
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