Executive Summary

• To reduce the cost of the pending 2025 reconciliation legislation, lawmakers are considering options to pare down the 2022 Inflation Reduction Act’s (IRA) clean energy tax credits – one of which is removing the transferability feature of the credits.
• Transferability allows clean energy developers with limited or no tax liability to monetize the credits by selling directly to an investor for cash at a low transaction cost, which makes the credits accessible for more taxpayers compared to prior to the IRA.
• If lawmakers decide to trim the IRA clean energy credits, they should repeal some of the poorly designed credits entirely rather than eliminate the transferability feature, which would make the credits less efficient.

Introduction

As lawmakers work on a reconciliation package, they are considering removing the transferability feature of the clean energy tax credits in the 2022 Inflation Reduction Act (IRA) to reduce the cost of the legislation.

The IRA includes 22 clean energy tax provisions with production and investment tax credits, transportation-related tax credits, and other tax incentives for decarbonization and commercial and residential energy efficiency. To broaden taxpayers’ access to the clean energy tax credits, the IRA added a new feature of transferability, which allows taxpayers to sell their credits directly to an investor for money.

The IRA’s transferability provision allows clean energy developers with limited or no tax liability to monetize the credits at a low transaction cost, which makes it easier for more taxpayers to access the credits.

If lawmakers decide to pare down the IRA clean energy credits, they should repeal some of the poorly designed credits entirely rather than eliminate the transferability feature, which would make the credits less efficient.

Analysis

Under current law, businesses can use general business tax credits to offset up to 75 percent of their tax liability in a year. The IRA clean energy tax credits are considered part of these credits. If a taxpayer, such as an energy startup, has limited or no tax liability, however, it would not be able to immediately utilize the clean energy tax credit, reducing the effectiveness of the credits.

Prior to the IRA, businesses used tax equity transactions to solve this limitation. Tax equity partnerships, typically costly and complex, require a third-party investor, in most cases a large bank, to invest directly in the clean energy project to monetize the credit. The investor who has taxable income would be able to leverage the tax credit to reduce its tax liability.

Transferability, on the other hand, is more efficient than tax equity because it is less costly and it allows small energy developers to access the credits. Tax equity partnerships require larger transaction fees than selling the transferable credits. Several estimates indicate that investors in tax equity partnerships typically can only get between 85–90 cents for one dollar of tax credit as they have to pay for due diligence and accounting. In contrast, transferable tax credits allow buyers to receive on average 92.5 cents for one dollar of investment tax credit, and 95 cents for every dollar of production tax credit. As a result, the lower transaction costs of transferable tax credits make it easier for small developers to use the credits.

The flexibility and lower costs of the transferable tax credits doubled the size of the clean energy tax credit monetization market compared to the level before implementation of the IRA. For 2024, the first full year in which the IRA transferable credits were available, market analysts estimate that the total tax transferability market size was between $21–$24 billion, excluding forward-market sales for 2025.

It is unclear how much eliminating the transferability of the IRA clean energy credits will save exactly, and it is challenging to tease out the potential behavioral responses of investors. They may respond by going back to tax equity partnerships and investing in fewer qualified assets. Furthermore, the lack of transferability may impact the value of other general business credits.

There are other better ways to modify the IRA tax credits to reduce costs. For example, the American Action Forum’s previous analysis establishes an evaluation framework of simplicity, efficiency, and fiscal sustainability to examine all the credits. Repealing some of the credits that are complex, inefficient, and costly, such as the clean vehicle credits, would raise approximately $100 billion from 2026–2035.

Conclusion

Transferability enhances the efficiency of the IRA clean energy credits. Although tax subsidies are not an ideal policy to encourage decarbonization, if lawmakers decide to retain some of the credits, they should not remove the transferability feature. Doing so would make the credits less efficient.