Key Takeaways: Unlocking Clean Energy Projects Using Tax Chaining

Since it became law in 2022, the Inflation Reduction Act (IRA) has spurred a surge in development and deployment of clean energy and technology projects necessary to meet the United States’ climate goals.

Download the Report

The IRA incentivizes private investment in decarbonization and clean energy through new and expanded provisions in the federal tax code. An emerging concept known as chaining could multiply the effects of two particular mechanisms to further catalyze this investment.

The idea of chaining is gaining momentum. While current regulations from the Internal Revenue Service (IRS) do not allow it, the U.S. Department of the Treasury is inviting public comment through Dec. 1 to help determine how much more capital chaining could enable and how it would work in practice.

A policy brief published Tuesday by Duke University’s Nicholas Institute for Energy, Environment & Sustainability and Grove Climate Group offers a primer about chaining for anyone interested in submitting comments. Here are three key takeaways:

1. Chaining would link two provisions of the tax code established by the IRA. Transferability gives clean energy project developers the ability to transfer or sell the IRA’s generous tax credits to third parties. Direct pay enables tax-exempt entities—such as school districts, municipalities, states, public utilities and tribal governments—to receive direct payments from the IRS instead of the credits. Chaining would combine the two, allowing credits to be sold to nonprofit or public entities that can convert them to cash.

2. Chaining could provide numerous financial benefits. The paper’s authors write that chaining has the potential to unlock “new and potentially robust pools of capital”—including from tax-exempt entities—while enabling quicker development of clean energy and technology projects. The practice could reduce transaction costs for tax credits and distribute risk across more entities. And it could create a bigger pool of entities that can participate in the tax credit market, thereby ensuring a better balance between supply and demand.

3. Chaining could diversify the types of projects that can be deployed. Chaining promises to not just enable large projects, but also community-level projects that might not be funded otherwise. These smaller-scale projects could generate greater community involvement in IRA-incentivized projects, lead to better environmental justice outcomes, enhance the ability for low-carbon energy to keep pace with anticipated load growth and accelerate climate-focused industrialization.

The policy brief was written by Clinton Britt, president of Grove Climate Group; Eric Fins, vice president of Grove Climate Group; Tatjana Vujic, principal at Novi Strategies; and Tim Profeta, senior fellow at the Nicholas Institute.

Readers who wish to learn more about chaining or are considering submitting comments to the Treasury Department are welcome to contact the authors.

###

CITATION: Britt, C., E. Fins, T. Vujic, and T. Profeta. 2024. Unlocking Clean Energy Projects Using Tax Chaining: A Primer. NI PB 24-01. Durham, NC: Nicholas Institute for Energy, Environment & Sustainability, Duke University. https://nicholasinstitute.duke.edu/publications/unlocking-clean-energy-projects-using-tax-chaining-primer.