June 1, 2023
6 min read

A Comprehensive Guide to Corporate Sustainability & Tax Credits

Get quick wins by pairing measurable impact with an economic incentive.

Corporates are now one of the most prolific forces on the planet for meaningful climate action. Who saw that coming 10 years ago!? A leading benchmark group, Science Based Targets initiative (SBTi), now counts nearly 5,000 companies taking action, with 2,600+ companies setting formal science-based targets and 1,800 companies with net zero goals. 

A key decarbonization activity has been to offset electricity-related emissions (also known as “Scope 2” emissions) by purchasing electricity from renewable energy generation–often via a corporate power purchase agreement, or PPA. 

While PPAs have been a great tool to drive new renewables build-out, not every corporate has the financial strength, risk appetite, or ability to sign up for long-term PPA contracts, which typically run for 10 to 20 years. Fortunately, following the passage of the Inflation Reduction Act (IRA), sustainability leaders now have even more ways to tackle their Scope 2 emissions targets. 

Tax credits – why do they matter? 

A central feature of the IRA was the expanded tax credit regime. Now, renewable energy and sustainable infrastructure projects can qualify for 10+ years of tax credits which can be monetized as part of the project financing process. 

These tax credits have drawn a lot of attention for driving top line growth projections for renewables. For example, Wood Mackenzie estimates that solar, wind, and battery storage alone could produce as much as $90B of tax credits per year:

As the chart below shows, the IRA tax credit incentives will help drive significant deployment of new wind, solar and other sustainable technologies. .

Less attention has been paid to where this capital comes from. Because the vast majority of clean energy funding in the IRA came in the form of tax credits, the unspoken assumption is that corporate taxpayers will simply monetize these credits for project developers as they did with pre-IRA tax credits. But going from a tax credit market that was traditionally in the $18B-$20B range pre-IRA to one that is 2-3x larger or more post-IRA will necessitate a large number of new corporate taxpayers to enter the market and trade tax capacity in the form of cash for tax credits. 

Source: Norton Rose Fulbright

What does this have to do with corporate sustainability? 

As corporates look for energy-related sustainability tools beyond the PPA, investing capital directly into projects via tax equity or its new post-IRA cousin, transferability, is an appealing option.  Some companies like Starbucks, Facebook, and Nestlé, have invested in tax credits with great effect already. 

With the IRA’s new transferability provision, the process is more straightforward than tax equity; companies with tax liability (which they have to pay anyway), can instead purchase tax credits at a discount. For example, paying $0.90 for $1.00 of tax credits on $50M of tax liability would net an immediate $5M savings.

Source: Reunion Infrastructure

Investing in transferable tax credits has a sustainability story, and it drives meaningful clean energy impact. But there’s a catch–the investment activity of monetizing tax credits on behalf of a specific renewable energy project doesn’t “count” towards Scope 2 emissions reduction targets. The corporate, despite putting tens or hundreds of millions of dollars into a project, would also need to buy the energy attribute certificates (EACs) or renewable energy certificates (RECs) to make a formal “green” claim. 

Fortunately for sustainability leaders, the savings generated by purchasing tax credits–$5M in our example above–could be redirected to offset the cost of REC procurement. This approach helps bring sustainability activity more directly into alignment with the financial incentives of the business.

“From a CFO’s perspective, an interesting feature of the green-energy credits is a provision in the law that makes the credits transferable one time”

Deloitte, “For CFOs, the full impact of the Inflation Reduction Act is still coming into focus”

Corporate sustainability leaders can be internal champions for tax credit purchases

Corporate sustainability leaders should champion tax credit purchases inside their company for three reasons:

  1. It drives real impact – as noted above, tax credit monetization is a real, measurable, and impactful way to put steel-in-the-ground. Without tax credit financing, projects don’t get built. Any company putting $20M, $50M or $100M+ of tax capacity to work financing projects is directly accelerating the energy transition.
  2. It fills an enormous funding gap for clean energy – also noted above is the gap between today’s tax credit investment  market (~$20B annually) and the very near future of ~$60 to $90B  in annual demand for tax credits. . Only taxpaying corporates can effectively monetize these credits to enable projects. Without them, the promises of the IRA and much of the decarbonization effort falls short. 
  3. It provides an economic benefit for action on sustainability – unlike RECs and PPAs which are often a net cost to the corporation, tax credits are a net benefit, saving 7-10% annually on tax liabilities that the company is already responsible for. These savings can be reinvested in REC purchases or other activities to secure the desired environmental attributes. 

Conclusion – sustainability teams can “do well and do good” with tax credits

Given the deep necessity of more corporates putting their tax liability to work in monetizing tax credits for renewable energy project developers, sustainability teams are a natural place to start for leading this effort. 

The alignment of doing well, by improving the bottom line via tax savings, and doing good, by sending already spoken for capital directly into renewable energy projects, should have any sustainability leader excited to pick up the phone and call their corporate finance team to get started.

Reunion accelerates investment into clean energy

Our platform facilitates the purchase and sale of transferable tax credits to support solar, wind, battery, biogas and other clean energy projects.
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