Biden’s Climate Law Has Created a Growing Market for Green Tax Credits

The climate law that President Biden signed in 2022 has created a large and growing market for companies to buy and sell clean-energy tax credits, new Treasury Department data suggests, creating opportunities for start-ups to raise money for projects like wind farms and solar panel installations.

The market also provides new opportunities for large companies and financial firms to make money.

Treasury officials will report on Tuesday that more than 500 companies have registered a total of 45,500 new clean-energy projects with the Internal Revenue Service in order to benefit from tax breaks in the 2022 law. That law, the Inflation Reduction Act, is the federal government’s most expensive effort ever to reduce fossil fuel emissions and fight global warming.

The projects registered with Treasury vary widely in size. They could be as small as a single wind turbine or as large as a new advanced battery factory. Treasury officials say that they are predominantly focused on wind and solar energy thus far, and that projects have been registered across all 50 states and the District of Columbia.

The numbers reflect both the wide scope of the climate law and the novel mechanisms it created for companies to cash in on its incentives.

The law seeks to encourage more production and faster deployment of emissions-reducing technologies, in part by offering tax credits to companies that manufacture those technologies or install them across the country. The credits are lucrative: Solar manufacturers, for example, say the incentives have reduced the cost of American production significantly and helped American-made panels compete with those made in China.

Typically, in order to cash in on tax incentives, American companies need to have high enough revenue and profits to generate significant federal tax liability. That has made it hard for small companies, start-ups and others struggling to turn a profit to benefit from the climate law. So the Inflation Reduction Act’s authors created what are effectively two workarounds to help the law boost those companies, both of which require registering projects with the I.R.S.

One mechanism allows a handful of groups, like nonprofit hospitals and local and tribal governments, to receive direct payments from the government for the value of tax credits — for activities like installing an array of solar panels.

A more expansive mechanism essentially allows companies to buy and sell the value of their tax credits on an open marketplace. A big corporation with significant tax liability might pay $900,000 to a start-up that has generated $1 million worth of tax credits for wind-turbine production, for example. The start-up gets a cash infusion to help finance production. The big company reduces its tax bill, at a discount.

Usually, financial middlemen take a cut for facilitating the transaction — but experts say that cost is still lower for many companies than the cost of borrowing money to underwrite production.

“Businesses in need of liquidity can sell their credits instead of taking out loans,” the nonpartisan Congressional Research Service wrote last month, “which is especially important when interest rates are high.”

Treasury officials say registration of projects is a first screen to detect possible fraud in the claiming of tax benefits. It does not guarantee the registered projects will qualify for credits. Officials do not expect the first wave of data on how many credits were claimed last year, the first full year of the law’s incentives, to be available until fall.

Still, the number of projects now registered is a surge from January, when Treasury reported just over 1,000 registrations for direct payments or eligibility for the new tax-credit marketplace. Of the 45,500 total registrations, more than 98 percent are destined for the marketplace, officials said.

“Before the Inflation Reduction Act, it was more challenging for companies to access tax incentives to finance projects and deploy new clean power,” Wally Adeyemo, the deputy Treasury secretary, said in a written statement. “Meeting our economic and climate goals depends on the ability of companies to finance capital intensive projects like building new factories, and initial data is encouraging.”

Mr. Adeyemo said the data also suggested that another portion of the Inflation Reduction Act was working as intended: an increase in funding for the I.R.S., part of which is dedicated to updating the agency’s technological capacities and allowing it to easily collect information like the tax-credit registrations.