Macro

US Green Energy Tax Credits Market to Hit $47bn by 2024

Inflation Reduction Act spurs $47bn green tax credit market, drawing diverse investors and impacting multiple sectors.

By Athena Xu

5/16, 06:26 EDT
S&P 500
iShares 20+ Year Treasury Bond ETF
iShares 7-10 Year Treasury Bond ETF
Blackstone Inc.
Houlihan Lokey, Inc.
Stifel Financial Corporation
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Key Takeaway

  • The Inflation Reduction Act is expected to create a $47bn market in green tax credits by 2024, attracting major investors like Blackstone and Vitol.
  • Companies across various sectors, including oil and gas, are actively purchasing these credits to manage their US tax liabilities.
  • Despite the burgeoning market, complexities and regulatory uncertainties may limit transactions to $15bn-$20bn this year.

Green Tax Credits Surge

The Inflation Reduction Act, signed by President Joe Biden in 2022, has catalyzed a burgeoning market for green tax credits, now approaching a $50bn valuation. This landmark climate law leverages tax credits to stimulate investment in clean energy and other green technologies, allowing for the free trade of these credits. Evercore projects a $47bn worth of credits to be available for sale in 2024, with expectations of the market exceeding $100bn annually by 2030. High-profile investors like Blackstone, Vitol, and a film venture involving Travis Kelce have entered this space, highlighting the diverse interest in leveraging these credits for tax offset purposes.

Corporate Engagement and Deals

An array of corporations, including Schneider Electric and Blackstone, have actively engaged in purchasing green tax credits to mitigate their US tax liabilities. Schneider Electric's acquisition of manufacturing tax credits from Silfab Solar, following an $80mn deal with Engie, exemplifies the strategic corporate use of these credits. Blackstone's hybrid deal with Arevon, facilitated by Stifel, underscores the innovative approaches being adopted within the market. Howard Steinberg of Houlihan Lokey noted a "frenzy" of interest, indicating a significant shift towards the normalization of credit purchases among corporate taxpayers.

Impact on Energy and Entertainment Sectors

The green tax credit market has attracted a wide range of participants, from energy giants to Hollywood studios. Oil and gas companies, buoyed by profits from volatile commodity prices, have been notable buyers, seeking to manage their tax liabilities effectively. Drax's investment in wood-pellet fueled power plants in the US, eligible for carbon capture tax credits, and Radiant Media Studios' financing of film projects through solar farm-associated credits, demonstrate the broad applicability and appeal of these incentives. This diversity underscores the tax credits' role in facilitating cross-sectoral investments in green initiatives.

Challenges and International Perspectives

Despite the enthusiasm, the market faces challenges, including complexity in credit transfer processes and uncertainty over project viability and tax rules. The anticipated $15bn-$20bn in transactions for the current year falls short of the potential, highlighting gaps between supply and demand. Internationally, the US's approach to subsidies, including those for green technologies, contrasts with global subsidy governance issues. The lack of clear international subsidy rules complicates the distinction between beneficial environmental subsidies and those that may distort trade or promote economic nationalism.

Street Views

  • Howard Steinberg, Houlihan Lokey (Neutral on the green tax credits market):

    "This really is a game-changer. The purchase of the credits will be a fact of life for corporate taxpayers."

  • Keith Martin, Norton Rose Fulbright (Neutral on oil and gas companies' involvement in tax credit sales):

    "The oil majors are like anyone else. They are big corporations. They have large tax liabilities and they’re looking to manage their effective tax rates."

Management Quotes

  • Chris Taylor, Head of GridStor:

    "It’s an essential part of the underwriting of the project."

  • Ross McKenzie, Drax:

    "The ability to sell tax credits was important to foreign investors such as his company, which 'don’t currently have a large US tax liability'."

  • Ray Maiello, Radiant Media Studios:

    "It is a very welcome addition because in the industry, with streaming, there’s a lot of changes in the consumption of content. It’s a very challenging environment."