US Senate Proposes Modifications to Inflation Reduction Act Affecting Clean Energy Tax Credits

The US Senate has introduced proposed changes to the previously passed House bill known as the ‘One Big, Beautiful Bill’. These modifications aim to significantly reduce the duration, value, and eligibility scope of various clean energy tax credits under the Inflation Reduction Act (IRA). Despite these reductions, the Senate proposal offers some relief to the clean energy sector compared to the House version.

Context and Alignment with Sustainable Development Goals (SDGs)

This legislative effort is part of a broader Congressional initiative to reduce discretionary spending in order to fund policies from the Trump administration, such as tax cuts, and to support the administration’s strategy to maintain US dominance in fossil fuel-based energy. According to the University of Pennsylvania’s Wharton School, the energy and climate provisions of the IRA are projected to cost approximately $1 trillion over ten years.

The proposed changes have significant implications for achieving several Sustainable Development Goals, including:

• SDG 7: Affordable and Clean Energy
• SDG 9: Industry, Innovation, and Infrastructure
• SDG 13: Climate Action
• SDG 11: Sustainable Cities and Communities

Key Proposed Changes to IRA Tax Credits and Their Impact

1. Solar and Wind Energy Tax Credits

• The Senate proposes reducing Section 48E investment tax credits (ITCs) and Section 45Y production tax credits (PTCs) for solar and wind projects to 60% if construction begins in 2026, 20% in 2027, and 0% starting in 2028.
• The proposal avoids a stringent clause requiring projects to start construction within 60 days of enactment and operations before 2029, which was included in the House bill.
• Despite this relief, the accelerated sunset of credits will pressure developers to expedite project timelines, potentially impacting the growth rate of renewable energy deployment.

2. Support for Battery Storage and Clean Firm Electricity

• Tax credit phaseouts apply only to solar and wind; other clean electricity pathways retain tax credits until 2032.
• Battery storage projects, including those integrated with renewable plants, remain eligible for Section 48E ITCs and Section 45X production tax credits.
• This support is expected to encourage the adoption of energy storage solutions, addressing intermittency challenges in renewable energy and advancing SDG 7 and SDG 13.
• Nuclear, geothermal, and hydroelectric power projects also continue to qualify for tax credits, reinforcing support for clean and reliable electricity sources.

3. Elimination of Tax Credits for Electric Vehicles (EVs), Charging Infrastructure, and Hydrogen

• Tax credits for EVs and related charging infrastructure are proposed to be phased out within one year.
• The removal of charging infrastructure support may slow the expansion of the US EV market and maintain consumer range anxiety, affecting progress towards SDG 11 and SDG 13.
• Hydrogen tax credits are also set to be phased out next year, with green hydrogen facing greater reductions than blue hydrogen, which is expected to maintain its market position domestically and globally.

4. Preservation of the Tax Transfer Market

• The IRA’s transferability clause, allowing developers to sell tax credits directly to other entities, remains intact.
• This mechanism has facilitated increased capital flow into clean energy projects, accounting for approximately half of the $45-50 billion tax credit market since its implementation in 2023.
• Maintaining transferability is crucial for mobilizing investment and accelerating clean technology deployment, supporting SDG 9 and SDG 7.

Summary of Additional Proposed Changes

Further modifications to the IRA have been proposed, with detailed impacts summarized in the table below.

Conclusion

The Senate’s proposed amendments to the Inflation Reduction Act reflect a recalibration of US clean energy policy with mixed implications for sustainable development. While reductions in tax credits for solar, wind, EVs, and hydrogen may slow progress towards climate and clean energy goals, continued support for battery storage, nuclear, geothermal, and hydroelectric power, as well as the preservation of tax credit transferability, provide important mechanisms to advance several Sustainable Development Goals.

1. Sustainable Development Goals (SDGs) Addressed or Connected

1. SDG 7: Affordable and Clean Energy
   • The article discusses tax credits for solar, wind, battery storage, nuclear, geothermal, and hydro energy, all of which relate to promoting clean and renewable energy sources.
2. SDG 13: Climate Action
   • The focus on reducing fossil fuel dominance and promoting clean energy aligns with combating climate change and its impacts.
3. SDG 9: Industry, Innovation, and Infrastructure
   • Support for battery storage, clean firm electricity, and tax credit transferability encourages innovation and infrastructure development in clean energy technologies.
4. SDG 12: Responsible Consumption and Production
   • The promotion of domestic battery production and reduction of imports aligns with sustainable production practices.

2. Specific Targets Under Those SDGs Identified

1. SDG 7: Affordable and Clean Energy
   • Target 7.2: Increase substantially the share of renewable energy in the global energy mix.
   • Target 7.a: Enhance international cooperation to facilitate access to clean energy research and technology.
2. SDG 13: Climate Action
   • Target 13.2: Integrate climate change measures into national policies, strategies, and planning.
3. SDG 9: Industry, Innovation, and Infrastructure
   • Target 9.4: Upgrade infrastructure and retrofit industries to make them sustainable, with increased resource-use efficiency and greater adoption of clean and environmentally sound technologies.
4. SDG 12: Responsible Consumption and Production
   • Target 12.2: Achieve the sustainable management and efficient use of natural resources.

3. Indicators Mentioned or Implied to Measure Progress

1. SDG 7 Indicators
   • Proportion of renewable energy in total final energy consumption (related to the uptake of solar, wind, battery storage, nuclear, geothermal, and hydro energy projects supported by tax credits).
   • Investment in clean energy technologies (implied by the value and scope of tax credits and transferability market size).
2. SDG 13 Indicators
   • Number of policies and measures implemented to reduce greenhouse gas emissions (implied by changes in tax credit policies affecting fossil fuel dominance).
3. SDG 9 Indicators
   • Research and development expenditure on clean energy technologies (implied by support for battery storage and clean firm electricity).
   • Value of tax credit transfer market (explicitly mentioned as $45-50bn market).
4. SDG 12 Indicators
   • Domestic production capacity of clean energy components such as batteries (implied by the advantage given to US-made batteries).

4. Table: SDGs, Targets and Indicators

Source: think.ing.com