- Federal tax credits that provide direct payments can help communities finance climate change mitigation and resilience projects that previously were out of reach due to high initial costs, according to a report the Alliance for a Sustainable Future published this month.
- These newly available “direct-pay” tax credits can dramatically reduce the cost or shorten the payback period for projects such as renewable energy systems and electric vehicle fleet transitions, the report says.
- The incentives are “so significant that they may warrant a re-evaluation of some previously assessed investment opportunities,” it says.
The upfront costs of climate change mitigation and resilience projects can make them financially infeasible for many local governments, the report says.
Direct-pay tax credits can lower those costs, but those financial incentives previously were not available to tax-exempt organizations such as local governments and nonprofits.“However, recognizing the need for climate action across all sectors of the economy, the [Inflation Reduction Act] allows non-taxable entities to receive direct payments from the federal government equal to the value of certain credits.”
The Alliance for a Sustainable Future — a joint effort of the U.S. Conference of Mayors and the Center for Climate and Energy Solutions — examined three case studies in which these “direct pay” tax credits could have reduced project costs. The case studies are based on actual projects local governments are undertaking or considering.
“Mayors and local leaders may find these examples useful in considering how to structure, locate, scale, and finance transformative projects to meet their community needs and climate goals,” the report says.
The first case study focuses on a district energy system for heating and cooling on a campus. The project was initially supposed to feature a microgrid: a solar-powered, local energy system with battery storage that is able to function independently from the larger grid. Microgrids can make communities more resilient during power outages and reduce municipal greenhouse gas emissions. The microgrid idea was nixed, however, because it wasn’t financially viable, the report states. If a “direct pay” tax credit had been available, the local government could have saved almost $30 million on the “total principal and interest costs over the life of the loan for the microgrid,” the report says.
The second case study also highlights local plans to build a microgrid, this time at a wastewater treatment plant, where it would reduce risks associated with power outages and decrease operating costs. The local government in this case could tap into direct-pay tax credits for repairs and upgrades to existing systems to support the microgrid. This strategy would reduce interest costs and generate energy savings and state rebates such that the project with the microgrid “costs less than repair or replacement of the supporting infrastructure alone,” the report says.
A third case study shows how direct-pay tax credits could shave a potential $640,000 off of a five-year project to replace 100 internal combustion engine fleet vehicles with electric vehicles, plus install charging infrastructure. The savings will allow the local government to financially break even on the project up to two years sooner than it otherwise would have.
To take advantage of the tax credits, the report advises cities to look at the requirements for project locations and timelines, clearly communicate eligibility requirements with contractors, and work closely with tax counsel to understand project financing and up-to-date federal guidance.