Earlier this month, the U.S. Treasury Department and the IRS held a public hearing on their recent proposed rules to implement the Clean Electricity Production Credit (Section 45Y) and the Clean Electricity Investment Credit (Section 48E).

My testimony is reproduced below. It covered a selection of topics from the full set of technical comments UCS submitted to the record in early August, focusing on:

• Supporting clear eligibility of solar and wind energy resources;
• Emphasising the urgent need for rigorous carbon accounting in life cycle assessments;
• Denial of eligibility due to indirect use of fuels/raw materials via book-and-claim accounting; and
• Recommendation for significantly stricter and more comprehensive justification requirements.

For more information about the tax credits and key aspects, see this related blog post.

Presented by telephone on August 13^th2024, public hearing under reference ID No. REG-119283-23.

My name is Julie McNamara and I am testifying on behalf of the Union of Concerned Scientists (UCS).

UCS uses rigorous, independent science to solve our planet’s most pressing problems. On behalf of our half a million supporters and our network of over 22,000 scientists, UCS commends the diligent work of the Treasury and Internal Revenue Service (IRS) in implementing several tax credits passed as part of the Inflation Reduction Act (IRA), including the Section 45Y Clean Electricity Production Credit (45Y) and the Section 48E Clean Electricity Investment Credit (48E).

The IRA was passed into law to advance our nation’s energy transition, and the 45Y and 48E credits are the foundation for this effort. They enable the widespread use of clean electricity sources to reduce carbon emissions in the power sector – thereby giving the power sector the opportunity to decarbonize much of the rest of the economy.

But that promise and potential depends on the consistent implementation of Acts 45Y and 48E. By switching to a tax credit based on a technology-neutral design, there is a high risk that high-polluting power plants – the very polluters that the tax credit is designed to deter – will use it for their own ends instead.

At the heart of these concerns is the fact that, by making the eligibility of combustion or gasification plants dependent on net greenhouse gas emission rates, the framework opens the door to complex problems that need to be carefully addressed to prevent high-polluting producers from exploiting carbon accounting loopholes.

The Treasury Department and the IRS have been given the authority by law to determine the appropriate course of action to address these issues, and they have a responsibility to do so diligently, accurately, and conservatively in the face of uncertainty.

To achieve these goals, UCS submitted detailed comments highlighting key issues that could threaten the ability of the Treasury Department and the IRS to reward truly clean energy production and block polluters who rely on loopholes in the law.

While carefully addressing these issues is critical to preserving the climate integrity of the 45Y and 48E credits, UCS also notes that closing loopholes for polluters can prevent the perpetuation of environmental injustices that have long been associated with C&G facilities and their upstream fuels and feedstocks.

These resources are not clean.

For the climate, for health, for justice: the Ministry of Finance and the Tax Authority must set the necessary strict rules right from the start.

Today I would like to draw attention to only a subset of the issues raised in our technical comments:

1. The Treasury Department and the IRS are right to propose clear rules for electricity generation from solar and wind power. The energy transition will rely primarily on the expansion of solar and wind energy. These have been and will continue to be the mainstays of clean energy progress. The proposed rules clearly ensure their eligibility, providing the necessary continuity in project development as the tax law transitions from one incentive system to another. UCS appreciates and strongly supports these efforts.

2. Life cycle analyses must be based on strict CO2 accounting. For C&G facilities, eligibility for the 45Y/48E tax credit depends on calculating a net greenhouse gas emissions rate, meaning that the structure and implementation decisions around the underlying life cycle analysis (LCA) are central. These decisions are also critical to the health and well-being of communities across the country, the fiscally responsible allocation of taxpayer dollars, and the ultimate ability of the tax credits to fulfill their statutory purpose of encouraging truly clean technologies. In fact, most—if not all—C&G facilities would be ineligible for either tax credit unless the LCA calculation was manipulated to such an extent that significant greenwashing by polluters was possible. While the 45Y and 48E tax credits assess eligibility based only on greenhouse gas emissions, it cannot be ignored that C&G facilities currently vying for inclusion, such as gas-fired power plants, waste-to-energy plants, and biomass power plants, are notoriously large emitters of harmful pollutants. That means that if the Treasury and IRS do not adopt strict life-cycle assessment protocols, they risk encouraging increases in greenhouse gas emissions and also serious harmful pollution. The stakes are incredibly high in getting these rules right.

UCS recognizes and appreciates that the list of questions raised by Treasury and the IRS in the proposal reflects their growing understanding of the complexity and enormous impact of various LCA decisions. Our written comments answer many of these questions; our recommendations reflect the following key positions and priorities:

• Counterfactuals and fugitive greenhouse gas emissions. Life cycle assessments must be based on rigorous carbon accounting, including credible counterfactual models and comprehensive reporting of fugitive greenhouse gas emissions from raw material production to point of consumption. Methane emissions are not a credible counterfactual model.
• Compensation amounts. The eligibility of an installation cannot be achieved through compensation payments. The law clearly requires the eligibility of the installation itself and not the subsidisation of – often dubious – reductions in greenhouse gas emissions in other parts of the economy.
• fuel mixture. The suitability of a plant cannot depend on the mixture of fuels with positive and negative carbon intensity. The use of a mixture of fuels with negative carbon intensity to analytically ‘balance’ the emissions of fuels with positive carbon intensity is a form of compensation and must therefore be prohibited.
• Suitability of raw materials. Requirements on the suitability of raw materials, such as first productive use, are important safeguards against perverse incentives that lead to increased hazardous waste generation. And they also ensure that tax credits do not simply subsidise pollution shifting rather than delivering real emissions reductions.
• Precautionary approach. Given the uncertainty about input assumptions, analysis limitations and/or counterfactual assumptions that have the potential to fundamentally affect the analysis outcome, a conservative approach is appropriate to ensure that the tax credits do not inadvertently subsidise a climate-harming outcome.

3. Eligibility cannot be made dependent on the indirect use of fuels or raw materials via book-and-claim accounting. Book-and-claim accounting as a means of allowing “non-direct” (i.e., indirect) use of a resource to grant facility eligibility clearly does not fit within the statutory framework of 45Y/48E and need not be permitted. The tax credit is intentionally based on the facility’s emissions; it would be unreasonable and unjustified to allow an otherwise ineligible facility to claim the credit based on actions by another facility. If that had been the intent, the law could easily and readily have been drafted to support the use of decoupled attributes. However, it was not.

4. The verification requirements must be strict and cover the entire lifetime of the plant. The Treasury Department and the IRS have correctly recognized that “certain types or categories of facilities can have highly variable emissions rates that depend on a complex interplay between design decisions, operating decisions, and the choice of fuel and feedstock sources.” They are also right to consider the relative risk that “facilities with emissions levels above zero will inadvertently receive a credit.”

Given these very real concerns – and challenges – Treasury and the IRS must address the uncertainty issues and guard against erroneously allocating funds to ultimately ineligible entities. If Treasury and the IRS cannot adequately determine whether an entity is or will continue to be eligible, they must designate that entity as ineligible.

In evaluating a “projected” greenhouse gas emission rate to determine a facility’s eligibility, the Treasury and IRS have improperly narrowed the time period over which that projected eligibility is assessed. The law does not impose a time limit on the use of the term “projected,” and the Treasury and IRS are wrong to now significantly shorten the time period over which those “projected” rates are assessed.

We also note that concerns about the permanence of plant eligibility further underscore the importance of Treasury and the IRS assigning rigorous, credible and, where necessary, conservative assumptions in C&G plant life cycle assessments. If Treasury and the IRS establish loose rules that allow, for example, a gas-fired power plant to cheaply procure a small number of biomethane credits based on avoided methane emissions for a few short years, and then switch back to gas for subsequent years, Decadesit would be an inexcusable – and entirely avoidable – failure.

Diploma

UCS appreciates the opportunity to comment on this proposed rule. We thank the Treasury Department and the IRS for their hard work in resolving complex and serious issues. We look forward to continued collaboration as the rulemaking process continues.