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BlogTax Credits for Low-Carbon Manufacturing
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On June 30, 2023, the U.S. Department of Energy, working with the Treasury Department and IRS, began accepting applications for 48C federal tax credits to funnel $10 billion to a wide range of clean energy and industrial decarbonization projects. 

Companies can now access information and materials for preparing their concept papers. More information for potential applicants, including a 48C mapping tool and an upcoming informational webinar, is available on the Department of Energy’s 48C webpage. 

Created over a decade ago to boost domestic production of renewable energy equipment, the 48C tax credits have been revived, given $10 billion in funding, and revamped to include a wide range of clean energy and industrial decarbonization projects.

Credits can potentially go toward assets that capture, remove, transport, store, sequester, or utilize carbon dioxide emissions; and to the manufacture or recycling of solar and wind energy equipment, power electronics, geothermal turbines, heat pumps, fuel cells, electrolyzers, hybrid, and electric vehicle batteries, E.V. charging infrastructure, low- and zero-carbon chemicals, renewable fuels, and a long list of other clean energy equipment and components, according to the joint IRS and Treasury Department guidelines released in February, and updated May 31

Equipment designed to refine, electrolyze, or blend any fuel, chemical, or product that is renewable, low-carbon, and low-emission is eligible for tax credits, according to the guidelines. Examples include low-emissions ammonia; renewable biofuels, such as sustainable aviation fuel; and low-emissions chemicals, such as polymer resins. Critical materials and minerals are also included in the 48C tax credit criteria. Eligible projects can retrofit or expand an existing industrial or manufacturing facility or establish a new one. 

The first step in the application process is to develop and submit a concept paper to the DOE via its 48C eXCHANGE web portal. Concept papers must be submitted by July 31, 2023, for the first round of 48C tax credit funding, which will make available up to $4 billion of the $10 billion total program budget. Up to $1.6 billion, or 40%, of first-round funding may be allocated to projects in communities with closed coal mines or retired coal-fired power plants. Eligible communities can be found in the 48C designated energy communities map.

Successful applicants can obtain tax credits to defray up to 30% of the cost of decarbonizing new and existing industrial facilities that output a wide range of chemicals, fuels, and other hard-to-abate products. Companies can combine the 48C tax credits with other clean energy tax credits from other programs. For example, if a manufacturing project plans to install solar panels or an energy storage system at the same site, the company can apply for clean energy investment tax credits for the solar or storage installation in addition to the 48C credits. Companies can also apply for a federal loan and loan guarantee from the DOE’s Loan Programs Office to help them finance their project. 

The advanced energy manufacturing credits, first created in 2009 under Section 48C of the federal tax code to support clean energy manufacturing, were reestablished and expanded as part of the Inflation Reduction Act of 2022 (IRA). The credits provide funding of up to 30% of the cost of a clean energy or decarbonization project and go far beyond the manufacturing of solar panels and wind turbines.

The expansion of the 48C credits to cover the production of renewable and low-carbon chemicals, plastics, fuels, and materials—including critical materials—in both new and existing facilities is significant, experts say.

“This is huge for chemical companies, battery companies, the automotive industry, utilities,” and other industries, says Mona Dajani, a partner in the Project Development and Finance practice at Shearman & Sterling in New York and the law firm’s Global Head of Renewables, Energy & Infrastructure, and Global Head of its Hydrogen and Ammonia practice, and Co-Head of its U.S. Energy Transition team. She adds that the 48C application process is similar to the application processes for solar and wind energy tax credits in that applicants must navigate what can seem like a lengthy process to fulfill the criteria for the program and secure the tax credits. Unlike many of the energy credits adopted by the IRA, the Section 48C credit must be applied for and granted after a review by the DOE and the IRS.

While many companies that have already deployed advanced clean energy and emissions-reductions projects plan to apply for the 48C tax credits for new projects, companies planning their first projects of this kind will also be applying, says Ms. Dajani, who advises such companies and provides support with the application process, structuring corporate structures to minimize liabilities and maximize economic returns, and all forms of financing and execution. 

The DOE will be looking for a diversity of project sizes, including small and medium-sized manufacturers. Among other factors, the Department noted that it would consider the degree to which a project will accelerate transformational technological advances in areas that industries probably wouldn’t undertake on their own due to financial uncertainty.

New Opportunities for Low-Carbon Chemical and Fuel Manufacturers

Decarbonizing the U.S. chemical and fuel industries is an enormous economic opportunity. Companies that can meet growing demand from consumers, investors, downstream manufacturers, and retail businesses for zero- and low-carbon products can gain a first-mover advantage. Leading on sustainability also can help companies reach their sustainability goals while staying ahead of federal and state emissions-reduction policies.

In the past, chemical and fuel manufacturers have been cautious about switching from fossil fuels to electricity, or other sustainable alternatives, over concerns about cost. But this is changing as demand for sustainable chemicals, fuels, and materials grows.

The 48C tax credits support the production of low-carbon biofuels and other products and materials sourced from biomass.

One example is Archaea Energy, which makes renewable natural gas (RNG) from waste biogas produced by landfills and farms. The Houston-based company, which was acquired by oil giant B.P. Plc in December 2022, plans to build more RNG production facilities and expand into carbon dioxide sequestration and renewable hydrogen. 

In addition to supporting projects that convert renewable materials such as biogas, biomass, and CO2 into fuels, chemicals, and other products, the 48C tax credits also can help companies that want to electrify processes that traditionally have run on natural gas or other fossil fuels. And the credits can be used to build equipment to produce clean energy, such as electrolyzers to produce hydrogen and equipment to produce ammonia, renewable biofuels, and low-carbon chemicals. 

Converting waste CO2 and biomass into carbon-neutral chemicals, fuels, and other products

A growing number of companies are scaling operations that use waste CO2 or biomass as a feedstock to produce green chemicals, fuels, and other products, which are among the types of projects included in the IRA criteria for the 48C tax credits. 

One such company is Origin Materials, based in California, which uses biomaterials, such as wood waste, agricultural waste, and cardboard, to produce chemicals. Origin plans to apply for 48C tax credits to help finance the construction of a new facility; the company told the IRS in November 2022. It looks to invest at least $1 billion in a commercial-scale, renewable, low-carbon chemicals plant in Geismar, Louisiana, that will convert wood residues from timber mills and forests into bio-based paraxylene. The renewable paraxylene will be used to make polyethylene terephthalate, or PET, which can be used to make everyday products such as clothing, textiles, toys, carpeting, and other goods, according to the company. Conventional PET is made from petroleum. Origin has partnerships with several global manufacturers, including Ford Motor Co. 

Another company that plans to apply for the 48C tax credits is New York–based Air Company, which uses waste CO2 to produce sustainable aviation fuel (SAF). Air Company plans to commercialize a single-step power-to-liquids CO2 conversion process that it developed to manufacture paraffins to produce SAF.

Mattiq, based in Illinois, is developing an electrochemical process to produce polyethylene furanoate, or PEF, a chemical sourced from biomass. A drop-in replacement for PET, PEF can be used to make food and beverage packaging and containers, clothing, and many other products. Mattiq is collaborating with chemical and plastics producers to co-develop and deploy a clean electrochemical pathway to PEF.

Securing domestic supply chains for critical materials needed for clean energy technology production

A major policy goal for the Biden administration is increasing domestic supply of critical materials and minerals used to make clean energy products. These include lithium, cobalt, and rare earth elements used in batteries for electric vehicles and stationary energy storage applications and materials needed for other processes. 

Critical materials, which are determined by the U.S. Geological Survey, and critical minerals “are big buzzwords now,” says lawyer and energy expert Ms. Dajani. She adds that companies that can secure a domestic supply chain for critical materials or minerals may qualify for additional government support to deploy those projects. 

Eligible minerals, which can be found on the federal government’s list of 50 qualifying critical minerals, include graphite, iridium, ruthenium, and others.

Using clean hydrogen (and ammonia) to generate electricity

Producing clean hydrogen is a major theme in the 48C tax credits. The program also supports the production and use of ammonia, a liquid compound made of hydrogen and nitrogen that is easier to transport and store than hydrogen gas and which is increasingly viewed as an important energy carrier.

More companies are developing processes to produce clean ammonia and use the hydrogen it contains—or use the ammonia directly as a fuel—to power fuel cells for use in vehicles, stationary storage, and other applications. While some companies are focused on producing clean ammonia supplies, others are developing technologies that enable ammonia to be used as a fuel to produce electricity for transportation and other applications.

ShipFC, a consortium of European entities that include Equinor, Eidesvik Offshore, and Wärtsilä Norway, is developing an ammonia fuel cell for the shipping industry. The group plans to retrofit a ship owned by Eidesvik with a 2-megawatt ammonia fuel cell that will allow the vessel to sail on clean fuel for up to 3,000 hours per year.

Amogy, based in New York, has developed a technology that integrates ammonia cracking—that is, the breakdown of ammonia into hydrogen and nitrogen using heat—with subsequent use of hydrogen in a conventional fuel cell. In January 2023, Amogy successfully tested a 300-kilowatt system in a semi-truck, and in March, the company said it would build a zero-emission ship that would run on ammonia. 

Mattiq is scoping projects with prospective industrial partners to co-develop direct ammonia fuel cells, which efficiently produce power from ammonia without the need for initial cracking. This technology aims to extract more power per molecule of ammonia with less capital required.

Electrification of heating 

Electrification of process heat to replace the direct use of fuel and reduce greenhouse gas emissions is also included in the eligibility criteria for the 48C tax credits. 

Forward-looking manufacturers are innovating ways to produce heat using electricity rather than fossil fuels. When powered by renewable energy, such as solar or wind power, these processes can be carbon-neutral or carbon-negative.

In one example, Finland-based UPM, which makes paper, biochemicals, biofuels, and other products, is replacing its use of fossil fuels to generate heat with electric boilers that will produce heat and steam at its mills in Finland and Germany. The electric boilers will help the company reach its emissions-reduction goals and increase energy security at its plants in Germany.

Decarbonizing the Manufacturing of Clean Energy, Chemicals, Fuels, and Other Products

For companies looking to produce carbon-neutral chemicals, fuels, and other products, there may be additional federal tax credits on top of the 48C credits to help finance a clean energy or decarbonization project. For example, clean hydrogen equipment producers may be eligible for federal 45V tax credits, which can cover up to 60% of the cost of producing hydrogen. Some states and local governments also offer incentives for the manufacturing of clean energy. Low-carbon fuels sold in California may be eligible for credits under the state’s Low Carbon Fuel Standard.

While demand for sustainable products is already growing, the Inflation Reduction Act aims to juice that growth with government incentives for downstream manufacturers, distributors, retailers, and consumers to purchase sustainable products, product components, and materials made in the U.S. For example, renewable energy facilities that use products manufactured in the U.S. may qualify for a 10% bonus tax credit on top of the federal Production Tax Credit they receive for wind energy or a ten percentage-point bonus Investment Tax Credit for solar energy, energy storage, or other renewables, according to the Treasury Department

For more information on how to apply for 48C tax credits, visit the 48C eXCHANGE web portal. The process has two basic stages. 

Concept paper review

  • First, potential applicants must submit a concept paper to the Department of Energy describing their proposed project. 
  • The DOE will evaluate the concept papers against criteria that include eligibility requirements, definitions for qualifying advanced energy projects, and reasonable expectation of commercial viability, among other factors included in program guidelines issued May 31, 2023. 

48C application process

  • After the initial review, potential applicants will receive a letter from the DOE that encourages them to submit a 48C application or discourages them from doing so. 
  • All parties who submit a concept paper can submit a 48C application, even if they receive a letter of discouragement from the DOE. 
  • The DOE begins the acceptance process for a taxpayer’s application seven days after the date of the letter, after which the applicant will have 45 days to submit their application.
  • The DOE will review all 48C applications to ensure they meet eligibility requirements, then conduct technical reviews to form recommendations for eligible applications. 
  • The DOE will send a recommendation for each application to the IRS, indicating whether the application should be accepted or rejected. The DOE will also rank the applications.
  • The IRS will then decide whether to accept or reject each application, based in part on the DOE’s recommendation and ranking.
  • The IRS will notify each applicant as to whether their application was accepted or rejected. If accepted, the IRS will determine the amount of the tax credit based on the applicant’s qualified investment in the project and other criteria. 
  • All IRS allocation decisions for the first round will be made by March 31, 2024.

In its review of project applications, the government is likely to consider factors including commercial viability, domestic job creation, technological innovation, commercial deployment, and the impact of airborne pollutants and greenhouse gas emissions, according to Deloitte.

“The reduction of energy consumption costs and greenhouse gas emissions is a really important factor,” Gary Hecimovich, a partner with Washington National Tax Group, Deloitte Tax LLP, said in a May 2023 article in The Wall Street Journal.

To apply for the first round of 48C tax credits, companies will need to submit a concept paper to the DOE by July 31, 2023.