BBB’s ITC direct-pay option would unleash the power of smaller business to tackle climate change
Through Gabe Phillips, founder and CEO, Catalyst Power
Build Back Better (BBB), the major infrastructure bill that contains critical climate and energy proposals, may be back from the dead. That’s great news and an opportunity to improve clean energy incentives so that all businesses, even small businesses, can be part of the climate solution.
Signs of life for BBB came last week when prominent West Virginia Senator Joe Manchin surprised many when he said he thinks the climate change aspects of the bill are some of the easiest for Congress to agree on. This perspective from Senator Manchin, who has been a major hurdle to climate action, is welcome.
How did we get to a point where the West Virginia senator says climate action is “easy” to agree on? The answer is that, after decades of innovation, CO2 reduction is not only feasible, but also practical and economical.
The world has undergone a significant shift in the past ten years. Big companies promise to become net zero. The world’s largest banks and investment companies are making similar shifts. Investments in renewable energy are growing at a double digit rate.
If you think these big, public corporations are making these decisions solely because they are concerned about climate change, you’re kidding yourself. They make these investments because they are smart and make financial sense.
But there is an essential segment of the economy that is lagging behind: the middle market. Millions of small and medium-sized commercial and industrial companies do not have the time, money or expertise to take advantage of these opportunities. These companies represent a large part of the economy and climate emissions. These are businesses whose owners are looking for ways to help, but have fewer options for decarbonizing their business than at home.
It should be a no brainer to include this part of our economy in climate action. Commercial and industrial consumption accounts for 60% of United States electricity consumption and production 25% of our country’s CO2 emissions. Shifting commercial and industrial electricity use to renewables would have a significant dent in our national carbon footprint, and focusing our energy on medium-sized companies in this sector would yield a much higher return than individual efforts or further attraction to large corporations. So why are these companies left out?
One of the reasons is that most clean energy companies do not have the right incentives to offer innovative products and solutions to this customer segment. That can be fixed if Build Back Better gets another chance.
Right now, the biggest financial incentive for companies to use solar energy is the investment deduction (ITC). The ITC grants a 26% tax credit to the owners of a solar energy project in the United States with a phasing out. That should mean that any business or individual installing solar panels on their property or investing in solar projects elsewhere should be able to use the credit. But that’s not how the ITC works right now.
As it stands, credit from commercial solar projects is only available to individuals and organizations with just the right kind of taxable income and/or corporate structure, making it far too inconvenient for smaller and medium-sized businesses to even consider doing it themselves. make the switch to renewable energy sources. This makes clean energy companies that partner with commercial organizations completely dependent on a very small group of financial institutions that can take advantage of the ITC. That group becomes even smaller if we consider that only institutions with a specific type of investment structure would find smaller commercial and industrial projects worth the logistical headache.
Congress and the Biden administration can change that.
The solution is that all private companies, regardless of their business structure or income classification, can also access the ITC and use it completely against all their income. In addition, if solar developers were able to effectively reduce their costs using the ITC, a third-party ownership model for renewables such as solar would be much more viable and less dependent on the small clique of tax-share investors who currently pick and choose the industry winners.
The Biden Administration and Congress should take advantage of this second chance at Build Back Better to simplify the eligibility and distribution of ITC.
While their most recent plan has extended ITC-capable projects to include standalone energy storage, it makes no mention of changing the actual ITC process itself. If small and medium-sized businesses were given guaranteed financial incentives to invest in renewable energy alternatives, we could steer this huge chunk of our economy toward climate action. It’s a small change. But with the change, smaller business owners can be confident that these measures will positively impact their bottom line today and in the future – and we can begin to support a transition in the ITC from a tax credit to a direct payment mechanism. . These changes would mean the tax credit that already exists is more accessible to everyone. By turning the ITC into direct rewards, we can properly incentivize all U.S. businesses to take positive climate action — unleashing the power of millions of smaller businesses.
That kind of broad-based climate action is something everyone can get behind — maybe even Senator Manchin.