Treasury and the IRS Finalize Clean Electricity Tax Credit Rules

The U.S. Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) finalized regulations on the clean electricity production tax credit and clean electricity investment tax credit under sections 45Y and 48E of the Internal Revenue Code, respectively. Sections 45Y and 48E were enacted through the Inflation Reduction Act of 2022 and specify that the tax credits are available for electricity produced by qualified facilities, where a qualified facility is a facility used to generate electricity that is placed into service after 2024 and for which the greenhouse gas (GHG) emissions rate is not greater than zero. Treasury and IRS’s new regulations provide a detailed framework for implementing these statutory requirements, including methods for determining GHG emission rates through lifecycle analyses (LCAs) for combustion and gasification (C&G) facilities and a list of types of facilities that Treasury and the IRS have determined have GHG emissions rates not greater than zero. 

Stakeholders interested in taking advantage of these credits must review the new regulations carefully to determine credit eligibility. However, the implementation and status of these rules – which were released in the final days of the Biden administration – are now subject to considerable uncertainty in the face of the new Trump administration’s approach to similar clean energy measures.

Key Highlights

Key topics addressed in the new 45Y and 48E rules include:

• GHG Emissions Rates. The rules provide detailed instructions for how GHG emissions rates must be determined for both non-C&G and C&G facilities. For non-C&G facilities, the GHG emissions rate must be determined through a “technical and engineering assessment of the fundamental energy transformation into electricity.” For C&G facilities, the GHG emissions rate must be determined through an LCA that complies with specific criteria.

• LCA Requirements. For purposes of the LCA required to determine GHG emissions rates for C&G facilities, the LCA must incorporate specified starting boundary, ending boundary, and baseline criteria. The starting boundary point is feedstock generation or extraction, inclusive of the “associated direct and indirect greenhouse gas emissions, of relevant land management activities or changes related to or associated with the extraction or production of raw feedstock materials or fuel.” The ending boundary is described as “the meter at the point of electricity production,” though the use of such electricity generated by the C&G facility (and what other types of energy sources it displaces), including emissions from transmission and distribution, are outside the LCA boundary. The LCA may also consider alternative fates and account for avoided emissions, though offsetting activities cannot be taken into account. Furthermore, the LCA should evaluate emissions over a time horizon of 30 years, while the spatial scale may be feedstock-specific.

• Annual Table. The “Annual Table” is a table that the statute requires Treasury and the IRS to publish annually and which sets forth the GHG emissions rates for types or categories of facilities. Taxpayers must use the Annual Table to determine tax credit eligibility for the facilities described in the table. Concurrently with this rulemaking, Treasury and the IRS released the first Annual Table which specifies that the following types of facilities have GHG emissions rates not greater than zero and are therefore eligible for the credits: wind, hydropower, marine and hydrokinetic, solar, geothermal, nuclear fission, fusion energy, and waste energy recovery properties that derive energy from any of the other listed sources. If a facility’s GHG emissions rate is not described in the Annual Table, that facility may petition for a provisional emissions rate. Future Annual Tables may add or remove certain types or categories of facilities, and any such changes must be accompanied by an expert analysis explaining how the relevant GHG emissions rate was determined. While the current Annual Table only lists facilities with GHG emissions rates not greater than zero, Treasury and the IRS noted that future Annual Tables may include facilities with GHG emissions rates greater than zero and which, therefore, would not be eligible for the credits.

The regulations also cover several other topics relevant to determining tax credit eligibility, assessing available credit amounts, and ensuring compliance, including but not limited to (1) the incremental cost rule (“incremental cost” being the excess of the total cost of equipment over the amount that would have been expended for the equipment if it was not used for a qualifying purpose); (2) the 80/20 rule (providing a new original placed-in-service date for a qualified facility that includes some components of a property previously placed in service, rather than requiring a facility to be composed of entirely new components); (3) prevailing wage and apprenticeship requirements; (4) the one megawatt exception (allowing small facilities with a maximum net output of less than one megawatt to qualify for increased credit amounts); and (5) substantiation requirements to justify the credits claimed. The rules and the preamble likewise contain detailed discussions of how the rules apply to specific types of facilities such as those involving energy storage, combined heat and power, biogas, and biomass.

Commentary

The new 45Y and 48E rules contain detailed requirements that clarify the application of these tax credits, and stakeholders wishing to claim the credits must assess these new rules carefully. Nonetheless, uncertainty remains: how the implementation of these new rules will play out in the new Trump administration is an open question. The 45Y and 48E rules were published in the Federal Register and became effective just before President Trump’s inauguration, meaning that these rules are not subject to the Trump administration’s regulatory freeze for regulations that were pending as of January 20, 2025. Moreover, President Trump’s Day One “Unleashing American Energy” Executive Order includes a directive to “pause the disbursement of funds appropriated through the Inflation Reduction Act of 2022.” However, the 45Y and 48E tax credits are not appropriated funds and are therefore not directly impacted by this executive order. Nonetheless, this new executive order could signal how the Trump administration may be critical in its implementation of Biden-era clean energy actions, including the 45Y and 48E rules. It is also possible that review of the 45Y and 48E rules pursuant to the Congressional Review Act could result in the rules being blocked, or the rules could be challenged via a timely filed petition for judicial review. Moreover, the current administration could seek to revise the rules (or Annual Table) to include different generation sources, change boundaries or other aspects of LCA calculations, or change incentive bonuses. We will continue to track this situation as it evolves.

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