Tax policy’s impact on decarbonization for manufacturers

ARTICLE | March 20, 2024

Authored by RSM US LLP

Tax policy is driving the decarbonization of many industrials companies. In the United States, nearly two years after the passage of the Inflation Reduction Act of 2022 (IRA), manufacturers are actively engaged in decarbonization projects. The federal and state tax incentives provided by that legislation have in many cases been the catalyst to greenlight these projects.

The U.S. federal tax credits from the IRA fall into a few general categories:

• Production and investment credits for clean electricity generated from renewable resources such as wind, solar, combined heat and power, and geothermal sources. Credits may also be claimed for stand-alone energy storage, microgrid controllers and other property.
• Annual credit for the capture and sequestration/utilization of carbon oxide. Credit is based on metric tons of carbon oxide collected from an industrial facility. 
• Incentives for clean fuels. This includes credits for producers of fuels such as clean hydrogen, ethanol, renewable diesel, and biogas; and for users of fuel such as propane in forklifts and biodiesel in motor vehicles.
• Production and investment credits for manufacturers of certain clean energy components to incentivize the build-out of a U.S. supply chain for these products.

States may also promote investment in clean energy through job creation incentives and utility rebates. While there are still some uncertainties regarding application of the tax credits, the Treasury Department continues to implement the various credits through the publication of guidance.

Canada tax policies

Canada also actively shapes its policies to support investments in a clean economy. Governments at both the federal and provincial levels offer investment tax credits and incentives, funding and grants through various innovation funds and programs, government financing, and targeted support negotiated directly with manufacturers.

At the federal level, Budget 2023 included several significant provisions to spur clean technology investments and critical mineral extraction and processing, including the introduction of the Clean Electricity Investment Tax Credit and the Clean Technology Manufacturing Tax Credit; proceeding with the Clean Hydrogen Investment Tax Credit; and expanding eligibility for the Carbon Capture, Utilization and Storage Investment Tax Credit.

Alongside policymakers, investors and consumers have also increasingly demanded that businesses take action to decarbonize operations and use more renewable energy sources, moving toward the broader goal of limiting greenhouse gas emissions that accelerate climate change. That’s one major focus of the 2015 Paris Agreement, which set the goal of net-zero greenhouse gas emissions globally by 2050.

Looking ahead

Decarbonization will bring challenges for the industrials sector, but also plenty of opportunities businesses can tap into. Tax credits can be a powerful tool to encourage collaboration between governments and businesses on the path toward decarbonization. Companies will continue to see increased demand from investors and consumers to take action to decarbonize operations and use more renewable energy sources. Reaching net-zero emissions by 2050 will happen only if the industrials sector plays its part and takes urgent and substantive actions to reach that goal.