What climate law tax credits will be in — and out — under Trump 2.0

The engine of the Inflation Reduction Act (IRA), the Biden administration’s landmark climate and industrial policy achievement, is tax credits. 

Through federal tax incentives alone, the law could direct as much as $780 billion into the U.S. clean energy economy over the rest of this decade. That money will help the U.S. cut its carbon emissions, grow employment, and compete in the global race for clean-technology dominance.

But the Trump administration and congressional Republicans could throw a wrench into that engine next year.

The GOP, which controls Congress as well as the presidency, has made it clear that its priority for 2025 is to extend for 10 more years the tax-cut package passed under the first Trump administration. The package, which primarily benefits corporations and wealthy individuals, is projected to add about $4.6 trillion to the federal deficit.

“They are going to be needing offsets” to federal spending to pay for those tax cut extensions, ​“and they are going to be looking anywhere and everywhere for them,” said Michael Catanzaro, CEO of Republican lobbying firm CGCN Group and a former energy and environmental official in the first Trump administration.

That is frightening math for the politicians, industries, experts, and advocates who support the IRA.

The question now is which of the law’s tax credits will have enough support from Republicans in Congress to survive and which will not.

Most of the investment and job growth spurred by the law has happened in red states and congressional districts. More than a dozen House Republicans are on the record supporting IRA programs that are creating ​“good jobs in many parts of the country,” including their own districts.

During a November 14 panel discussion hosted by law firm Norton Rose Fulbright, Catanzaro speculated that there are likely more House Republicans who agree, but ​“were just not really willing at the time to sign on.”

“We know that the margins are extremely thin in the House,” he said — it now stands at 218 Republicans to 212 Democrats — ​“and so those who want to keep these credits will certainly have a fair amount of leverage.”

Tax credits that benefit industries with bipartisan support, including nuclear power, carbon capture, and advanced manufacturing, have better prospects. Industries already targeted by the Trump administration, such as those for electric vehicles and offshore wind, face a rockier future, Catanzano and other tax experts at last month’s panel discussion said.

But ​“everything else in the middle is going to be a case by case examination,” said Joe Mikrut, a partner at tax firm Capitol Tax Partners and a former U.S. Treasury Department official during the Clinton administration. ​“I don’t know if you can necessarily put out an endangered list.”

What will happen to clean power? 

That’s not stopping clean energy analysts from attempting to forecast the impact of Trump 2.0 on the utility-scale solar, wind, and energy storage projects that are cleaning up the U.S. power grid.

Carbon-free power has become by far the biggest — and cheapest — source of new electricity in the country. That’s largely due to the falling cost of solar and batteries, which make up the lion’s share of new additions. But tax credits that can recoup 30 percent or more of a project’s cost remain a key part of the equation.

Most observers don’t expect the tax credits for clean power investments to be eliminated, given the economic benefits they bring to red states. But the industry is preparing for changes that could make financing harder and complicate continued growth.

One widely held expectation is that Republicans will seek to shorten the phase-out date for these credits, said Keith Martin, an attorney at Norton Rose Fulbright and an expert on clean energy tax equity. Under current law, firms can apply for those tax credits through 2032 or when U.S. electric power sector emissions reach 25 percent of their 2022 levels, whichever comes later. Shortening the timeframe to apply for credits will reduce their cost to the federal government over the next 10 years.

Those changes would likely reduce the expected profitability of a given clean energy project and make borrowing money more expensive for developers, Martin said during the November 14 panel discussion.

Just the prospect of changes to the tax credits has been enough to affect the industry. Publicly traded clean energy companies, including solar giants like Sunrun and Sunnova, clean energy developers such as NextEra and Brookfield Renewable Partners, and wind turbine manufacturers like Vestas, have already taken a hit.

“Even if you don’t think a sledgehammer is coming in terms of policy, it’s been a sledgehammer for the stocks because of the uncertainty that we’re facing,” said Joe Osha, senior managing director for equity research at Guggenheim Partners.

Some technologies are better positioned to weather this uncertainty than others.

For example, the fundamental economics for solar power remain sound, analysis firm Wood Mackenzie wrote in a post-election note. The U.S. has nearly 100 gigawatts of utility-scale solar projects in development, and ​“customer demand for distributed solar projects continues to grow. A Trump administration will not change this in the near term,” the firm wrote.

But Michelle Davis, head of global solar for Wood Mackenzie, did highlight that the firm’s forecasts could be crimped if IRA incentives such as tax credit bonus adders, which can boost the value of tax credits to as much as 50 percent of a project’s cost, undergo ​“substantial modifications — a strong possibility given Trump’s agenda to maintain tax cuts.”

Onshore wind projects, which for the past few years have been slowing even as solar and battery installations have boomed, could face more risks from the Trump administration’s agenda. Unlike solar and battery projects, which tend to rely on investment tax credits based on a project’s cost and can be recouped in the year after completion, wind power projects rely on production tax credits that are earned over multiple years based on how much energy they produce.

“Should Congress seek to repeal key mechanisms of the IRA or restructure an earlier phase-out of the production tax credit, deployment could slow significantly,” Wood Mackenzie wrote.

To be clear, few experts expect that Republican lawmakers would seek to cut short the duration of those production tax credits. The more likely outcome, Martin said, is that Congress moves up the deadline by which developers must complete their projects in order to claim the tax credits. That would put enormous pressure on project developers to move fast over the next five years, though interconnection wait times and permitting procedures will limit how quickly they are able to build.

A further complication will arise next year, as the technology-specific tax credits that have existed for decades are to be replaced with ​“tech-neutral” tax credits.

This feature of the IRA was meant to standardize the value of tax credits for solar, wind, geothermal energy, batteries, low-carbon fuels, and other zero-carbon electricity generation. But the Treasury Department has not yet finalized the rules for these credits, which opens the possibility for the Trump administration to influence their development in ways that could weaken their value.

While experts seem to agree that the Trump administration will shorten the lifespan of clean power tax credits, other parts of the climate law are less likely to be altered. That includes its tax-credit transferability rules, which have opened up opportunities for more companies to invest in clean energy projects.

“I think there’s a general view within Republican circles, to the extent you have the private sector working out economic arrangements with each other and keeping government out of the discussion and controlling the entire transaction, that’s something that’s generally being viewed favorably,” said David Kautter, federal specialty tax leader at tax consultancy RSM and former assistant treasury secretary for tax policy during the first Trump administration.

Kautter also doubts that Republicans in Congress will strip away the domestic content requirements and bonuses for projects that use technologies manufactured in the U.S. ​“It’s consistent with a lot of what President Trump talked about during the campaign, and it’s all about bringing jobs home, focusing on domestic manufacturing and domestic economic activity.”

That’s good news for utility-scale solar projects relying on the domestic content bonus, Osha said. ​“Big swaths of projects may be challenged if that 10 percent domestic content adder goes away.”

What will happen to cleantech manufacturing? 

It’s also good news for the companies investing hundreds of billions of dollars to build factories to make solar panels, inverters, wind turbines, lithium-ion batteries, and other clean power technologies.

Many of these manufacturing investments have been made in Southeastern and Midwestern states that voted for Trump in the November election, as shown on this map from Clean Investment Monitor, a joint project from Rhodium Group and the MIT Center for Energy and Environmental Policy Research. 

The IRA’s 45X Advanced Manufacturing Production tax credit has played a central role in spurring these investments. Few experts anticipate that Republican lawmakers will want to undo it, given the political ramifications.

At the same time, there’s no doubt that this tax credit is ​“pretty expensive to the Treasury,” said Whitney Stanco, managing director and senior policy analyst at Compass Point Research & Trading.

That’s because 45X tax credits are awarded to every unit of domestic production of components of solar panels, wind turbines, inverters, and batteries for electric vehicles and the power grid, as well as the critical minerals that go into these products. As those industries scale up, the volume of the tax credits going to them could increase well beyond the $30 billion by 2032 that Congress initially forecasted it would cost.

That could drive Republicans to alter the program to reduce its projected cost over the coming decade, Stanco said. ​“Are we looking at changes to timeframe? Are we going to go back to doing this by technology, so that nascent technologies can still get a credit while mature ones don’t? How is this going to play out?”

Experts don’t have to wonder about the nature of the first big proposed change for the 45X tax credit. Several bills meant to ban companies with ties to China from using this tax credit have already been introduced in Congress this year.

Some approaches are more aggressive than others. Last month, U.S. Representative John Moolenaar, a Republican from Michigan, cosponsored a bill that would block implementation of the tax credit’s rules completely. Moolenaar is a longtime critic of high-profile battery factory projects in his state with links to China, including one being built by Ford that will make batteries using technology licensed from Chinese lithium-ion battery giant CATL, as well as a battery factory being built by Gotion, a U.S.-based company owned by a Chinese parent company.

Other bills under consideration would more selectively prevent 45X credits going to companies with certain ownership stakes from China-based companies. Those include a bill targeting solar manufacturers with Chinese links introduced by Republican Senator Rick Scott of Florida and Democratic Senators Jon Ossoff of Georgia and Sherrod Brown of Ohio. The latter two states host major solar manufacturing facilities owned by South Korea–based Qcells and U.S.-based First Solar, respectively.

Phil Shen, managing director and senior research analyst at Roth Capital Partners, said during the Nov. 14 Norton Rose Fulbright panel that denying 45X tax credits to companies with ties to China would slow domestic solar-manufacturing growth, given the dominant position of Chinese firms in the industry.

“There are a lot of projects that have been announced with support or in collaboration with Chinese companies, and we see risk to many of them,” he said. At the same time, ​“those with existing U.S. manufacturing such as First Solar are in a much better position.”

Chinese companies may be already preparing for this shift. China-based Trina Solar announced the day after the election that it planned to sell a solar factory it’s building in Texas to a U.S.-based battery manufacturer, although both companies denied that fears of losing access to tax credits spurred the sale.

Some U.S.-based clean technology manufacturers support these efforts. ​“Congress will need to have a smart, thoughtful approach to understanding that the 45X American manufacturing incentives are helping reduce our reliance on Chinese-controlled supply chains, especially when it comes to solar manufacturing,” said Yogin Kothari, chief strategy officer for Solar Energy Manufacturers of America, a trade group that represents companies building factories in the U.S. that compete with Chinese solar producers.

But the push to exclude Chinese companies from U.S. tax credits is part of a broader and more troubling set of policy developments championed by Trump on the campaign trail — a pledge to institute punishingly high tariffs on Chinese-made products, including key solar and battery materials and components over which China has almost complete control.

Trump has proposed to impose a 10 percent tariff on all imports and a much higher 60 percent tariff on Chinese imports, and can enact them via executive order. The Biden administration has already imposed tariffs well higher than that on some key Chinese-made products such as solar panels and EVs. But U.S. tariffs on Chinese lithium-ion batteries and components stand at 25 percent today.

Raising tariffs on Chinese batteries and battery minerals and materials could have a significant impact on EV manufacturers and grid-scale battery projects. ​“Tesla, for example, with its Megapack, is still mostly sourcing its cells from China,” Osha of Guggenheim Partners said. ​“So a 60 percent tariff on imported Chinese [battery] cells would be very, very disruptive.”