The trifecta of climate tech: policy, technology, and markets
By: Juan Pablo Quintero and Stella Liu
Our publication has focused on new technologies and markets. We now turn our attention to policy, the winning piece for scaling climate technology solutions. 🏛️
IRA, CHIPs, PTCs, EU Green Deal, and 25D… It’s an alphabet soup of policies! Over the next series of articles, we will decipher these acronyms, why they matter, and why you should care.
If you miss our startup and tech analyses, don't fret! We will include with each policy deep dive the coolest climate startup and job opportunity we have heard from our networks 😎:
Startup Spotlight: Crusoe Energy. Methane has 80x the warming power than carbon dioxide. Crusoe Energy captures this energy, combusts it, and powers data centers for the cloud. Yup, there’s three mega tailwinds here: climate, cloud, and GPUs for AI. They’ve raised $908M in VC funding, and their valuation puts them in unicorn status. They’re hiring! For graduating MBA students, send us why you uniquely qualify + interested role at thegigaton@gmail.com and we will try to get you connected.
Cool Job Alert: The CEO/Co-founder of Aepnus Technology is looking for a Chief of Staff. They are an Activate Berkeley company, their Oakland lab is recovering critical metals out of waste from battery plants and critical mineral refineries using their platform electrochemical technology. They just raised $8M Seed, have impressive investors (Lowercarbon, Voyager), and a team of 10 to date. Looking for MBAs, and searching for some key business experience for the Chief of Staff to work with the CEO directly. The job post is here. For graduating MBA students, send us why you uniquely qualify + blurb about yourself to thegigaton@gmail.com and we will try to get you connected.
A Watershed Moment for Climate Policy
In April 2021, President Biden announced a greenhouse gas reduction target for the country, as part of the US’ commitment to meeting the Paris Agreement goals. The announcement pledges to reduce carbon emissions 50% of 2005 levels by 2030, while creating high-value domestic jobs and launching the US to a leadership position in the various industries that make up the green economy.
The landmark legislation passed in 2021-2022 includes the Inflation Reduction Act ($500 billion), the Infrastructure Investment and Jobs Act ($1.2 trillion), and the CHIPS and Science Act ($280 billion), which represent the single biggest investment in American industry in decades, and the biggest total spending on climate initiatives in the country’s history.
These three bills represent over $500 billion in climate-related spending through the next ten years and will be a major catalyst for private-sector investment. They address a variety of climate issues, including new infrastructure, clean energy, energy efficiency, domestic manufacturing, zero-emissions vehicles, and climate resilience.
Policy deep dive P1: US Inflation Reduction Act
The $500 billion Inflation Reduction Act (IRA) is a package of policies aimed at fighting inflation, cutting the national deficit, promoting domestic industry, and aggressively reducing greenhouse gas emissions to meet the country’s 2030 targets. Importantly, it allocates $393 billion over ten years to climate-related initiatives, primarily tackling four of the highest carbon-emitting sectors: buildings, electricity generation, transportation, and manufacturing.
Out of the three main climate policies passed by Congress, the IRA will have the most direct impact on taxpayers and companies who will be eligible to receive rebates and tax credits.
Funds from the IRA will encourage investments that reduce carbon emissions, from clean energy and energy-efficiency technologies to purchases of zero-emission vehicles. Many credits in the IRA depend on manufacturers using a certain percentage of domestically made components, which will require new supply chains to be formed.
Companies are already gearing up to take advantage of the various credits and incentives offered by the IRA. For example, BMW announced an investment of $1.7 billion in 2022 to shift its South Carolina factory to EV production and build a battery factory nearby. Many auto manufacturers are following suit and investing heavily in EVs and domestic supply chains.
The IRA is expected to speed up the adoption of various clean energy technologies and reduce up to 1 billion tons of greenhouse gas emissions per year by 2030 (from a 2005 baseline of 6.6 billion tons per year).
Figure 2: The IRA is expected to lead to an incremental 10% reduction of GHG emissions from the 2005 baseline. Source: The Rhodium Group
The breakdown of the IRA
Since carbon-free energy and transportation will take the lion's share of investment, here is what you need to know:
Carbon-free Energy ⚡
Clean Energy & Energy Efficiency Tax Credits
The largest allocation of IRA funding will go towards accelerating the deployment of clean energy projects, energy-efficient retrofits, and domestic production of key manufacturing inputs.
Projects will be eligible for Production Tax Credits (PTCs) and/or Investment Tax Credits (ITCs).
Projects will be eligible for a base credit as long as they guarantee a defined minimum wage and meet apprenticeship standards for labor. Additional credits are available for projects that meet other criteria such as sourcing a certain percentage of their components domestically and creating employment opportunities in low-income areas or “energy communities” vulnerable to job losses in the fossil fuel sector.
A project can only benefit from one type of tax credit, so companies should evaluate both ITC and PTC and apply for the set of funds that provides the highest benefit. Tax credits can be used by the company receiving them or sold to other companies for cash value.
Production Tax Credits (PTCs): PTCs are per kilowatt-hour credits for electricity generated for a 10-year period. The primary types of PTCs are Section 45 and 45Y “Clean Electricity Production Tax Credits” for solar and wind generation, as well as battery storage. There are also additional types of credits incentivizing nuclear and hydrogen generation.
45X “Advanced Manufacturing Production Tax Credits”: available for facilities processing or recycling critical components for clean energy manufacturing, and the raw materials used in the manufacturing process. Examples include lithium for batteries and rare earth metals for wind turbines and transmission cables.
Investment Tax Credits (ITCs): ITCs are one-time tax credits calculated as a percentage of the applicable project investment, starting at 30% and increasing if additional criteria are met. Similar to the PTCs, Section 48 and 48E “Clean Electricity Investment Tax Credits” cover projects increasing solar, wind, and battery capacity, and 48C “Advanced Energy Project Credits” are available for projects processing key components.
The 48C “Advanced Energy Project Credits”: are also available for improvements for industrial facilities resulting in a GHG reduction of at least 20%. This can cover improvements such as the implementation of carbon capture technologies and energy efficiency investments. The act also includes Fuel Tax Credits to subsidize the production of low-carbon fuel, sustainable aviation fuels (SAF), and other biofuels.
Residential Energy Efficiency
For homeowners, the 25D “Credits for Residential Clean Energy” will subsidize residential installations of clean energy, including wind, solar, and battery storage. 25C “Credits for Energy Efficiency Home Improvements" will subsidize residential energy efficiency upgrades including the installation of heat pumps, electric appliances, and energy-efficient windows and doors.
Mobility 🚗
Clean Vehicle Tax Credits
The IRA also offers credits to encourage consumers and companies to purchase American-made clean vehicles including EVs, hybrids, and hydrogen fuel cell vehicles. Importantly, the IRA removes the previous quota for clean vehicle tax credits for manufacturers, which phased out after the sale of 200,000 applicable cars – which excluded major manufacturers including Tesla and General Motors from eligibility.
For consumers, the 30D “Clean Vehicle Credit” and 25E “Previously Owned Clean Vehicle Credit” would provide credits of $7,500 and $4,000 for purchases of new or used low-emission and zero-emission vehicles.
For companies, the 45W “Commercial Clean Vehicle Credit” would provide a credit of $7,500 for commercial clean vehicles under 14,000 pounds and $40,000 for vehicles over that weight limit.
Only vehicles that are manufactured in the United States and have a certain percentage of domestically made components will be eligible to receive credits, which excludes a large proportion of zero-emission vehicles currently on the market from eligibility.
Other Policies
The IRA provides support for a long list of additional climate-related initiatives:
Funding for the development of low-carbon building materials
Nuclear energy tax credits
Financing for companies and communities through the Loan Programs Office
45Q “Carbon Capture and Sequestration Tax Credits” to subsidize direct air capture
Funding to reduce methane emissions
Investments in communities and environmental justice
Stay tuned as we tell you what you need to know about the Infrastructure Investment and Jobs Act, the CHIPS Act, the EU Green Deal, ICE car bans, and mandatory ESG reporting and disclosures. Yes, that’s a lot, but stay with us over the coming few weeks and you’ll grow your climate policy muscles.
Author Bios:
Juan Pablo is pursuing dual Masters of Environmental Management / MBA degrees at Duke University and is passionate about the intersection of climate and business. Originally from Bogota, Colombia, he grew up in the Northern Canada before moving to the United States for his undergraduate studies in New York. Outside of Duke, he has experience in climate activism and corporate sustainability through internships with the Sierra Club and McKinsey & Company, where he will return as an Associate in the Chicago office after graduating. He has published various pieces on the ocean economy and global climate policy. In his personal time, Juan Pablo plays bass guitar for the Duke MBA rock band and enjoys off-road desert racing.
Stella Liu is now part of the Third Derivative Investment team after graduating from the Stanford GSB MBA program last June. She grew up in California, and is now a SF native. In her personal time, she is lifting weights, exploring the electronic music scene, and reading science fiction (Three Body Problem anyone?).