Abstract

The latest report from the Alliance for a Sustainable Future–a joint effort of Center for Climate and Energy Solutions (C2ES) and The U.S. Conference of Mayors  to help cities and businesses collaborate on sustainable development–focuses on the Inflation Reduction Act’s (IRA) new opportunity for renewable energy systems and electric vehicle tax credits now available to cities through an elective payment mechanism commonly known as “direct pay” tax credits.

Across the country, cities have long been at the forefront of efforts to reduce greenhouse gas emissions and increase community resilience to climate change impacts. As extreme temperatures and climate related events such as storms and wildfires become more frequent and intense, cities are increasingly pressed to meet the needs of their residents while also reducing their carbon emissions and making their communities more resilient. A number of strategies exist, including investing in resilient, low-carbon infrastructure like microgrids and transitioning to electrified fleets, but these options present initial costs that may place them out of reach of many local governments.

Thanks to recent action by the federal government, new opportunities exist for cities to make climate goals a reality. The Inflation Reduction Act (IRA) of 2022, signed into law on August 6, 2022, puts the U.S. on a path toward achieving its Paris goals by enabling emissions reductions of 31-44% below 2005 levels, while also funneling billions to climate resilience needs. The landmark legislation, for the first time, provides tax-exempt entities, including local governments, the opportunity to receive the monetary benefit of tax credits directly from the federal government.1 This document focuses on this new opportunity for renewable energy systems and electric vehicle (EV) tax credits that are now available to cities through an elective payment mechanism commonly known as “direct pay” tax credits.

This document explores the potential financial impact that the new direct pay opportunity creates. Based on actual municipal projects, the analysis in this publication demonstrates how direct pay tax credits could be utilized to help fund climate and resilience projects. We show that these tax credits could shave tens of millions off the cost of a campus microgrid project, reduce the overall cost of creating a carbon-free, resilient power system for a wastewater treatment plant, and accelerate the payback period of a municipal fleet transition by one to two years.

This publication explains:

• How the Inflation Reduction Act creates new opportunities to fund climate change mitigation and resilience projects
• What a direct pay tax credit is
• How direct pay tax credits can improve the financial viability of climate and resilience projects
• When direct pay tax credits may work for your city
• How to start planning to use direct pay tax credits