With the tax season underway, business owners have an opportunity to explore the crossover between finance and sustainability. The landscape of government policy is ever-changing, with significant implications for the business community—especially regarding sustainability. For example, the Inflation Reduction Act provides significant tax credits and incentives for sustainability-focused programs. Capitalizing on these incentives can significantly reduce your tax burden.
However, the horizon holds much more, with potential regulations relating to sustainability poised to impact the business community over the next few decades. Staying informed about these changes is not merely about compliance; it's about leveraging available incentives to drive business success in an increasingly eco-conscious market.
So, what sustainability-focused tax policies should you keep an eye on?
Carbon Tax: A Pending Reality?
The concept of a carbon tax is gaining momentum globally, and the United States is no different. In simple terms, a carbon tax puts a cost on carbon emissions to encourage cleaner business practices.
While there are no federal policies in place that put a price on carbon emissions, there is growing momentum to do so. Five carbon pricing proposals were introduced in the 2021 to 2022 session of Congress. While none were passed, it singles a growing willingness among some legislators to implement a carbon tax, which will significantly impact many businesses.
Additionally, thirteen states already have carbon pricing systems in place in the form of cap-and-trade programs. Eleven of those are northeast states that encompass the Regional Greenhouse Gas Emissions Initiative (RGGI), plus California and Washington.
The RGGI puts a cap on total emissions from the power sector. The participating states auction greenhouse gas emissions allotments, which power plants purchase. This creates a maximum threshold of greenhouse gas emissions that each facility can produce. On the other hand, California’s cap-and-trade program spans several high-emitting sectors. These policies put a price on carbon and the total allotment of carbon available to purchase decreases over time. As allotment decreases, carbon price increases, disincentivizing further fossil fuel investment.
The Methane Emission Charge
Similarly to a carbon tax, the Inflation Reduction Act reaffirmed an EPA decision to place a fee on excess methane emissions from qualifying power plants and natural gas facilities. The fee will take effect in 2026 after a two-year rollout period. This initiative targets the reduction of methane emissions, a potent greenhouse gas with a global warming potential many times greater than CO2, over a 20-year period.
Structured to escalate over time, the tax begins at $900 per metric ton of methane emitted beyond a set threshold, increasing to $1,500 by 2028. This progressive fee structure encourages companies to adopt more stringent leak detection and repair practices, moving towards cleaner operations. While only including the power sector, the IRA puts the EPA at the center of adapting the policy over time to help meet the country’s decarbonization goals. The EPA may increase the scope and sectors involved over time.
Incentivizing Clean Hydrogen
On the flip side of taxation, the government is rolling out significant incentives for clean hydrogen production. These incentives are designed to accelerate the production and adoption of green hydrogen, a crucial element in the transition towards a low-carbon economy. The U.S. Treasury's proposed rules detail the mechanisms through which these incentives will be applied and offer a tax credit of up to $3 per kilogram of green hydrogen produced, providing a significant financial boost to producers.
Along with producers, the federal government is putting incentives in place to help facilitate infrastructure development to increase clean hydrogen use. For example, tax credits are available for installing green hydrogen refueling systems, and certain alternative fuel vehicles are exempt from existing federal fuel taxes. This provides an opportunity for fueling stations and companies with fleet vehicles to reduce their tax burden when investing in green hydrogen transportation.
The Implication of Sustainability-Focused Regulation for Business Owners
Overall, the landscape of business taxation is evolving, with sustainability at its core. Understanding how taxes and low-carbon technology incentives affect your business is crucial for strategic planning and long-term success. While these programs are still in their infancy in the United States, they will continue to grow in importance over the next several decades as part of the country’s strategy to have net-zero greenhouse gas emissions by 2050. High-priority sectors the government is targeting include buildings, transportation, energy production, industry, and agriculture. Businesses in these sectors will undoubtedly see major tax implications.
For businesses aiming to navigate these changes while implementing sustainable solutions, Emerald Built Environments can help guide you through the process. Getting ahead of the curve of regulation and embracing eco-friendly practices is crucial for business owners. Our expertise ensures your business not only complies with emerging regulations but thrives in a greener economy.
