Tax Pros Navigate Chaos, Rewards In Climate Law's 2nd Year

Partners Mike Masri and Sam Kamyans discuss with Law360 impacts of the Inflation Reduction Act two years after it was signed into law, including the quick adoption of innovative financing structures and the steady flow of tax equity transacting despite political uncertainty.

Energy tax attorneys have been knee-deep in project finance deals for the past year since the Inflation Reduction Act of 2022 triggered a flurry of clean energy investments, but the work, they say, has been fulfilling as part of broader efforts to save the environment.

The historic climate law — which will finish its second trip around the sun Friday — has in a relatively short period rapidly transformed the way clean energy projects are financed. Policy changes have so far generated more than $265 billion in major private sector investments, according to the White House, largely thanks to the expansion of existing tax credits and new mechanisms to capitalize on those incentives that are expected to boost more investments in the industry.

Tax attorneys are among those at the forefront of these new big-ticket deals that aim to decarbonize America's energy sources, which means the climate law has also upended their professional and personal lives.

Still, it's an exhilarating time to be in this practice, attorneys told Law360, despite long and frustrating days that entail reading through hundreds of pages of new tax rules, assessing huge financial risks for clients, dealing with political and regulatory uncertainty and meeting other demands that come with significant new policies.

"We're part of a whole industry that is helping address climate change," said David Gillespie, a shareholder at Greenberg and Traurig LLP.

While it may not solve everything, he said, attorneys can still tie the work to the larger public interest.

"And that's a good thing," Gillespie said.

Before the Inflation Reduction Act , the renewable energy tax practice was operating in a predictable environment, mostly structuring tax incentives in finance deals for solar and wind facilities, according to attorneys.

The primary way to monetize credits back then was through tax equity investors, which were limited to big banks. However, such financing arrangements were riddled with complexities and inefficiencies that often deterred investments and development projects.

That all changed after the climate law, which tied valuable tax incentives with complicated industrial policies that aim to boost America's own clean energy industry amid global competition. It created two novel ways to monetize the tax perks through transferability and direct pay, which have significantly widened the pool of green energy investors.

The law retooled existing production and investment tax credits to subsidize a wide array of clean energy sources, including renewable natural gas and hydrogen production and carbon capture and storage systems.

It also extended the credits for a much longer period so the industry did not have to rely on a politically divided Congress to renew them every few years.

Once the U.S. Treasury Department released enough regulatory guidance and rules, the private sector pounced on the opportunities, resulting so far in billions of dollars in investment, which will continue to grow in the coming years, said White House officials in a briefing ahead of the law's second year.

"We are very proud of our 2-year-old that has accomplished more than any 2-year-old," said White House climate adviser Ali Zaidi. "As we stand here today in 2024, we are poised to add more capacity to the grid than we have in nearly two decades."

Flourishing Career

Lauren Collins, a partner at Vinson & Elkins LLP, said her career has flourished under the climate law.

The firm, which is renowned for its energy, oil and gas legal practice, has clients still engaged in traditional transactions but many are considering different assets and credits and ways they can participate in the clean energy market, she said.

New financing entities, Collins said, are also coming into the fold, such as private equity funds, other banks and individual investors trying to figure out how they can take advantage of the law.

"My career went from a stable trajectory, focusing on a narrow set of clients and matters, to being pulled to different directions," she said. "I've become a lot more popular within the firm, because not only do I have my clients, but I can help service other people's clients that are now looking at this."

What makes the job also fun and exhilarating, attorneys said, is being able to solve unique problems for clients seeking opportunities under the new law and seeing them quickly apply those solutions.

"Whenever there's change, it requires new thought and that just makes life interesting rather than doing the same thing over and over again," said Keith Martin, co-head of projects at Norton Rose Fulbright US LLP.

Practitioners continue to be abuzz with the law's transferability method to monetize credits, which has revolutionized the funding for clean energy developments as project owners and developers no longer have to solely rely on the traditional tax equity financing.

"It's really a bonanza for anyone dealing with the monetization of tax credits in the renewable energy space," said April B. Kim, shareholder at Greenberg Traurig LLP.

Treasury finalized rules this year for this mechanism, which is codified as Internal Revenue Code Section 6418 , along with direct pay, the companion monetization method for tax-exempt entities' projects under IRC Section 6417 .

Through a tax credit transfer, project owners that do not have enough tax debt to absorb their credits — often worth millions of dollars — can sell them at a discount for cash to large corporations seeking to lower their own tax bill.

Treasury has been highly aware of the significance of the new credit monetization regimes, which is why developing guidance and rules for those two provisions has been its top priority, a department official told Law360.

The industry has quickly adapted to the new financing structures and identified issues that need to be resolved under transferability, which supplements tax equity with hybrid or joint venture models, Sam Kamyans, a partner at Kirkland & Ellis LLP, said.

"That's been a rather remarkable outcome to see the very quick uptake on innovative solutions," Kamyans said.

Learning more about new energy technologies, such as hydrogen and carbon capture, that are eligible for the tax credits under the climate law and seeing diverse projects pursued by a variety of clients from startups to established companies has also been rewarding, attorneys said.

"They're just doing really cool things," said Nicole Elliott, a partner at Holland & Knight.

What's especially rewarding for Shariff N. Barakat, partner at Akin Gump Strauss Hauer & Feld LLP, is figuring out what the market will look like for these technologies.

"People haven't been doing this for forever so you're on the cutting edge of understanding," Barakat said.

Uncertainty

The climate law also comes with frustrations. Attorneys said that though Treasury has done a commendable job of quickly implementing the law with the flurry of rulemaking in the past two years, there are still issues that put clients in a holding pattern.

For example, uncertainty continues to loom over hydrogen projects' eligibility for the production tax credit under IRC Section 45V  without final regulations, they said.

Currently, the hydrogen sector is at odds over strict standards that hydrogen producers should use to measure their greenhouse gas emissions and determine eligibility for the Section 45V credit. Treasury unveiled the standards in December in proposed rules for the incentive.

"Until final regulations come up, a lot of projects will not know whether they're going to qualify," said N. Hunter Johnston, who focuses on carbon capture and sequestration policy at Steptoe LLP.

There has also been very little guidance on a new credit for producers of low carbon biofuels under IRC Section 45Z , which will go into effect in January through the end of 2027, said Holland & Knight's Elliott.

The challenge in that is dealing with clients that want to make a decision before final regulations, she said.

Treasury acknowledged that there are remaining issues in implementing the law.

"We are continuing to implement [the Inflation Reduction Act] at an accelerated pace, with more to come over the coming months," the department official said.

The highly competitive presidential race in November, too, has added another layer of uncertainty, with Republican nominee former President Donald Trump vowing to gut the climate law should he get elected, attorneys said.

"People are very nervous that the [Inflation Reduction Act] could be repealed, or pieces of it could be repealed," said Michael Masri, a partner at Kirkland & Ellis LLP.

While the law could theoretically be overhauled under a Trump administration, the chances of a full repeal are slim, according to Masri, saying he and colleagues have been telling clients that changes to the law will likely be at the fringes.

Nevertheless, Masri said his team continues to be busy with the buying and selling of credits through the transferability method.

"The tax equity market seems to be transacting without a hiccup despite this uncertainty," he said.

Work-Life Balance

Many attorneys said their personal lives have gone topsy-turvy since the enactment of the climate law.

The past couple of years "have not been leisurely," said Vinson & Elkins' Collins, who is also raising two young children ages 2 and 4.

While she is not sleeping as much as she would like, Collins said kids do force a work-life balance.

"There is so much work — you could work 24/7 — but having a young family kind of puts some of that in perspective," she said.

Attorneys agree that the key to keeping sane is staffing, along with a supportive team and work environment.

Holland & Knight, for example, has been shoring up its energy tax team at every level — from partner to junior associate — immediately after the Inflation Reduction Act became law, hiring industry veterans such as Amish Shah, who has spent 20 years in the practice.

While the energy tax practice has generally been busy even before the climate law, Shah said the work was usually handled by a partner or two, and possibly with an associate or two.

By hiring at every level, he said, the firm is "trying to make sure that people are getting some time off, and they're getting a chance to recharge."