Outlook for Energy and Tax Policy in 2025
While we await the outcome of the upcoming US elections, stakeholders in the energy tax and policy space should recognize that, regardless of the outcome of the election, there will be plenty of activity in the energy sector in the year to come. As noted in our previous Legal Update, 2025 will bring the largest tax policy debate in the country’s history. Perhaps no individual sector of the economy could see more changes coming out of that debate than the energy sector. After experiencing significant—sometimes even drastic—changes to energy tax policy as part of the Tax Cuts and Jobs Act (TCJA) and the Inflation Reduction Act (IRA), the energy sector will have no chance to catch its breath. In addition to recently enacted legislation, energy is one of the few sectors still wrestling with the routine expiration and renewal of “traditional” tax extenders.1
Both the traditional fossil fuel and the renewable energy industries will likely be significantly impacted by the 2025 tax debate. Changes are likely to come no matter the outcome of the elections. Regardless of the political alignment in Washington DC, significant changes to energy tax policy will be hotly debated.
At the macro level, the energy sector will be caught up in the debate over economy-wide tax policies, such as the corporate tax rate, expensing, and interest limitations. In 2017, during the debate over TCJA, the energy sector showed robust support for such policies as the extension of full expensing and a carveout from the interest limitation for regulated utilities. Changes to the corporate tax rate have spillover effects on the degree of benefits realized from tax credits and depreciation, and could impact activities in the tax equity markets.
The traditional fossil fuel industry has, for decades, faced efforts by Democrats to repeal tax provisions important to the industry.2 These include proposals to repeal expensing of intangible drilling costs, the credit for enhanced oil recovery, and the use of percentage depletion with respect to oil and natural gas wells. Democrats, whether in Congress or the White House, can be expected to continue to push for these changes to tax policy. More recently, the traditional fossil fuel sector has also invested significant resources in the debate around the Section 45Q credit for carbon oxide sequestration. The IRA made significant changes to this credit and the regulatory process required to implement these changes may not be finalized before the end of the current Biden administration. Thus, how this credit operates could be pulled into the 2025 debate.
Congress Signals Bipartisan Concern
However, the enactment of the IRA—and the substantial changes to renewable energy tax policy—also expanded the scope of the debate. Going forward, the debate on these renewable energy policies will be colored by US-China economic relations and competition, on top of the actual energy policy debate itself. Indeed, Congress—on a bipartisan basis—is actively debating further changes to the credits enacted and modified by the IRA in ways specifically related to the ongoing debate about US-China economic relations.
Perhaps no change to energy credits introduced through the IRA more clearly highlights the linkage between the US-China debate and the energy policy debate more than the Foreign Entity of Concern (FEOC) provision enacted as part of the modifications to the Section 30D Clean Vehicle credit.3 The FEOC criteria were added as part of the IRA to block—or at least severely limit—the use of critical minerals and battery components sourced from China or Chinese entities. The implementation of this provision by the Department of the Treasury has led to calls from some in Congress (on both sides of the aisle) for changes to the statute. For example, Democratic Senators Joe Manchin (D-WV) and Sherrod Brown (D-OH), along with four Republican senators, sponsored a Congressional Review Act Resolution to overturn the final Section 30D regulations, over concerns that the final regulations do not go far enough to restrict the use of battery components and critical minerals sourced from China or Chinese entities. The House version of this resolution was co-sponsored by Jared Golden (D-ME), along with Carol Miller (R-WV). Senator Manchin has also criticized the ability of taxpayers to avoid the FEOC criteria (among other criteria) included in the 30D credit by instead relying on the Section 45W credit for Commercial Clean Vehicles.
The FEOC provision has impacted the debate around IRA energy credits beyond 30D. Senator Brown has also called for the incorporation of the FEOC criteria into the Section 45X Advanced Manufacturing Production Credit. Section 45X provides tax credits to producers of enumerated renewable energy products such as solar panels, windmills, and EV batteries, as well as a long list of critical minerals.4 Under current law, any entity—regardless of its residence—is eligible for these production credits, so long as the production takes place in the United States. Adding the FEOC criteria to the Section 45X credit could shrink the number of potential entities eligible for the credit.
Policy Demands for More US-Sourcing
The overlay of US-China relations also spills into the debate over the domestic content provisions included in the IRA. The IRA added domestic content bonus credits to the Section 45 PTC, 48 ITC, 45Y PTC, and 48E ITC. Taxpayers who meet the domestic content bonus-credit criteria are eligible for increased tax credits. However, the implementation of these bonus credits by the Biden administration has prompted significant commentary from some members of Congress. For example, four Democratic senators—including Ron Wyden (D-OR), chairman of the Senate Finance Committee—sent a letter to Treasury expressing concern that the guidance on meeting the domestic content criteria was not strict enough, pressing Treasury to tighten the rules.
Republicans in Congress have been equally active in the debate over these criteria. Legislation has been introduced in the House and Senate by Republican members to add the FEOC criteria to the Section 45X credit. The House Ways & Means Committee passed legislation that would expand the scope of the FEOC criteria as applied to Section 30D,5 and Republicans in the House have passed legislation that would repeal or greatly curtail large chunks of the renewable energy provisions enacted as part of the IRA.6
Energy Production Versus Climate Goals
While the dynamic surrounding US-China competition will certainly have a significant impact on the 2025 tax policy debate for the energy sector, debate will also focus on the actual energy policy. For example, tax policies to promote the production of hydrogen—both as an alternative fuel for electricity production and as a component in manufacturing that would reduce the carbon intensity of manufacturing—has a strong history of bipartisan support. This support persists—notwithstanding that the Section 45V hydrogen production tax credit was enacted as part of the IRA, which was a strictly partisan exercise. This bipartisanship also extends to controversy over the implementation of the credit. Take, for example, letters from both Democratic and Republican senators criticizing the inclusion of deliverability, temporal matching, and incrementality requirements in the proposed Section 45V regulations. In contrast, some Democratic Members of the House have explicitly advocated for such criteria. Additionally, bipartisan senators and House members have called for Treasury to ensure access to the Section 45V credit for biogas. It is unclear whether the Section 45V regulations will be finalized by the end of the current administration and, if there is a change in the administration, then these regulations, as well as legislative changes, could be part of the 2025 debate.
Given the breadth of the bipartisan debate on a range of energy tax policies, we are confident that these policies will be central to the larger 2025 tax debate regardless of the outcome of the 2024 elections. However, an election outcome that puts Republicans largely in control of the 2025 tax debate would mean an additional factor will come into play: the ability to use the repeal or imposition of additional restrictions on IRA renewable tax credits as sources of revenue; that is, tax increases that can be used to “pay for” the cost of other policies. For example, H.R. 2811, the Limit, Save, Grow Act of 2023, which the House Republicans passed in 2023, repealing a range of IRA credits, was estimated to raise over $515 billion dollars.7 Among the targets of H.R. 2811 were a full repeal of the credit for commercial clean vehicles, the credit for the production of clean hydrogen, repeal of the advanced manufacturing credit, and repeals of the ITC and PTC for clean energy production. That revenue could be used to offset the cost of other tax policy priorities, such as those included in H.R. 7024, the Tax Relief for American Families and Workers Act, legislation that passed the House on an overwhelmingly bipartisan basis.
Thus, the 2025 tax debate will be hugely impactful on the energy sector. Congress is already taking steps to set the table for the 2025 debate, and taxpayers who could be impacted by this debate should be engaging now to ensure the most visibility into the debate, and to provide comments to influence the outcome.
1Joint Committee on Taxation, List of Expiring Provisions, JCX-1-24, January 11, 2024.
2 Many of these policies have been included in the Green Book of proposed tax policy changes by the Obama and Biden administrations.
5 See H.R. 7980, https://gop-waysandmeans.house.gov/wp-content/uploads/2024/04/JCT-Description-of-H.R.-7980.pdf.
6 H.R.2811 — 118th Congress (2023-2024), https://www.congress.gov/bill/118th-congress/house-bill/2811.
