Direct Pay: Avenues Toward a Clean Energy Economy

This year’s State of the Union address and recent release of the president’s budget deliver a clear message on where the Biden Administration stands on climate investments: They are critical and they must be actualized in the near term. Clean energy tax credits — federal subsidies to scale access to clean energy technology — are a critical tool for the administration to use to support and incentivize taxpayers to make the switch to renewable energy sources. If implemented at the scale the administration has proposed (more than twice the scale of previous investments), these tax credits would make significant strides toward reducing the U.S.’s greenhouse gas (GHG) emissions. While tax credits have been proven effective in reducing emissions, receiving the benefits of these credits can often be preceded by a slew of unnecessarily complicated bureaucratic and administrative hurdles.

Direct Pay describes the process of accessing tax credits through direct cash payments rather than as deductions from year-end tax returns, thus making it easier for people and organizations to capitalize on and access clean energy tax credits. The term originated from the Domestic Manufacturing and Energy Jobs Act of 2010, which was introduced in response to the complicated political processes brought forth by Section 1603 of the American Recovery and Reinvestment Act of 2009 (ARRA). Section 1603 set a precedent for the Treasury Department replacing tax credits with direct payments to eligible entities that applied for specified energy projects. Under Section 1603, 105,972 projects were funded, $93.8 billion in private, regional, state, and federal investments were made, and an estimated total of 91.2 TWh of annual electricity generation from funded projects (the equivalence of the energy consumption of roughly 8,440,000 homes) was produced as of March 31, 2017.