Final regulations on clean electricity tax credits GHG emissions: PwC

In brief

What happened?

The IRS and Treasury on January 15 published final regulations on the Section 45Y clean electricity production tax credit and the Section 48E clean electricity investment tax credit. The regulations generally apply to qualified facilities and energy storage technology placed in service after 2024 in tax years ending on or after January 15, 2025.

This Insight discusses the rules addressing greenhouse gas (GHG) emissions, which are provided in Section 45Y and apply for both credits. The PwC Insight Final regulations clarify general rules for the clean electricity tax credits discussed the general rules for Sections 45Y and 48E.

The IRS also released Rev. Proc. 2025-14, which provides the first annual emissions rate table for non-combustion and gasification facilities.

Why is it relevant?

The final regulations implement Sections 45Y and 48E, which replace Sections 45 and 48, respectively, as the primary tax incentives for clean electricity production or investment for facilities placed in service after 2024.

Action to consider

Taxpayers should note that, consistent with recently released Section 45V final regulations, the Section 45Y regulations add detailed rules relating to the use of methane in production. Taxpayers also may note the refinements in the requirements for conducting lifecycle analyses (LCA) for combustion and gasification (C&G) facilities.

In detail

Statutory background

Section 45Y provides a tax credit of an applicable amount times the kilowatt/hours of clean electricity a taxpayer produces at a qualified facility in the United States and sells to an unrelated person or uses, consumes, or stores during the tax year. The applicable amount is 0.3 cents generally or 1.5 cents if a taxpayer meets prevailing wage and apprenticeship requirements or exceptions, adjusted for inflation. A qualified facility must (1) be owned by the taxpayer, (2) generate electricity, (3) be placed in service after 2024, and (4) have a GHG emissions rate not greater than zero.

The Section 48E credit generally is 6% of qualified investment in a qualified facility or energy storage technology (defined in Section 48(c)(6)), increased to 30% if a taxpayer meets prevailing wage and apprenticeship requirements or exceptions. A qualified facility (1) is used to generate electricity, (2) is subject to depreciation or amortization, (3) has a GHG emissions rate of not more than zero, (4) is placed in service after 2024, and (5) has not been allowed a credit for any tax year under Section 45, 45J, 45Q, 45U, 45Y, 45Z, 48, or 48A.

For both Sections 45Y and 48E, a qualified facility must have a GHG emissions rate not greater than zero. The GHG emissions rate is the number of grams of CO2e emitted into the atmosphere in producing electricity per kilowatt/hour of electricity produced by the facility. The GHG emissions rate for a C&G facility is the net rate of grams of CO2e per kilowatt/hour emitted into the atmosphere by the facility, taking into account lifecycle GHG emissions as defined in the Clean Air Act (42 USC 7545(o)(1)(H)). A facility’s GHG emissions rate does not include qualified carbon dioxide that a taxpayer captures and utilizes or disposes of as required under Section 45Q.

As an investment tax credit, the Section 48E credit is claimed in the tax year a facility is placed in service, but must maintain GHG emissions standards during production years. Section 48E property fails to be investment credit property, and the credit is subject to recapture, if Treasury determines that a facility’s GHG emissions rate in any tax year exceeds 10 grams of CO2e per kilowatt/hour of electricity produced.

C&G and non-C&G facilities

The proposed and final regulations define a C&G facility as a facility that produces electricity through combustion or uses an input energy source produced through a fundamental transformation of one energy source (e.g., renewable natural gas, biogas, or methane) into another using combustion or gasification to produce electricity. Gasification is a thermochemical process that converts carbon-containing materials into syngas, a gaseous mixture of primarily CO, CO2, and hydrogen.

Non-C&G facilities include wind, hydropower, marine and hydrokinetic, solar, geothermal, nuclear fission, nuclear fusion, and waste energy recovery facilities, which inherently have a zero GHG emissions rate.

Emissions assessment for C&G facilities

The proposed and final regulations require GHG emissions rates for C&G facilities to be determined by an LCA conducted according to certain criteria. An LCA has a starting boundary, ending boundary, and baseline. It must include direct and significant indirect emissions, such as emissions associated with market-mediated changes in related commodity markets or that are the consequences of increased feedstock production. An LCA may consider alternative fates and account for avoided emissions. The proposed regulations provided that an LCA may not take into account offsets and offsetting activities that are unrelated to the production of electricity, including the production and distribution of input fuel.

The final regulations make clarifications and refinements to these rules, including:

The baseline must be updated at least every 10 years, but no more often than every five years, to capture material regulatory, economic, supply chain, or environmental changes.
Market-mediated effects are effects resulting from policy interventions and other factors (for example, technological advances) that alter the availability of and demand for marketed goods and activities and their emissions profiles.
Indirect emissions from other countries must be taken into account.
The language “that are unrelated to the production of electricity, including the production and distribution of input fuel“ is deleted from the description of offsets and offsetting activities.
An alternative fate is a set of informed assumptions used to estimate the emissions from the use or disposal of each feedstock were it not for using the feedstock’s new use to produce electricity; avoided emissions are estimated emissions associated with the feedstock that would have occurred in the alternative fate if the feedstock was not diverted for electricity production.
Rules clarify the temporal and spatial scope of an LCA.
Materials involved in or resulting from electricity production are categorized as products, co-products, byproducts, or waste, and principles are provided for treatment of these materials; categorization should be reevaluated every 10 years but not more often than every five years.
The rules are applied specifically to electricity production using methane derived from biogas, renewable natural gas derived from biogas, fugitive sources of methane, and hydrogen derived from methane from these sources as a fuel or feedstock, and provide alternative fates for sources of methane.
The regulations expand rules for computing the energy efficiency percentage of combined heat and power property for facilities using nuclear energy.

Observation: The preamble to the final regulations advises that an entity-by-entity approach to determining alternative fates was rejected in favor of a sector-by-section approach. Thus, the final regulations specify alternative fates from coal mine methane and methane derived from landfill gas, wastewater, animal waste, and fossil fuel activities other than coal mining.

Carbon capture and sequestration

The final regulations provide that a taxpayer that uses carbon capture and sequestration equipment at a qualified facility must comply with certain requirements of the EPA’s Greenhouse Gas Reporting Program.

Anticipated GHG emissions rate for Section 48E facilities

The proposed and final regulations require a taxpayer to objectively determine, based on the facts and circumstances, that a facility (other than a facility that has an inherently zero emissions rate) is anticipated to have a zero GHG emissions rate for at least the 10-year Section 45Y credit period. A taxpayer should consider the combination of type of facility, practice, and objective indicia that include co-location of the facility with a fuel source, a 10-year contract for fuel purchase or to capture or dispose of qualified CO2, and facility accommodation of one or a small range of fuel types.

The final regulations add as an indicia the existence of a legally binding federal or state air permit that requires the facility to operate in a manner that is reasonably expected to result in a GHG emissions rate not greater than zero and the permanent geological storage of captured carbon dioxide, and impose civil or criminal penalties for violating the relevant requirements.

Emissions rate table for non-C&G facilities

Rev. Proc. 2025-14 provides the first annual emissions rate table for wind, hydropower, marine and hydrokinetic, solar, geothermal, nuclear fission, and fusion energy facilities and waste energy recovery property. The table shows a zero GHG emissions rate for these properties.