Crux Climate to provide a marketplace for IRA tax credits

The Inflation Reduction Act passed last year was chock full of financial incentives for the fast-growing climate economy. Crux Climate, a new company launching Thursday, aims to streamline and broaden access to that cash.

“The IRA creates a trillion-dollar pool of capital to de-fossilize our economy, but it’ll take a platform like Crux to unleash the flood waters,” according to Clay Dumas, founding partner at Lowercarbon Capital, which is the lead investor in Crux. The company announced its first funding round of $4.6 million on Thursday.

The IRA tax credits expected to be worth hundreds of billions (exactly how much is not known yet because some of these tax credits are not capped) for building electric vehicle infrastructure, wind power, solar power, nuclear power, clean hydrogen, manufacturing of component parts, and other businesses meant to reduce greenhouse gas emissions. Those incentives are expected to drive $3 trillion of infrastructure investments over the next decade, according to a March 2023 estimate from Goldman Sachs.

There’s a problem with tax credits, though. They’re only helpful if you have have significant income that you’re paying taxes on, and many startups aren’t there yet.

“Many of the companies that earn the credits aren’t able to make use of them because they don’t pay large enough tax bills in the year that they get the credits to be able to use them,” Crux co-founder and CEO Alfred Johnson told CNBC.

To address this problem, companies have historically bought and sold tax credits. Typically, the company that’s earned the credit sells it for less than its full value, landing much-needed cash. The buying party gets a discount, then takes the full amount of the credit against its taxes.

Conventionally, liquidating a tax credit required entering into a formal partnership with a company that could turn that tax credit into liquid cash. That process is not easy. So the IRA changed it so these tax credits can be transferred to unrelated parties.

This has the potential to substantially increase the size of the tax credit marketplace.

“Transferability adds a critical new mechanism to be able to monetize the huge supply of tax credits that will be generated as a result of the IRA,” Johnson told CNBC.

A September report from Credit Suisse estimates approximately $500 billion of tax credits will be monetized over the next decade.

“We advise on a large portion of deals in the market, and all the players are discussing transferability as part of their transactions,” said Sam Kamyans, a Crux investor and partner at law firm Allen & Overy.

“Tax equity has been the fuel of the renewable energy boom for decades, and it’s about to be put on steroids with the IRA,” Kiran Bhatraju, the CEO of Arcadia, which manages over a gigawatt of community solar projects, told CNBC. Bhatraju is an investor in early-stage venture fund Overture, which is investing in Crux.

Even though the IRA allows tax credits to be bought and sold to unrelated parties, the market is still largely operating manually — which means slowly and without much transparency.

Climate companies still have to find an organization looking to buy credits, coordinate a meeting, and negotiate a price, depending on the specific attributes of the deal. Companies can’t even figure out how competitive a bid is until they shop it around.

“The tax credit market is very opaque,” explained Christopher Kemper, another Crux investor and the CEO of clean energy company Palmetto. “There are a few institutional players in the market that purchase tax credits at discount to market value in exchange for buying at volume. Transaction processes are highly involved, very complex and can take 6 to 12 months to structure.”

“These transactions are wildly complex, and very expensive, and about to grow by orders of magnitude in scale,” Bhatraju told CNBC. “I’ve seen how difficult it can be for solar projects to line up tax equity. They have hundreds of underlying documents and all of the possible stakeholders from developers, lenders, offtakers, lawyers, and accountants involved.”

Crux is meant to address the problem by creating a centralized marketplace of buyers and sellers and an associated software platform.

The Crux platform will make it easier to discover the price of tax credits, which tend to trade at a some varying discount to their full value. Sellers can list their tax credits on option, get bids on those credits, and compare offers. The software will employ risk management tools and processes to increase trust, ensure regulatory compliance and report on the status of the project.

Crux will make money by selling the software and in taking a percentage of transaction costs, Johnson said.

Bringing transparency and ease to the opaque sector will make tax equity a more accessible source of income for smaller developers building community solar projects, Bhatarju says.

“These projects have historically found it difficult or expensive to source tax equity…with investors wanting to see large portfolios rather than single projects,” Bhatraju told CNBC. “The Crux platform could even the playing field.” 

It could also help developers looking to build in underserved areas of the country, Kamyans said.

“Under the IRA, underserved communities enable energy projects to generate more tax credits than well-served areas. In addition, certain tax credits are only available for projects in low-income communities. Projects in those communities tend to be smaller and overlooked” because of the costs of doing the deal are too high, Kamyans told CNBC.

“Crux’s platform enables the sale of these credits, which encourages investors to build projects in underserved communities to supplement projects in well-established areas.”

The complexity of the tax credit market begs the question: Why does the government offer credits instead of just funding climate startups directly?

In fact, for five years, companies in three particular categories — hydrogen, carbon capture and advanced manufacturing — that are eligible for IRA credits can get money directly from the government. (As to why those categories get special treatment, Johnson has no explanation because he was not working at the Treasury when the bill was passed: “I wasn’t in those rooms there at the Treasury at that time.”) Tax-exempt entities like local governments, nonprofits, or universities can also bring a credit to the government for a direct payout for the face value of the credit.

Clearly, it would be more efficient for the government to cut checks directly to all climate companies its trying to support. But there are two reasons why the law includes tax credits instead.

First, having the government making direct investments in companies creates a whole set of complicated legal requirements.

Johnson knows this from his two experiences working at the U.S. Treasury. From 2009 to 2012 he helped steer the U.S. economy and its banking system out of the Great Recession, and from Jan. 2021 to April 2022 where he was the deputy chief of staff to Secretary Janet Yellen.

“If you imagine a program where the government is making grants in the hundreds of billions to companies, then the government needs the capabilities to be able to underwrite the projects, ensure that risk is appropriately managed, and have different mechanisms of managing and tracking the performance of those investments over a longer period of time,” Johnson said. “Those are difficult activities for the government to do.”

Just as importantly, building the IRA with more carrots than sticks makes the bill more politically durable, Johnson said. Tax credits have a wide base of support politically because a lot of very diverse stakeholders benefit from them.

“I’ve got two young kids. I hope that the IRA is the policy that changes the energy system of the United States. And in that sense, I hope that it is politically durable and it isn’t easily replaced if there’s different control of Congress in the White House,” Johnson told CNBC.