While there is quite a bit of uncertainty about the future of the IRA, the clean energy tax credits appear to be the most robust part of the law. They have extremely strong, bipartisan interest groups behind them. In addition, despite being the biggest line item in the bill, their budget impact is small compared to the size of proposed Republican tax cuts and other IRA programs. At first glance, this seems like a paradox. How are clean energy tax credits so politically potent if their budgetary implications for cost savings is so low? The reason is the tax credits are, at their core, money market instruments that incentivize the financial system to provide lower cost short term funding for longer term capital assets in the clean energy sector. This is the key to understanding both how the tax credits work so well, and how we might develop them in the future.
To start, what is the money market? Money markets are short-term funding assets like checking accounts, repos, and treasury bills. What unites all these products is that they service individuals and institutions who need to hold cash balances. Money-market instruments offer easy access to liquidity and subsequently the ability to make payments, but are not officially recognized, publicly issued monetary instruments like cash or central bank reserves; thus, they carry either returns or access to other privileges (like the ability of a bank to make payments via checks). Money markets offer borrowers short-term liabilities they can use to finance longer term cash flow generating assets such as stocks, bonds, and clean energy projects. The role of a financial institution that we broadly call a bank is to connect the money and capital markets. In other words, the money market is the variety of instruments that look and act like bank deposits which, in turn, fund loan-like products.
Clean energy tax credits are money market instruments because they are promises by the federal government to deliver cash for the completion of a clean energy project. Instead of a conventional subsidy which pays cash out of the treasury, they reduce an entity’s tax liabilities–in other words, cash–back to the treasury. This is why Nathan Tankus quipped that they are a “bad form of money.” What he means isn’t really a judgement, rather that they are a backdoor form of government money issuance via the financial system. Jeff Gordon argues that the flip side of this is that they act as contracts between the government and the private sector, each getting something in return.
When they were conceived, energy tax credits were meant to stimulate investment into the building of new energy generation by reducing the tax bill of developers, thus raising the profitability of their investments. However, developers invest into long-term projects with long profitability horizons and low upfront tax bills. These low tax bills mean they cannot claim the entirety of tax credits on larger projects (the tax credits are not fully refundable for private entities). Moreover, the tax credits are disbursed only when a project is complete. What developers need is cheap financing to install their projects. Very quickly, developers figured out that they could monetize their tax credits by passing them to an entity with lots of spare cash and high tax bills, like a large bank. In the traditional “tax equity” form of financing, a developer would form a legally complex equity partnership with a bank that allowed the bank to inject cash into the project and take ownership over the tax credits it generated. The bank’s spread on this transaction came from the difference between the amount of cash it injected into the project and its savings on its tax bill.1
Tax equity was and remains a core part of the way we do energy financing in the United States. However, it has serious drawbacks. First, tax equity transactions are complex and thus expensive to structure. Large law firms broker connections between banks and projects while structuring the deals. These transaction costs mean the deals are only worthwhile to large projects and established developers. Second, the public and non-profit sectors were locked out of tax equity transactions because they could not generate tax credits as they had no tax bills (until the IRA instituted elective pay). Third, the tax credits can only pay out in full if an entity has a tax bill of commensurate size. This means there was an upper limit to the supply of tax equity finance available from even the large banks. In a recession, just as we need more investment, that supply shrinks because banks’ tax liabilities shrink with those of others.
The IRA attempted to solve some of these problems by creating new pathways to monetization. The “transferability” provision allowed developers to give a third party all or even part of the tax credits they are owed for their projects without need for complex equity structures to move around the ownership of tax credits. This created an opportunity for the tax credit market to move from being brokered by law firms to market places such as Cruxx and Basis. Furthermore, the IRA created new credits and dramatically boosted the generosity of the existing generation credits—enabling healthy demand for the newly created transferability mechanism. Transferability lowered the cost of tax credit financing allowing a larger ecosystem of lenders and developers to enter the market to meet that demand. For example, Travis Kelce’s first film project was partly financed by the sale of tax credits on the transferability market by his renewable energy developer co-producer. The ten million dollar transaction would be considered relatively small for a tax equity transaction, but not for a transferability transaction. And the low-risk cashflow it provided could easily be re-invested in a higher risk project like a film. In essence, it offered individuals and businesses with large enough tax liabilities the means to park their excess cash on a short-term time horizon. In addition, the requirement that energy projects be finished ensure that tax credit “origination” is clearly tied to the completion of capex—creating a firm conditionality that ensures projects are anchored to verifiable projects that meet credit standards.
IRA had a very large effect on the volume of tax credits. Nat Bullard’s annual roundup of decarbonization shows that the IRA doubled the market for tax equity, with most of that growth coming from transferability.

Source: Bullard, N. 2025. Decarbonization: 2021 Things, The Complex, Reagents. Slide 51.
Bullard’s graph also shows us that traditional tax equity has not disappeared but actually seems to be holding a steady market share of transactions. There are very good reasons for this. First, tax equity cash injections tend to be faster than transferability transactions—they come into the project somewhat earlier than transferability. Second, because they are structured as equity, the lender has more information about the developer and there is less execution risk and lower insurance costs. Moreover, despite some successes, there is still a large premium gap between small and large developers and projects.
There are also limits to transferability that constrain both its growth and the volume of tax equity finance the IRA has thus far facilitated (Nat Bullard’s extraordinary figures notwithstanding). The IRA could have been even more successful if it embraced the money market nature of tax credits and allowed them to become a bigger part of the financial system. Under the current rules, a transfer can only happen in the year that a project goes into operation and can only be done once; the transferee cannot transfer the tax credit to a third party. This limits the potential buyers, volume, and liquidity of transferability markets. A money market investor is searching for an instrument that is money-like: in other words, it can be easily sold to a third party to receive money that can pay for the investor’s current commitments. Tax credits would be a better investment if their buyer knew that they could ultimately sell that tax credit on to another buyer at a moment’s notice. In well developed markets, this function is served by dealers: businesses that match buyers and sellers by holding the assets over some period of time on their own balance sheets (literally “warehousing” them in market slang) and making a profit off the bid-ask spread. Dealers are critical to providing the liquidity that makes money markets work. However, the limitations of the tax credit mean that no system of dealers yet exists in the tax credit market. Instead, the transferability market is built around less-efficient brokers, who must absorb price and execution risk because, once a credit is sold, no new transactions can take place.
Despite these drawbacks, transferability has reinforced the political resilience of tax credits by not just expanding the market but including new actors, including celebrities and oil and gas companies. The market for tax credits is a shadow banking market where the money market instrument—the tax credit—enables lenders (tax credit buyers) to provide discounted lending to borrowers (developers of energy projects). These transactions create multiple powerful constituencies because, unlike tax credits that go directly to consumers or state entities, transferability is necessary to ensure the borrower gets a substantial benefit from the tax credit’s size (which the IRA also increased). Not only do developers benefit from them but so do the banks and brokers that make the market. Everyone wins because they are a “form of money” that is intermediated by the private sector. Not coincidentally, American policy making has a long history of tying elites to national projects by investing them into publicly built financial markets.
Obviously, the same things that make tax credits hard to kill also triggers some suspicion from policy makers and the public. What we described above is a system that helps create private profit in service of public commitments. Additionally, the expansion of private money market credit can pose potential dangers to financial stability. Money markets are credit markets and credit markets are unstable. Clean energy tax credits are relatively benign in that respect. The main credit risk from clean energy tax credits is that a project is not completed and, thus, a tax credit is not generated. In the event of project failures, transferability transactions create risks for credit buyers by design. There is a possibility that transferability transactions could rope buyers into a “big green bubble” of capital projects—some of which are installed to claim credits and others that do not. However, the upside of this productive bubble is that it would leave plenty of useful assets in its wake. Moreover, like with other money markets, judicious intervention by regulators and dealers of last resort can add further liquidity to these markets.
If we manage to save the IRA’s tax credits, we should work towards the following changes to fully harness the potential of transferable tax credits.
- Uncap the number of times tax credits can be transferred
- Allow tax credit flows to be securitized and repackaged into larger products, like mortgage-backed securities
- Allow dealers to rehypothecate such products into fractional shares so that multiple buyers can participate on one credit—this will be especially useful for large fixed capital projects
- Enable the creation of money market mutual funds in which small investors can buy into numerous tax equity deals
If we had a normal political environment, I can even imagine this being a bipartisan initiative and complementary to financial regulation that is leaving the largest banks to safer activities while facilitating experimentation in money markets. Furthermore, we recommend allowing public entities of one form or another to participate in transferability transactions and to allow them to monetize tax credits they purchase through the elective pay mechanism, a process known as “chaining.” Chaining would allow some public entities—perhaps even very specifically designated ones—to play the role of a central bank dealer or buyer of last resort in tax credit markets, agreeing to accept credits from developers or dealers at a penalty rate. (CPE is supportive of administrative changes to tax administration by the Treasury Department that would enable chaining transactions.) This would ensure a sudden loss of liquidity due to macroeconomic factors does not cause the delay or destruction of new projects. Furthermore, allowing federal agencies to participate in elective pay (from which they are currently barred) and transferability would effectively turn the credits into a revolving loan fund for project finance, limiting their already modest fiscal impact and further increasing their liquidity.
Of course, the prospect of publicly backed private profits means that we need to think hard about countervailing institutions. If we are really worried about the financial instability or “Minksy moments” that come with expanding money market financing of capital market assets, it would be wise to prepare for that eventuality. But this is not something tax credit design itself can or should compensate for. Rather, it requires a robust look at the financial regulation we utilize for money markets in general, the vulnerability of energy financing to U-turns in monetary policy, and the various regulatory or market-structuring incentives imparted to energy projects via state and federal policy. In other words, if we are to treat tax credits as money market instruments, we must look to complementary policies to ensure tax credits play a constructive role. This is a job for macroprudential policy, industrial policy, and even orderly bailout and liquidation mechanisms.
Instead of trying to fight financialization or financial engineering, a robust political agenda for a rapid decarbonization transition can be built around pairing mechanisms to increase the volume and pace of investments while managing the implications for society. This will be even more urgent as the lessons of tax credits are tried in other sectors for the purpose of promoting investment. A critical need is to create well designed public institutions that can operate in markets to both shape their direction, but also effectively capture and return the value added they create to the public.
- In effect the bank creates a deposit in the name of the developer in exchange for the tax credit turning it into what practitioners call a “swap” of payments. ↩︎