Energy tax credits must be reformed to make startups eligible. Because climate technology startups are focused on research and long-term growth activities, they do not generate profits in the short-term that the tax credits can offset. The lack of a direct pay mechanism for energy tax credits generally means startups cannot access the capital in their credits until they have become profitable, if ever. In other words, when startups are most in need of the support during their research and initial scaling phases, they are cut off from the value of these credits. Even tax financing transactions, where energy tax credits are transferred to taxable investors, often do not work for startups because they are too small to be worth the transaction friction. Further, the Section 383 limitation on credit carryforwards can diminish the value of tax credits while startups are in their growth phases. This means that a cornerstone of U.S. energy policy almost entirely excludes the most innovative companies in the country from participation, seriously undermining our progress on accelerating the creation and deployment of climate technology. Creating a direct pay mechanism for energy tax credits would solve the issue and provide immediate liquidity to this subset of climate technology companies.

Energy Storage: The pace of innovation in renewable energy storage capability is a central gating factor in the transition to a clean energy economy. Renewable sources such as wind and solar have variable output capacity depending on the availability of the energy they are capturing. These sources need expanded storage capacity in order to pair energy generated during peak generation times with the demand created by businesses and consumers during peak consumption times. We recommend creation of a tax credit with a direct pay mechanism that supports the economics of energy storage capacity development.

Carbon Capture: Given the enormity of the challenge, the scaling of carbon capture technology is critical to any strategy seeking to meet global emissions reductions targets by 2050. But, in addition to the lack of a direct pay mechanism, the minimum scale requirements in the carbon capture credit under Section 45Q also bars startups from accessing the value of the credit. The minimum scale requirements require facilities to capture tens of thousands of metric tons of carbon dioxide per year in order to be eligible, while companies in their early stages may only be able to capture less than one thousand metric tons. But because an emerging technology must prove its effectiveness before the scaling process begins, the minimum scale requirements effectively cut off access to the credit for emerging technologies and creates a massive gulf between a technology coming out of a university or government lab and a fully-scaled product deployed widely in the commercial markets. This barrier depresses investment into carbon capture technology and slows the pace of innovation.

We also encourage policymakers to explore the various new technologies coming on-line to ensure that reform of 45Q appropriately encourages novel approaches and broad experimentation in carbon capture technology, as well as an increase in the value of the credit per ton of carbon captured for new innovative technologies, which would bring greater investment into carbon capture and transformation innovation.

Renewable energy research investments, such as the Department of Energy’s Advanced Research Projects Agency-Energy (ARPA-E) and the national laboratories, are important partners in the energy innovation process. Federal research is a crucial component to developing alternative energy technologies that are the building blocks of new venture-backed companies, creating jobs, and enhancing America’s energy independence.

NVCA supports the Advanced Research Projects Agency-Energy (ARPA-E) as a key agency relied upon by Congress to lead research, commercialization, and scale support efforts for climate technologies. ARPA-E runs several successful programs in this regard, including early stage-support programs and the ARPA-E SCALE-UP Program. More resources for ARPA-E would grow existing programs and speed up processing times for eligible companies, expanding the office’s ability to impact climate technology commercialization.

NVCA supports federal commercialization programs such as the existing Small Business Innovation Research (SBIR) programs and implementing modernizations to ensure they are effective public private partnerships and prioritize new company formation, particularly around climate technologies.

Mobility and Transportation accounts for more than half of climate technology investment. The ambitious investments into mobility and electric vehicles in the American Jobs Plan will drive broad adoption and generate greater innovation in the sector, giving the country an advantage in ensuring that the next generation of auto jobs will be created domestically. Further, it will produce activity that generates greater domestic manufacturing opportunities, including in semiconductors and batteries.

In addition to energy-specific policy recommendations, NVCA supports broader efforts to encourage more long-term investment into capital-intensive industries, of which energy is one of the most significant. Policy changes that improve the environment for this type of investment and encourages those investors with a longer-term investment horizon to increase their involvement will encourage American energy entrepreneurship.

Specifically, NVCA supports efforts to make the U.S. public markets more welcoming to small capitalization companies, particularly those with longer-term investment needs. NVCA also supports tax changes that allow startups to access the benefits of their tax assets such as accrued R&D credits and provide a safe harbor from Net Operating Loss (NOL) limitation rules, which punish startups for investing in innovation and make it harder for capital-intensive startups to find longer-term growth capital.