Introduction to ESG Tax Credits

This article reflects federal tax laws as of November 12, 2026.

Introduction

ESG stands for environmental, social, and governance. Tax credits are amounts directly taken out of a company’s tax liability and represent a dollar-for-dollar reduction in taxes owed. Unlike business deductions, which only reduce the portion of income subject to tax, tax credits are not taxed and directly lower the final tax bill. ESG tax credits are designed primarily to encourage environmental outcomes, though some also impose workforce requirements and compliance conditions. This article introduces what ESG tax credits are and their history.

Inflation Reduction Act 2022

The Inflation Reduction Act (IRA) of 2022 represented one of the biggest investments in ESG in the United States. It created more than a dozen tax credits related to ESG goals and contributed more than $300 billion to climate change provisions. These additional credits were designed to incentivize and motivate companies, other than those in energy, to invest in decarbonization.¹

Ultimately, the IRA expanded the role of tax incentives in advancing ESG objectives. It encouraged investment in clean energy, promoted social goals through labor standards, and strengthened governance through documentation and compliance requirements. These incentives encouraged companies across industries to incorporate sustainability into their investment decisions and internal processes.

One Big Beautiful Bill Act 2025

In 2025, the One Big Beautiful Bill Act (OBBBA) revised the IRA’s tax credits and compliance requirements. The OBBBA made several changes to the timelines, restrictions, and scope of ESG tax credits created in the IRA.² It shifted incentives away from prioritizing clean energy and toward strengthening domestic manufacturing and energy security.

One of the most significant changes pertained to transferable credits. Transferable credits are credits a business can sell or transfer to another owner or business. The other types of credits are refundable and nonrefundable. Nonrefundable tax credits can only reduce income tax liability to zero. If there is any excess, the taxpayer cannot get that money back. Refundable tax credits, on the other hand, can reduce tax liability to zero and below, resulting in a refund to the taxpayer. Despite OBBBA’s changes, Section 6418 transferability continues to work as it did before. Clean energy developers can sell eligible tax credits to unrelated corporate buyers for cash, which serves as a primary mechanism for project monetization.³

Under the IRA, businesses were allowed to transfer or sell credits to foreign entities. The OBBBA retained the ability to transfer or sell credits; however, it established a clear restriction on specified foreign entities (SFEs). Entities under this ban include those associated with China, Russia, North Korea, and Iran. Companies face greater due diligence in ensuring that transferred credits do not go to SFEs and must retain explicit documentation proving this. Not only was direct transfer limited, but the OBBBA also placed restrictions on indirect transfers. Indirect transfers include partnership allocations and sales of project interests.⁴

Furthermore, the OBBBA introduced more compressed timelines on certain tax credits. For instance, wind and solar projects had to begin construction by July 4, 2026, or be placed in service by December 31, 2027, to retain eligibility for clean electricity credits.⁵

Overall, the OBBBA narrowed the scope of ESG tax incentives and increased compliance requirements. These changes emphasize domestic investment and stricter oversight of credit transfers. As a result, businesses must reassess their tax strategies and ensure they meet updated eligibility and documentation requirements.

Specific ESG Tax Credits

Together, the IRA and the OBBBA reshaped the federal tax incentives tied to ESG goals. The tax credits fall into four broad categories, roughly aligned with the four largest sources of greenhouse gas (GHG) emissions by sector in the American economy: power generation and consumption, transportation, industrial production and processes, and real estate. The credits below are among the most significant. The first four credits remain available, subject to the deadlines and restrictions noted, and the last three have limited remaining eligibility.

Credits That Remain Available

Section 45Y: Clean Electricity Production Credit

Section 45Y provides a tax credit to eligible taxpayers that generate electricity at qualifying facilities with a GHG emissions rate of zero or less. Eligible technologies may include wind, solar, nuclear, geothermal, and hydropower. The credit is generally available for the first 10 years after a qualifying facility is placed in service.

Who Can Claim: Taxpayers who own a qualifying facility placed in service after December 31, 2024. The electricity generally must be sold to an unrelated party, although an exception applies to certain facilities with qualifying metering arrangements.

Credit Amount: The credit is calculated by multiplying the kilowatt-hours of eligible electricity produced at a qualified facility by the applicable rate. The base rate is 0.3 cents per kWh and increases to 1.5 cents per kWh for facilities meeting prevailing wage and apprenticeship (PWA) requirements or qualifying for certain exceptions. Both rates are adjusted annually for inflation.⁶

Availability: For technologies other than wind and solar, the OBBA replaced the emissions-based phaseout with a phaseout based on when construction begins. The credit is reduced to 75% for facilities beginning construction in 2034, 50% in 2035, and zero in 2036 or later. Separately, qualifying wind and solar facilities generally must have begun construction on or before July 4, 2026, or be placed in service before 2028, to remain eligible. Eligible taxpayers, partnerships, and S corporations may elect to transfer all or part of the credit to an unrelated third party in exchange for cash. Certain tax-exempt and government entities may instead elect to treat the credit as a payment of income tax.⁷ Taxpayers claim the credit on Form 7211 for each qualifying facility.⁸

Section 48E: Clean Electricity Investment Credit

Section 48E provides an investment tax credit (ITC) for taxpayers investing in qualifying clean electricity facilities and energy storage technology placed in service after December 31, 2024. The credit applies to the upfront cost of building facilities and energy storage technology that generate electricity with zero GHG emissions, such as solar, wind, nuclear, and geothermal.

Who Can Claim: Taxpayers with a qualified facility and energy storage technology placed in service after December 31, 2024.

Credit Amount: The base credit is 6% of the qualified investment and increases to 30% when applicable PWA requirements are met. Additional bonus credits may be available for projects located in qualifying energy communities or that meet domestic content requirements. The credit is also eligible for direct payment or transfer.⁹

Availability: For technologies other than wind and solar, the OBBA replaced the emissions-based phaseout with a phaseout based on when construction begins. The credit is reduced to 75% for qualifying investments in facilities or energy storage technology beginning construction in 2034, 50% in 2035, and zero in 2036 or later. Separately, qualifying wind and solar facilities generally must have begun construction on or before July 4, 2026, or be placed in service before 2028, to remain eligible.¹⁰ Eligible taxpayers, partnerships, and S corporations may elect to transfer all or part of the credit to an unrelated third party in exchange for cash. Certain tax-exempt and government entities may instead elect to treat the credit as a payment of income tax. Taxpayers generally claim the credit on Form 3468.¹¹

Section 45X: Advanced Manufacturing Production Credit

Section 45X provides a per-unit tax credit to U.S. manufacturers producing defined clean energy components. Examples of qualifying components include:

Solar Energy Components
Wind Energy Components, including Offshore Wind Vessels
Inverters
Electrode Active Materials
Qualifying Battery Components
Applicable Critical Minerals

Who Can Claim: Manufacturers that produce eligible components in the United States and sell them to unrelated parties. Facilities that have claimed the Section 48C credit are not eligible.¹²

Credit Amount: The credit equals a specific rate for each eligible component multiplied by the quantity the manufacturer produces and sells during the taxable year. See the table below for eligible components and credit amounts.

Section 45X Eligible Components and Credit Amounts¹³

Category	Component	Unit	Credit per unit
Solar	Thin film or crystalline PV cell	DC watt of capacity	$0.04
Solar	Photovoltaic wafer	Square meter	$12.00
Solar	Solar grade polysilicon	Kilogram	$3.00
Solar	Polymeric backsheet	Square meter	$0.40
Solar	Solar module	DC watt of capacity	$0.07
Solar	Torque tube	Kilogram	$0.87
Solar	Structural fastener	Kilogram	$2.28
Wind	Blade	Watt of turbine capacity	$0.02
Wind	Nacelle	Watt of turbine capacity	$0.05
Wind	Tower	Watt of turbine capacity	$0.03
Wind	Offshore foundation, fixed platform	Watt of turbine capacity	$0.02
Wind	Offshore foundation, floating platform	Watt of turbine capacity	$0.04
Wind	Related offshore wind vessel	Sales price	10%
Inverters	Central inverter	AC watt	$0.0025
Inverters	Utility inverter	AC watt	$0.015
Inverters	Commercial inverter	AC watt	$0.02
Inverters	Residential inverter	AC watt	$0.065
Inverters	Microinverter	AC watt	$0.11
Inverters	Distributed wind inverter	AC watt	$0.11
Batteries	Electrode active materials	Production costs	10%
Batteries	Battery cell	kWh of capacity	$35.00
Batteries	Battery module using cells	kWh of capacity	$10.00
Batteries	Battery module not using cells	kWh of capacity	$45.00
Critical minerals	Applicable critical minerals	Production costs	10%
Critical minerals	Metallurgical coal	Production costs	2.5%

Availability: The credit phases down for most components sold from 2030 through 2032 (75% in 2030, 50% in 2031, and 25% in 2032) and ends after 2032. Wind energy components are not eligible if produced and sold after 2027. Applicable critical minerals other than metallurgical coal phase down for minerals produced from 2031 through 2033 (75% in 2031, 50% in 2032, and 25% in 2033) and end after 2033). The credit is not available for metallurgical coal produced after 2029. Certain tax-exempt and government entities may elect to treat the credit as a payment of income tax. Additionally, other taxpayers, including partnerships and S corporations, may elect to treat the credit as a payment of income tax under a special rule, generally for 2025 and the four succeeding years. Taxpayers that elect payment cannot transfer the credit. Otherwise, eligible taxpayers, partnerships, and S corporations may transfer all or part of the credit to an unrelated third-party buyer in exchange for cash. Taxpayers use Form 7207, Advanced Manufacturing Production Credit, to calculate and report the credit for each eligible component sold to an unrelated party during the tax year.¹⁴

Section 45Z: Clean Fuel Production Credit

Section 45Z provides a credit for domestic U.S. production of clean transportation fuels sold under the statutory conditions. Qualifying transportation fuels include sustainable aviation fuel, renewable diesel, ethanol, biodiesel, and hydrogen that meet certain GHG emissions standards. For fuel produced after 2025, the section requires that feedstocks be produced or grown in the U.S., Mexico, or Canada to remain eligible.¹⁵

Who Can Claim: Producers that make eligible transportation fuel at a qualified facility in the United States, sell it to an unrelated party, and are registered with the IRS as clean fuel producers at the time of production. A facility is not a qualified facility for any year in which it receives the Section 45V clean hydrogen credit or the Section 45Q carbon sequestration credit.

Credit Amount: The credit equals a per-gallon amount multiplied by the fuel’s emissions factor. The cleaner the fuel, the higher the percentage of maximum credit awarded. To realize full value, the fuel must be manufactured at facilities meeting PWA requirements. In addition, a fuel’s calculated emissions rate cannot be less than zero.¹⁶

Availability: The credit applies to fuel produced after December 31, 2024, and sold by December 31, 2029.¹⁷ Certain tax-exempt and government entities may elect to treat the credit as a payment of income tax. Eligible taxpayers, partnerships, and S corporations that do not elect payment may transfer all or part of the credit to an unrelated third party in exchange for cash. Taxpayers claim the credit on Form 7218, Clean Fuel Production Credit, filing a separate form for each qualified facility.¹⁸

Credits and Related Deductions That Are Ending

Section 30C: Alternative Fuel Vehicle Refueling Property Credit

Section 30C provides a credit for taxpayers that install qualifying clean energy refueling equipment, such as electric vehicle (EV) charging stations, hydrogen fueling equipment, and other alternative fuel infrastructure.

Who Can Claim: Businesses and individuals who install qualified alternative-fuel vehicle refueling or recharging property, such as electric vehicle charging equipment, in an eligible census tract. The property must meet additional requirements based on its use.

Credit Amount: For businesses and tax-exempt organizations, the credit equals 6% of the cost, up to $100,000 per item. It increases to 30%, with the same per-item limit, if PWA requirements are met. For property at an individual’s main home, the credit equals 30% of the cost, up to $1,000 per item (each charging port, fuel dispenser, or storage property).¹⁹

Availability: The IRA extended the credit to property placed in service through 2032. However, the OBBBA terminated Section 30C for property placed in service after June 30, 2026, so property placed in service after that date is not eligible.²⁰ Certain tax-exempt and government entities may elect to treat the business portion of the credit as a payment of income tax. Eligible taxpayers, partnerships, and S corporations may elect to transfer all or part of the business portion of the credit to an unrelated third party in exchange for cash. Taxpayers claim the credit on Form 8911, Alternative Fuel Vehicle Refueling Property Credit.²¹

Section 40A: Biodiesel and Renewable Diesel Used as Fuel Credit

Section 40A offers a credit for biodiesel and renewable diesel used as fuel, including a separate credit for small agri-biodiesel producers. The credit is designed to support domestic fuel producers and encourage the transition to lower-emission transportation fuels.

Who Can Claim: Eligible small agri-biodiesel producers with a productive capacity of no more than 60 million gallons per year. For fuel sold or used after June 30, 2025, the fuel must be derived exclusively from feedstock produced or grown in the United States, Mexico, or Canada.

Credit Amount: The credit is 20 cents per gallon (10 cents for fuel sold or used before July 1, 2025) on up to 15 million gallons of qualified agri-biodiesel production per year.²²

Availability: The credit was originally scheduled to expire after December 31, 2024. The general biodiesel and renewable diesel credits expired for fuel sold or used after that date. The OBBBA extended the small agri-biodiesel producer credit through December 31, 2026. It also allowed eligible taxpayers, partnerships, and S corporations to transfer all or part of the credit to an unrelated third party in exchange for cash for fuel sold or used after June 30, 2025. Taxpayers claim the credit on Form 8864, Biodiesel, Renewable Diesel, or Sustainable Aviation Fuels Credit.²³

Section 179D: Energy Efficient Commercial Buildings Deduction

Section 179D provides a deduction for energy-efficient improvements made to commercial buildings, including interior lighting, heating, ventilation, air conditioning (HVAC), hot water systems, and building envelope upgrades.²⁴

Who Can Claim: Owners of qualifying commercial buildings who place in service energy-efficient commercial building property or energy-efficient building retrofit property. Designers of qualifying property installed in buildings owned by specified tax-exempt entities may also claim the deduction.

Deduction Amount: The deduction is calculated per square foot, based on the energy savings achieved. For tax years beginning in 2026, the base deduction ranges from $0.59 to $1.19 per square foot. It is five times higher if PWA requirements are met. The amounts are indexed for inflation.

Availability: The OBBBA terminated Section 179D for property whose construction began after June 30, 2026. Taxpayers claim the deduction on Form 7205, Energy Efficient Commercial Buildings Deduction.²⁵

Other Terminating Credits:

The OBBBA also ended several other incentives early. The clean vehicle credits (Sections 30D, 25E, and 45W) do not apply to vehicles acquired after September 30, 2025. The home energy credits (Sections 25C and 25D) do not apply to property placed in service or expenditures made after December 31, 2025. The refueling property credit (Section 30C) ended for property placed in service after June 30, 2026, the new energy efficient home credit (Section 45L) for homes acquired after that date, and the commercial buildings deduction (Section 179D) for property whose construction begins after that date.

Energy Credits Ended Early by the OBBBA

July 4, 2025 — The One Big Beautiful Bill Act became law.
September 30, 2025 — Last day to acquire a qualifying clean vehicle (§§ 25E, 30D and 45W).
December 31, 2025 — Last day to place qualifying home improvements in service (§ 25C) or make qualifying residential clean energy expenditures (§ 25D).
June 30, 2026 — Last day to place qualifying refueling property in service (§ 30C), acquire a qualifying energy-efficient home (§ 45L), or begin construction on qualifying commercial building property (§ 179D).

Source: IRS Fact Sheet FS-2025-05 (Aug. 21, 2025).

Industry Example

First Solar Inc., a solar technology and manufacturing company, has been significantly affected by the tax credits created by the IRA and modified by the OBBBA. In its 2025 Form 10-K, First Solar reported recognizing $1.6 billion of Section 45X credits as a reduction to “Cost of sales.”²⁶ These credits were a major source of funding for facility expansion and had a substantial positive impact on the company’s 2025 results.

However, First Solar notes that under the OBBBA, enacted in July 2025, the availability of Section 45X and other major clean energy credits has been significantly curtailed. The Act accelerates the termination of credits and imposes new eligibility restrictions; particularly excluding products manufactured with material assistance from foreign entities of concern (FEOC). As a result, First Solar cautions that if the magnitude or realization of these financial benefits varies significantly from current assumptions, its “business, financial condition, and results of operations could be materially and adversely affected.” The company further cautions in its 10-K that future sales or monetization of Section 45X credits are uncertain and that changes in law or guidance could result in “material adverse changes to the benefits [it has] recognized and expect[s] to recognize.” These factors create both immediate and ongoing risks to the amount and reliability of the monetary benefit First Solar receives from ESG-related tax credits under the new legislative environment.

Conclusion

The available ESG tax credits offer significant benefits to both taxpayers and stakeholders. For taxpayers, the credits reduce the cost of investing in clean energy, alternative fuel infrastructure, and lower-emission fuels. They encourage increased investment in renewable energy and support job creation. Stakeholders use ESG considerations, including tax-related information, to assess a company’s risk profile and strategy.

These benefits come with compliance and implementation challenges. The credits require extensive research and tracking to remain in compliance. Companies must define project scope clearly and regularly collect, test, and remediate data. Companies should model potentially applicable credits against the added compliance costs some of them require, as well as how certain credits may interact with one another. They should also consider the accounting treatment, since tax credits may be accounted for as a government grant. Finally, companies should keep an eye on the policy landscape, as governments are also looking at carbon taxes to put a price on carbon.