Despite Buy American rhetoric and a trend toward heightened domestic content requirements in public works, there are still plenty of opportunities and incentives for foreign investment in American facilities and industries.
Over the course of the last two years, Congress has passed massive federal infrastructure spending bills in the form of the Infrastructure Investment and Jobs Act of 2021, the CHIPS & Science Act of 2022, and the Inflation Reduction Act of 2022 (IRA), which may represent $2 trillion of federal spending on infrastructure and clean energy production. The combination of federal spending and expanded tax credits for carbon capture, utilization and storage (CCUS) and clean energy production promise to unleash massive public and private investment in U.S. public works and privately-owned facilities.
However, foreign investors have to wonder if they have a seat at the table.
President Joe Biden has hailed the so-called Inflation Reduction Act as the most significant climate action passed in U.S. history. Despite talk of the urgent need for global climate action, the IRA comes with various strings attached — including protectionist domestic content rules.
In his State of the Union address, the president doubled down on his Buy American rhetoric and the policies which limit international companies from participating in federal infrastructure projects and other procurement opportunities. Following the State of the Union, the president proposed raising the domestic content requirements for materials and manufactured products used in federal infrastructure projects from 60 percent for 2023, with the goal of increasing the domestic content requirements to 65 percent in 2024 and 75 percent in 2029.
Similar domestic content restrictions will apply to subsidies under the $53 billion Chips Act program and the 25 percent investment tax credit, each of which are designed to secure America’s semiconductor supply chain.
These Buy American restrictions apply even to traditional trade partners and allies like Canada, the United Kingdom, and others — despite shared concerns about climate change and an over-reliance on China for semiconductors. It’s understandable that these policies would rankle our trade partners and foreign investors. But the opportunities for investment in American facilities are too great to pass on over a little rhetoric.
In light of the president’s Buy American policies, how can foreign investors and international corporations participate in America’s race to build carbon-zero infrastructure and production facilities?
In the absence of a waiver, the Buy American rules will indeed restrict the use of imported products in public works such as construction, electrical transmission, dams of various important inputs and materials. Larger multinational companies may qualify under the domestic content requirements by establishing manufacturing facilities in the U.S.
However, the good news for foreign investors and manufacturers is that Buy American regulations typically do not apply to investment in privately owned facilities. The IRA’s expanded carbon capture credits and green energy production credits are expected to unleash staggering private investment and capital expenditures in privately owned facilities.
For example, the IRA includes several tax credits to stimulate investment in CCUS projects as well as clean energy production. These credits are not limited to American companies per se, but are credits available to U.S. taxpayers (including multinational companies with U.S. operations).
Some of the key tax provisions under the IRA include expanded Internal Revenue Code Section 45Q, which substantially increased carbon capture value per ton up to $85 per metric ton for captured qualified carbon oxides (QCO) stored in geologic formations (up from $50 per metric ton) and up to $60 per metric ton for QCO either stored in oil and gas fields as “enhanced oil recovery” or used in qualifying industrial application (up from $35 per metric ton). This increase in tax credit will incentivize incorporating CCUS technologies into industrial facility projects.
In addition, 45Q incentivizes the development and deployment of Direct Air Capture (DAC) — an emerging technology to capture carbon dioxide already in the atmosphere. The IRA offers a significantly greater DAC credit amount of up to $180 per metric ton for projects that store DAC captured QCO in secure geologic formations (up from $50 per metric ton) and up to $130 per metric ton for QCO which is captured and used, including use in enhanced oil recovery (up from $35 per metric ton).
Importantly, the 45Q carbon capture credits are tradeable. The owner of the credit can sell the 45Q credit to other taxpayers. The ability to trade the 45Q credits will facilitate the ability of the developer to finance the CCUS projects and may make otherwise unprofitable projects financially viable.
In addition, the Treasury Department is launching a $10 billion program to subsidize approved solar, wind and renewable projects through a 30 percent tax-advanced energy project credit under IRC Section 48C(e). Like 45Q, these credits are expected to unleash massive new investments.
Companies that are already focused on the energy transition, production of clean energy technology, and decarbonization will find the expanded tax credits of Section 45Q particularly attractive. For instance, Exxon Mobil, coming off a year of record profits, recently announced the development of a $100 billion CCUS facility in Baytown, Texas. Likewise, Occidental Petroleum Corp is developing what may be the largest direct air capture facility in the world upon completion.
The array of tax credits available under the IRA is expected to unleash a private sector capital spending spree on CCUS projects and clean energy facilities. Despite the Buy American rhetoric — and the domestic content requirements in public works — there will be plenty of opportunities and incentives for investment in the American market for foreign and domestic investors alike.
Doug McCullough is a shareholder in the Houston office of Munsch Hardt Kopf & Harr. Doug has extensive experience representing clients across various industries in a full range of business transactions, including corporate governance, mergers and acquisitions, taxation, international business, private equity, venture capital and investment funds and private securities offerings.