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Key Takeaways | Domestic Supply Chain, Manufacturing and the DPA: How America Will Step Back into Its Global Leadership Role

The Inflation Reduction Act of 2022 (IRA) is intended to stimulate domestic production in the US energy market and incentivize investment into those projects that utilize such domestic content. On October 26, Partners Carl Fleming and Philip Tingle talked about what the passing of the IRA means for the supply chain (and all its issues as of late), manufacturing within the energy sector, the Defense Production Act and more with guest Brett White, VP of Regulatory Affairs at Pine Gate Renewables (PGR).

Below are key takeaways from the discussion:

1. The IRA Has Already Spurred Investment and Onshoring. The IRA brings improvement to manufacturing and the supply of domestic contents that are capable of bringing a lot of investment opportunities. Investors and manufacturers are already responding positively to it, including module suppliers who are already looking to bring facilities over to the United States. There is still a need for guidance from the US Department of the Treasury (Treasury) and other agencies with respect to regulation, specifically transactable regulations, including comprehensive domestic policy on onshore manufacturing and all the steps it entails. However, the McDermott and PGR teams have already seen a rise in activity surrounding mergers and acquisitions, finance and manufacturing in response to the IRA.

2. Carrot as Opposed to Stick Approach. The domestic content adder is a major carrot to incentivize domestic production, which is quite a contrast to the stick approach that was applied in connection with tariffs and the Auxin investigation. With regards to the tariffs and duties approach and the incentive tax treatment, they do not complement each other; there is a disjointed approach when you look at the tariff items. The Internal Revenue Service (IRS) and the Treasury must issue commercially viable, financially transactional guidance because these incentives are a part of financing for each side of the transaction, the supply chain side and the development side and so it has to be transactable.

3. Need for Further Clarification. The IRS recently issued a request for comments on the domestic content adder, as well as other IRA items. Those comments are due by November 4, 2022. The domestic content adder will be a boon for standing up a domestic supply chain, but the current language requires significant clarification before parties can fully transact. Once that language is determined, this guidance will solidify the number of manufacturers interested in bringing facilities to the United States. While the IRS has a lot on its plate with numerous IRA adders and other legislation, the McDermott and PGR teams see domestic content being among the first items to be clarified within the next few months.

4. Parties Are Transacting on IRA Adders. While some parties are waiting on guidance from the Treasury and the IRS on how they will interpret “manufactured product,” the McDermott team is leading a number of the [...]

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The Carbon Tax Checklist

Many stakeholders have called for the United States to adopt a carbon tax. Such a tax could raise billions of dollars in annual revenue while simultaneously reducing greenhouse gas emissions. Several carbon tax proposals were introduced in the last Congress (2019-2020 term), and it is likely that several more will be introduced in the new Congress. Several conservative economists have endorsed the idea, as has Janet Yellen, President Biden’s Secretary of the Treasury. But the details of a carbon tax matter—for revenue generation, emissions reductions and fairness. Because Congress is likely to consider several competing carbon tax proposals this year, this article provides a way to compare proposals with a checklist of 10 questions to ask about any specific legislative carbon tax proposal, to help understand that proposal’s design and implications.

1. What form does the tax take: Is it an emissions tax, a fuel tax or a production tax?

The point of a carbon tax is to reduce greenhouse gas emissions by imposing a price on those emissions. But there is more than one way to impose that price. Critically, the range of options depends, to a very large degree, on the type of greenhouse gas the tax is trying to address.

The most ubiquitous greenhouse gas is carbon dioxide (CO2) and the largest source of CO2 emissions is the combustion of fossil fuels. Those emissions can be addressed by imposing a fee on each individual emission source or by taxing the carbon content of the fuel—because carbon content is a reliable predictor of CO2 emissions across different combustion circumstances. Most carbon tax proposals are fuel tax proposals; they impose a tax on fuel sales, corresponding to the amount of CO2 that will be emitted when the fuel is burned.

For CO2 emissions, the fuel tax approach has one significant advantage over the emissions fee approach. The fuel tax can be imposed “upstream,” rather than “downstream,” thereby reducing the total number of taxpayers and the overall administrative burdens associated with collecting the tax. A tax imposed on petroleum products as they leave the refinery, for example, is a way to address CO2 emissions from motor vehicles without the need to tax every individual owner of a gasoline-powered car. Most CO2-related carbon tax proposals work that way—they are upstream fuel taxes rather than downstream emissions taxes.

But not all greenhouse gas emissions can be addressed through a fuel tax, because not all greenhouse gas emissions come from fossil fuel combustion. Methane, for example, is released in significant quantities from cows, coal mines and natural gas production systems. A carbon tax directed at those emissions is likely to take the form of an emissions fee imposed on the owner or operator of the emission source. Many carbon tax proposals, however, simply ignore methane emissions or expressly exempt agricultural sources.

Fluorinated gases are yet another type of greenhouse. If they are subjected to a carbon tax, that tax is likely to take the form of a production tax, which would be imposed [...]

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