President Joe Biden’s efforts to shore up major banks could imperil financing for green energy projects, Politico reported Tuesday.
The Biden administration is primarily relying on Inflation Reduction Act (IRA) tax credits to spur a wave of green energy investment and development, and it is separately looking to introduce new regulations to the banking sector to decrease the risks of a systemic collapse, according to Politico. The banking reform push— led by the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency and the Federal Reserve— could jeopardize a substantial amount of private financing for green energy development, which could stymie the industry at a time when it needs to ramp up to meet the Biden administration’s longer-term climate goals.
Green energy developers often rely on partnerships with major banks in order to drive up their tax liability to make full use of the subsidies they qualify for, according to Politico. In such arrangements, the investors provide capital to cover development costs in exchange for tax credits. (RELATED: Biden Official Calls Banking System ‘Resilient’ Amid SVP Collapse)
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The new banking rules would boost the amount of capital that major banks must hold in reserve in order to offset potential losses from their investments, quadrupling the requirement for investments in exchange for the tax credits, according to Politico. The rules would decrease the financial gain that major banks would realize from successful investments, making bets on green energy less appealing than they currently may be.
Leading financial institutions “would absolutely exit this market” if the capital requirement rule became finalized, Bank Policy Institute President Greg Baer, whose trade organization represents the largest American banks, said in September to lawmakers on the House Financial Services Committee.
The regulatory changes in question would align tax equity investments with other private equity exposures, and are intended to reduce levels of underlying risk to the banking system, according to a source familiar with the process. The Federal Reserve is soliciting comments and public feedback on the proposal, and will closely consider those comments when making a final determination, the Federal Reserve’s Vice Chair for Supervision Michael Barr said in July.
Some major institutions have already started to warn green energy developers that they would substantially reduce their exposure to the tax credit market if the rules become finalized, according to Politico. Meanwhile, the American Council on Renewable Energy, a green energy trade group, wrote that the banking sector rules “threaten to derail the clean energy transition” in an August letter to Lael Brainard, the director of the National Economic Council. More than 40 leading green energy companies signed onto that letter.
“It is a big concern,” David Burton, a partner at the law firm Norton Rose Fulbright who specializes in tax equity transactions, told Politico. “Congress made a decision to address climate change through the tax code. And this would really, really undermine it.”
The Biden administration is aiming to have the American power system reach net-zero carbon dioxide emissions by 2035, and to have the overall U.S. economy reach net-zero by 2050. They largely plan to achieve these goals by phasing out fossil fuel power generation infrastructure and replacing it with green power generation from sources like solar, wind and hydrogen.
The FDIC, Office of the Comptroller of the Currency and the Federal Reserve declined to comment. The White House did not respond immediately to a request for comment.
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