Basis Climate, a New York-based startup, introduced a digital exchange Monday where companies can buy and sell renewable energy tax credits like the kind offered under last year's Inflation Reduction Act.
The law offered a variety of tax incentives to spur development of new energy facilities across the country using technologies like solar, wind and geothermal power. The IRS offered
Basis formally opened the exchange on its
"When I read through the Inflation Reduction Act after it was passed, it became really clear to me that these tax credits were a catalyst for the private sector to be able to start transferring, and this would bring really fresh new variability and liquidity to the market for the corporations that are able to buy these credits," he said. "You have to make it easier for the sellers and buyers of these credits to find each other. That's where our exchange comes in. Second, you have to give them the transaction tools, such as standardized documentation, diligence frameworks and negotiating tools to be able to let them know what it takes to get a transaction done, and educate them and provide them the confidence to transact. A lot of this is new territory for these corporate buyers that are now interested in these tax credits. We're really excited to give them the background, education tools and mechanics to be able to get involved in these transactions."
His company received its initial funding from angel investors around the end of last year and is in closing discussions with several strategic and early stage investors for a seed round that will probably be announced in September. The exchange has already been getting plenty of use even during pilot testing.
"We're really excited about the progress we've made," said Underwood. "We just passed our first 100 million credits that have term sheets signed, and we're hoping to do hundreds of millions this year. Accounting and tax liability forecasting annually is a very cyclical area. We think that being able to buy smaller and larger amounts of tax credits helps people, so we're doing transactions anywhere from $1 million in tax credits up to $100 million of tax credits per transaction."
Users have been trading a variety of different tax credits. "The inflation Reduction Act allows 14 different types of tax credits, which are associated across various clean energy technologies," said Underwood. "Right now we're doing tax credits that are solar storage, wind, EV charging infrastructure and biogas. All of these tax credits can either be an investment tax credit that's based off of the capital investment at the beginning of operations, or based off of the production of these facilities. We're working with both investment and production tax credits across those clean technologies."
Right now, the platform isn't being used for trading carbon offsets, although there are some provisions for carbon capture in the Inflation Reduction Act under Section 45Q of the Tax Code. "We're only doing tax credits on our platform," said Underwood. "There's a form of transferable tax credits called 45Q. That's the IRS Internal Revenue Code number, but we haven't opened up at that point. We're still waiting for that market to develop some more."
Basis Climate verifies the credits offered to make sure they're legitimate. "We really value having a high-quality level of credits on our platform and a high confidence that transactions will happen," said Underwood. "We do vetting both of the sellers and projects that have these tax credits, as well as vetting and understanding the tax liability and tax strategy of the corporate buyers that are on our platform. Once they've gone through that vetting to get onto our platform, the sellers will have listed their tax credits. We at Basis Climate support them in making sure that the credits are listed correctly, that they're the right figures. We're doing that pre-diligence for the buyers effectively. And then on the buyer side, we're very focused on having them get the right amount of information to review those credits, and then double-click on them to be able to enter into the amount of diligence they would want to be able to provide an offer. From them providing an offer, we give them the standard term sheet documentation that they can input the variables that they have for their offer into and then help them navigate to our standard purchase and sale agreements as well."
People at his company aren't personally visiting facilities to make sure they're under construction or producing renewable energy, but they're reviewing the documents carefully.
"I've done hundreds of project-financing deals or project transactions in my career, and a lot of it you can do through reviewing the documentation that you would expect to see from developers on these projects," said Underwood, who is the former head of corporate finance at Aela Energía, as well as an associate at Marathon Capital. "Did they have their construction contract signed? Do they have all their land ownership or control requirements in place? Do they have the power purchase agreements or the energy offtake agreements in place that lets them build a real project? All these discrete data points let us see how far along a project is in terms of its development or its construction. We have projects that are listed in pre-construction and projects that are listed in construction, and some projects that are even operational that are on our platform. Basically, we take diligence screening tools to be able to identify if they satisfy each of those categories, and then show that transparently to the buyers."
To get the tax credits from the federal government, the project needs to be placed in service, meaning it's operational and the construction has been completed. Basis Climate tries to steer clear of any projects that appear to be only speculative.
"We really want to avoid that," said Underwood. "We wouldn't sell tax credits for a project that has no plans to enter construction in the near term, unless it's part of a broader platform or portfolio that has multiple years worth of credits that are going out. For us, it's really important, because we know that if a tax director at a company is committing to a future purchase of these credits, they don't want to have any cash out before construction is completed. But they also want to have confidence that construction will get completed within the tax year that they're strategizing. It's really important to have that transparency and clarity on project status and not have speculative projects signing up to sell tax credits for a project that may never get built."
He believes the tax credits will still be available despite opposition from Republicans in Congress to the Inflation Reduction Act and efforts to repeal the clean energy tax credit provisions in the House after they took control earlier this year. Projects like wind farms have also generated opposition and lawsuits in some communities from homeowners who complain the turbines are ruining their view, and in some states like Florida and Texas the state governments have been passing laws to discourage ESG investment.
"If you think of what the industry was like before the Inflation Reduction Act versus what it's like now, they're like night and day," said Underwood. "Before the Inflation Reduction Act, you needed to have corporations enter into tax equity partnerships with the solar developers or wind developers to establish this long-term, multiyear agreement. Those are so complex and required such ongoing maintenance that the smallest threshold meant that it could be a $25 million and up transaction. What transferability does is it removes a lot of those structural concerns and problems. But you still of course have to make sure that the project is real and is being built. In terms of the risk that tax credit buyers face on our platform of these projects facing the inability to achieve placed in service, Basis works really hard to reduce that through our diligence. We don't think that any corporation that's on our platform should be committing to purchase credits or a project that is not 99.99% going to be built within the timeframe that we're committing to that. It's really important for new players that are entering this market to have that context. Our view is if you can give them the framework where they can feel confident that the diligence is being done, that they're seeing the documentation, that they understand what it means, and that they're getting educated about the risks that they're taking by buying these credits in the future, that's great. But it's much better that you say, 'Look, you will have no cash out until the credit is a valid credit.'"
He wants to avoid the kind of controversy that has arisen in the carbon offset market about the validity of some of the offsets provided by companies.
"We focus really hard on making sure both the quantity and quality of the credits are very well understood and agreed on when these transactions take place," said Underwood. "For us, it's really important to make sure that there's a high standard of confidence in our credits that are transacting because there is a recapture risk from the IRS if you overstate the amount of tax credits you have. Unlike some of the voluntary markets, the benefit here is that buyers and sellers are operating within a strong regulatory framework. These tax credits have existed for 20 years. They are now transferable, so what the IRS is doing is they issued guidance on what those transferability mechanics look like. And they also have a registration system that they're building for people to make sure that there's no fraud in these credits, and that the credits are not being sold twice, or that the credits are registered and not oversold for the amount that were registered. We're tracking all of that and supporting all those regulatory mechanics, but I think we're operating within a strong regulatory framework that has a very controllable amount of risk in terms of fraud protection."
He doesn't expect to see the tax credits repealed after the 2024 election. "We think that the Inflation Reduction Act was really good at prioritizing an equal distribution of these credits across blue and red states," said Underwood. "There's a lot of low-income benefits. There's a lot of rural community benefits and energy community benefits that are extra incentives for people to build in areas, for example, that had a coal plant retirement or that has had a high level of oil and gas labor workforce. These incentives into more red districts show those population areas and those voters that clean energy means jobs, it means good investment, it means better infrastructure, and those are issues that they care about. What's really good about the way that the bill is structured is it's directing all these clean energy projects into a more diverse set of states across the country."
He hopes to see more companies using his platform as a way to buy and sell the tax credits for clean energy.
"What we've been hearing from a lot of corporate buyers is they say, 'I saw a bulletin about these credits, but I don't really know how to transact with them.' Our message to the public is Basis Climate is here to give corporate tax directors and accountants a really easy way to transact on these credits, and your capital is an important part of this," said Underwood. "But at the end of the day, what you're doing is saving on your tax liability. We invite people to look on our website,
