Cities across the United States are working to advance a clean energy transition, which is crucial to reducing carbon emissions and meeting climate goals. As part of the Inflation Reduction Act (IRA), the federal government recently developed a new financial tool called Direct Pay (also called Elective Pay) to incentivize clean energy investments. Direct Pay will provide direct financial assistance to cities, non-profit organizations, and other tax-exempt entities to defray the costs associated with a range of clean energy investments via tax rebates. 

With this in mind, the Local Infrastructure Hub is highlighting two cities for their work in climate action and consideration for Direct Pay rebates : Madison’s municipal fleet transition and Denver’s Climate Protection Fund.

In Madison, WI, the city is investing in greening their municipal fleet by transitioning to light/medium duty electric vehicles and heavy-duty vehicles fueled by state-sourced biodiesel. Their procurement of EVs, installation of the charging infrastructure, and related grid work will be funded in part by reinvested Direct Pay rebates. Fleet electrification is an initiative being adopted in cities across the country, and the story of Madison is an illustrative example of that process and how Direct Pay can support it. 

In Denver, a 2020 ballot referendum established the Climate Protection Fund with revenue generated by a local 0.25% sales tax. The fund, administered by the Office of Climate Action, Sustainability, and Resiliency, provides for investments in climate action projects and workforce development programs. The LIH case story on Denver illustrates how the fund originated and the office’s plans to reinvest Direct Pay rebates generated by their projects to grow the fund’s capacity. 

Considerations for municipal leaders looking to leverage Direct Pay

• Does the municipality have a climate action plan? If not, what steps need to be taken to develop one? If yes, does it need to be updated since initial adoption? 
• Which projects and/or purchases are eligible for Direct Pay tax credits, and which credits are they eligible for? 
• What strategies can the municipality use to finance projects ahead of receiving rebates? 
• Does the municipality plan to take advantage of increased or maximum rebate amounts available if certain requirements are met (prevailing wage, domestic content, and energy community bonuses)?
• How will the tax rebates be accounted for in annual budget documents and what local approvals/process will be  necessary? 
• What is the municipality’s strategy for securing an initial capital investment to fund projects that are eligible for the Direct Pay rebates? 
• How will the city engage leaders across the various departments involved in planning/implementing projects and receiving the tax credits (finance/budget, sustainability, community development)?