Proponents of clean steel say they have identified a gap in tax credits that affects makers of a wide range of sustainable materials.

Such companies can reap indirect tax benefits from the 2022 Inflation Reduction Act by using renewable energy, clean hydrogen and capturing and storing carbon dioxide. But no direct tax credits exist for producing the products themselves in the law, which otherwise provides some $369 billion in subsidies over 10 years to other types of cleantech.

The lack of direct credits in the law could hamper startups like Colorado-based Electra as they try to scale up novel approaches to steelmaking and compete against other clean steel manufacturers implementing more mature technologies.

Companies trying to cleanly produce other emissions-intensive products, like fertilizer, chemicals or cement, also cannot claim direct tax credits for producing those materials, experts say.

“If we want to get these technologies to market very quickly then these companies will need additional support, something that covers their operational costs, not just their capital costs,” said Julio Friedmann, chief scientist with Carbon Direct, a carbon management firm. “So, something like a production tax credit for green steel or clean fertilizer or low-carbon cement would actually help.”

All of these materials are often overlooked but essential to our modern lives. Making steel and cement, for example collectively accounts for roughly 15% of global carbon dioxide emissions.

Decarbonizing these sectors is a priority for the United States and the European Union to help meet their net-zero carbon goals by midcentury. Cleaning up industrial pollution will likely be a priority if President Biden wins a second term, The New York Times recently reported.

The IRA contains generous tax credits, which can be claimed over a 10-year period, for myriad cleantech activities, including manufacturing clean hydrogen and sustainable aviation fuel, producing wind, solar and battery components, expanding production of wind and solar power and capturing and storing CO2.

But the IRA was not crafted with novel technologies like Electra’s in mind that make sustainable materials, and instead focuses more on boosting clean energy production, said Friedmann.

Electra can benefit indirectly from lower energy costs because of tax credits going to renewable-energy producers, which Electra aims to purchase energy from to make its clean iron, a chief ingredient of steel.

“There is no production tax credit for making iron like there is for making sustainable aviation fuel or hydrogen and there’s no tax credit for avoiding CO2 like there is for reducing CO2 emissions or capturing and storing it,” Electra CEO Sandeep Nijhawan told Cipher.

Nijhawan said the lack of production tax credits for their approach is “skewing the market” in favor of other companies that make steel with clean hydrogen or from natural gas with carbon capture and storage (CCS), since those would be eligible for tax credits.

“It could be construed as unfair that tax credits are given for carbon capture and storage, but not for avoidance,” Barbara de Marigny, partner with global law firm Baker Botts, told Cipher.

Clean hydrogen and to a lesser extent natural gas equipped with CCS are the favored ways to produce low-carbon steel around the world, according to a World Economic Forum-backed green steel tracker.

Electra is one of just a handful of companies pursuing an alternative approach based on renewable electricity, including Massachusetts-based Boston Metal.

Although production of green steel and other materials don’t have direct production tax credits under the law, analysts say they still benefit. “Everything needed to decarbonize steel (hydrogen, renewable electricity and carbon capture and storage) is receiving some level of subsidy,” Jessica Terry, RMI manager specializing in decarbonizing steel, told Cipher in an email.

Indeed, de Marigny, Friedmann and others say the IRA hasn’t sidelined companies like Electra and Boston Metal. Such companies can still take advantage of the one-time investment tax credit for building a clean technology manufacturing plant, de Marigny said. This particular credit, which pre-dates the IRA and was expanded under that law, has hurdles others in the law don’t, experts say. Those hurdles include the fact that companies must apply for the credit instead of automatically qualifying, like they can for others.

Perhaps the biggest way the IRA tax incentives will help manufacturing companies like steelmakers is by creating demand for everything from electric vehicles to wind turbines. All those products are made from steel and will need to eventually be made with low-carbon steel.

Given the gaps in government support and the enormous scale-up required of these technologies, clean steel companies looking to ramp up operations are increasingly turning to the private sector, which has its own climate goals to meet.

Electra raised $85 million from six investors including Nucor, the largest U.S. steel producer, and Amazon last year. Last month, Boston Metal secured additional funding of $262 million from several investors including Aramco Ventures, the investing firm of the Saudi-based Aramco oil company.

Major corporations like Microsoft seeking to green their supply chains and meet climate targets are demanding clean steel.

The “IRA boom” is expected to increase U.S. steel demand by about 84% to 87.3 million metric tons cumulatively by the decade’s end, according to think tank RMI.

During New York Climate Week in September, Microsoft joined other large corporations in announcing their first-ever commitment to collectively purchase up to 2 million metric tons of clean steel through a new platform RMI developed that will link end users with producers and investors. Such a figure, while objectively large, is still a “drop in the bucket” compared to the nearly 2 billion metric tons of conventional steel produced globally in 2022, Friedmann said.

Given the strong demand for low-carbon steel in the U.S and the world, Boston Metal is optimistic about being able to operate without federal subsidies, according to Adam Rauwerdink, senior vice president of business development at the company.

“If we are able to be competitive without being dependent on incentives and tax credits in the long term, that will be a sustainable approach,” he said.

Editor’s note: Investors in Electra and Boston Metal include Breakthrough Energy Ventures, a program of Breakthrough Energy, which also supports Cipher.