Climate+ | Episode 2 | Tac Leung @ Secured Carbon

$900 BILLION in 2020 alone, increasing to $5 TRILLION every year from 2030. Those are extraordinary amounts of money. That money makes the Climate+ World go 'round. And in the US, one of its biggest drivers is [drum roll] the federal tax code. Wait … the tax code? Yes, and we’re going to walk through that absolutely vital topic in this episode. (And a note to the financially timid: we’re going to distill it down for everyone. No listener left behind on Climate+ ;)·      How can we harness the power of the tax code to enable standardized and scaled investment in the clean energy transition? ·      And by so doing democratize the clean energy transition so that all taxpayers, from large corporations to individuals, can do well by doing good?These are critically important questions, for the financially sophisticated to the financially timid alike. I cannot think of a more important place from which to start this podcast – and to seek solutions, opportunities, and outcomes. Our guest today, Tac Leung, is eminently qualified to help us all understand this vital climate+ topic. Tac is a seasoned Silicon Valley engineer, entrepreneur, and fintech innovator with over two decades of experience in regulated financial markets across global banking and risk management as well as start-ups like his current venture, Secured Carbon. I know you’ll enjoy this new episode and I look forward to your feedback!

Transcript

Lincoln Bleveans (00:00.169)
We are recording. There we go. Okay, so I'm gonna do a little bit of written stuff here. So hello and welcome back to Climate Plus. This is episode two, follow the money and then show me the money. Here's why that is so important, so vitally important to our Climate Plus world and so vital to understand whether you are a Climate Plus curious person

or a climate plus committed person or anyone in between. As always on this podcast, we're gonna distill it down without dumbing it down with no listener left behind. So here's the context. The world invested about $900 billion in climate action in 2020, just in 2020, $900 billion.

That's everything from solar farms to electric car chargers to waste recycling to water conservation. 900 billion in a single year. That's pretty staggering, but it pales in comparison to the projections for annual investments by 2030 and beyond. Those numbers are $5 trillion, trillion with a T, dollars per year, every year.

forever and always. That number to me is a little bit like the Grand Canyon. can stare at it as long as I like, but I can never quite get my mind around it. But we really have to if we're going to solve the problems and find the solutions that we have. So where that money comes from and where it goes is what makes the climate plus world what it is and what it will be for all of us everywhere on our finite planet.

And in the US, which is going to be our focus today, how that massive investment is driven by federal government policy. And here's a note to the financially timid. You're going to hear the word tax a lot. Please stay with us. This is vitally important and we will not leave a single listener behind. So I cannot think of a better place to start off our podcast. Our guest today, Tak Leung.

Lincoln Bleveans (02:23.547)
is eminently qualified to help us both follow the money and show us the money. is a seasoned Silicon Valley engineer, entrepreneur, and FinTech, that's financial technology, innovation expert with over two decades of experience in regulated financial markets across global banking and risk management, as well as technology startups. TAC has built a heck of a track record in making innovation real.

especially where policy, finance, and infrastructure meet. These days, is the founder of a very innovative startup called Secured Carbon, which is focused on supercharging this multi -trillion dollar transformation. And we'll talk about Secured Carbon a little bit later in the podcast. But let's start with setting the stage. TAC, how does clean green infrastructure, everything from the

biggest renewable energy project to the smallest curbside electric charger get paid for.

Tac (03:29.42)
Well, thanks for having me at Lincoln. I appreciate being an early pilot of your podcast and pilots are what I specialize in innovation. And so when you ask this question about investment, with any technology adoption, there's a curve, right? And there's an exploration period and then there's followed by a trough of disillusionment a lot of the time.

And then it kind of comes back to what they call a sort of plateau of investment. So just to maybe to start off when you talk about investment in clean energy, the last generation of energy infrastructure, very fossil fuel based, we've been in plateau for some time. There has been observations that we've passed the peak of that. Clean energy, which is a...

a big family of technologies. In fact, they're really more diverse than fossil by many orders of magnitude. It's a range, right? So you have solar, which has been around since Jimmy Carter days, and nuclear, right? then other. So when you talk about the flow of investment, just to kind of spread out the budget here and to talk about R &D through to deploy, and I'm going to focus in on what's really

important today, which is the transition, right? So where we're scaling to the $5 trillion target that you mentioned. Hopefully that helps frame a little bit because we can go really quite broad here. So Lincoln, would you like me to talk about more of this plateau investment side, maybe kind of steer away from the R &D kind of new technology?

Lincoln Bleveans (05:17.257)
Well, I think it's a mix. think the big dollars, of course, are in the big metal, so to speak, the big wind farms, the big solar farms, transmission lines to get that power to people. But increasingly, as you mentioned, especially on the consumer side, especially on the demand side, you're now seeing a tremendous amount of activity in the smaller stuff, the small metal, whether it be EV chargers or thermostats.

air conditioning systems, but maybe start on the big steel, the big metal side, heavy metal, ouch, terrible pun, the heavy metal side and talk about how has that been financed to date? How do we follow the money of a project, say a solar farm, under the way we've been doing it in the US now for a couple of decades?

Tac (06:17.644)
Got it. Yeah. So what we call utility scale, right? The kind of traditional big heavy metal projects. These are energy companies, right? These days, oil and gas is getting quite involved as they transition their strategies, but very much industrial, know, big players, mostly publicly traded companies, right? And they're the, what we consider to be the energy industry. So that segment.

As you say, that's been de facto for the last number of decades that investment comes in and they have all of the advantages of economies of scale. And these projects are often these days, you know, hundreds of millions of dollars investment. A lot of them start to reach a billion in deploying a full farm, whether it's wind or solar or other other technologies. So

There are a couple of mechanics that come into play in that. A, you have to finance it. A lot of these companies have a pretty healthy capital stack, but there's always a need for leverage. And so that's where banks come in. there are a layer of a lot of international banks, Japan and Canada actually are very active in this, that bring in capital. They typically deploy

They like to deploy maybe 150 million per project and they'll get a syndicate of them together and they'll all kind of come in and deploy and they'll go behind a name brand project. Really they're looking at reputation here. They want to see blue chip, right? And these are the, traditional, this is a traditional institutional flow into these institutional projects. A piece of this, which is starting to bring in the three letter dirty word tax is,

There's a mechanic, which is a bit of a loophole that was introduced along with a kind of tax credit that came into the US tax code back in about 1980. These are about 20, maybe some of them are four years old. And these are investment tax credits and production tax credits for alternative energy. So around the Carter era, right, that there was already some, put in the speed limit, right, there was the 55 mile an hour. All that kind of, there's policy around then.

Tac (08:43.544)
which was starting to anticipate that energy efficiency was going to be important to this country. So the foundations of this run very deep, the ITCs and PTCs. So investment tax credits, they belong to the tax owner of that infrastructure. And when they were created, were sized at 6 % of the investment. So an oil and gas company that was putting

let's call it a billion, right? They'd get 6 % in tax credits back. And a tax credit is different than a deduction. It's a direct credit, right? If you owe a dollar of tax, give a tax liability of a dollar, a tax credit relieves that liability. So original ITCs were 6%. And what evolved in this financing mechanic was that banks actually have a lot of tax liability, and energy companies sometimes don't.

or they'd like to leverage this tax credit. So a structure evolved called a tax equity transfer. So a bank would come in, put equity in the project, and by doing so become part owner in the project, and so become a tax owner of that project and then earn the tax credit. So they transfer it to the banks.

Lincoln Bleveans (10:03.487)
And just to jump back a little bit in case folks aren't completely familiar with how these things work. So you've got the big corporation, which is the equity owner. And then you've got the banks, which are the lenders to the project. And a lot like buying a house, right? You've got a certain amount of, you've got your 10, 20 % down payment, and then the rest is loaned to you by the bank. then you have to pay, the project has to pay the bank back over time.

And so that was the standard duality. And then what happened was, as you point out, is this tax credit came along and all of a sudden the bank needed to be on the homeowner's side, on the project owner's side, the corporate side, in order to avail themselves benefit from the tax credits that were on offer. I think you're leading to...

all of a sudden this got just wicked complicated. All of a sudden you had these very, very complex financial structures that grew up around this so that the bank could be an owner but also a lender and under the evolving rules from the US Treasury Department, the bank would be taxed in a way and be able to

take advantage of those credits in a way that created the economic benefit that they were looking for. And so all of a sudden you went, and this is a very broad brush look at it, but all of a sudden you went from like, put it in home ownership terms, you went from the family owning the home and the bank lending to the family owning the home to like,

All of a sudden the bank is sitting in a spare bedroom in the basement for the purposes of its tax position. But what this ended up doing is mobilizing an extraordinary amount of money to make these projects happen. And I want to start coming in on that because again, the three -letter word tax,

Lincoln Bleveans (12:26.373)
It's just so vitally important in catalyzing, in bringing all this money together, even though it seems kind of a complicated way to do it. Other countries have just said, hey, you produce renewable energy. We, the government, the local government are just going to pay you. And in the US, we did it through the tax code, which has always seemed a little passive aggressive to me.

But that's the way we've done it. That's the way it seems to work. So I'd love for you to react to my massive generalization there. What do you think?

Tac (13:07.352)
you've got it. I think you're, you're pointing us in the right direction here. So we've got. Tax and then we've got tax relief, right? And the magic word is tax relief, right? Because tax, the word tax will kill a cocktail party, but you talk about tax avoidance, you know, you've got a lot of lean in there, right? And there was a, there was a particular, alignment in that banks you've mentioned mortgages, right? So 6%.

Lincoln Bleveans (13:24.959)
you

Tac (13:36.792)
return or 6 % gain for a bank is significant. Right. That's their whole business model is based on, you know, shaving half or so of a point or they're working in dips even, You know, a hundredth of a percent. So 6 % was a bonanza and it was attractive enough that the banks were willing to devise a somewhat complex legal structure, which we call these days a tax equity.

transaction or a tax equity flip. But these tax equity contracts are essentially a joint venture, as you're saying, they moved into the bedroom. And it's essentially an &A deal, right? The bank would come in and essentially buy part of the project, become a part owner. Right, so a lot of corporate law, a lot of tax law, big law firms billing $5 ,000 an hour, actually.

is not at a typical rate.

Lincoln Bleveans (14:35.583)
You see $5 ,000 an hour. Wow. I was thinking maybe, I was thinking of a number lower than that, but that isn't.

Tac (14:48.421)
I had not run into that number as an hourly rate until I ran into tax law.

Lincoln Bleveans (14:54.751)
But it really speaks to, I mean, it's kind of funny. mean, it's kind of amazing in its own right, but it really speaks to the amount of value that is generated by these tax credits and getting them right. The idea that you would sign up for $5 ,000 an hour from a law firm to make these things happen is really, I'm just gonna go with astounding.

and not be any more judgmental. But why was it so complicated? What was it? And what was the...

Why, yes, let's start with that. Why was it so complicated? Why did you need a $5 ,000 an hour lawyer to make these things happen?

Tac (15:47.64)
Yeah. So first of all, remember we're talking about heavy metal, right? So these are projects that the capital required is on the magnitude of a billion dollars, right? So, you know, if you're looking at a $3 million law firm bill, you're right. You're still in in a bips billing, right, right. Hundreds of, a hundred percentage, right.

Lincoln Bleveans (16:13.023)
Yeah, 100%. Yeah.

Tac (16:15.542)
So we're looking at very large transactions, very large gain. then now imagine you are a banker and you're about to move into a home that not only is a home, it's a factory for generating energy. And some of these credits, the credit is tied to the performance of that project. So how much energy is it generating?

Right. So there's a lot of technical operations that could go wrong. There's a lot of risk in these projects, construction risk, operation risk, Whether, you know, wind, rain, there's a lot of things that can happen to an energy project. And if your return, your, you know, your leverage, your 6 % is tied to that. Projects getting built on time, on budget.

producing the energy on time, on budget, right? And you're not just moving to a house. You actually, it's business that you are tied to its operation. So there's a lot of risk analysis, a lot of underwriting that goes on here. And then you have to, each of these projects are unique, right? In different locations, different equipment every time. So a of due diligence, ridiculous amount of due diligence.

Lincoln Bleveans (17:37.577)
Yeah. And the most fundamental input to all of these things is essentially mother nature. And how much sun are we actually going to get? How much wind are we actually going to get and when? Is there going to be a monsoon season like we see, for example, in the Western United States where a project, solar project just might not generate very much for weeks?

So yeah, there's a lot of kind of human controlled risk there or human risk that humans can affect. But to your point, the fundamental input to these things other than money is mother nature. And that is always, as we know from weather forecasting, this is our best guess, our best highly educated guess of how much this thing will produce.

And when you're putting up tens or hundreds of millions of dollars against this, my God, yeah, of course. Yeah, you're gonna be studying this thing from every possible angle with the best experts you can find. So that's the production tax credits. I was about to go down a total rabbit hole and geek out, but that's the production tax credit. But what's the investment tax credit and how does that make things different?

Tac (19:03.788)
Yeah. So roughly what's happened since these credits were created, wind farms tend to end up leveraging production tax credits and solar farms. This is just rule of thumb. You could go either way. can choose whether you want an ITC or PTC. And then solar tends to go with ITC. That's just kind of what's happened. And there's some reasons for this. So investment tax credits are recognized upon the

facility being placed in service. So you're being rewarded for the investment and that's the 6 % of the investment that went to that. And there's cost accounting that you need to do, segmentation to really prove that you put that money in receipts and all this. So that's the ITC. Production tax credits, we'll put them aside, but they are tied to kilowatt hours produced. So it's not a 6%, it's actually a percentage of the kilowatt hours. And it so happens the way that

wind farms are capitalized and longevity and so forth, and the types of investors and the types of companies, they're willing for that return to come in year over year as the energy is produced. Whereas with the solar tax credit, at the end of construction, you get your tax credit, you walk away. So the risk is a lot lower with solar. So that's just to say, if you're going to do an investment, you say, all right, well,

Lincoln Bleveans (20:24.713)
Yeah.

Tac (20:29.912)
If I have the choice between ITC and PTC, I have a more immediate ROI on my ITC project.

Lincoln Bleveans (20:36.447)
A more immediate return on investment. So much lower risk, but also a situation where you've got to get everything right because you are absolutely counting on not just what Mother Nature does over a period of years, you're counting on the... This goes back to the $5 ,000 an hour. You're counting on...

everything being exactly right under a fairly complex tax code with fairly complex financial structuring so that you get that wire transfer in the amount that you've projected and when you projected and with zero headaches. Let me throw in one more level of complexity here and not to belabor it, but I think it's important. When the Inflation Reduction Act came in,

that changed the game and that created, I think, more clarity, certainly a whole lot more money available, but also it expanded the universe of individuals and companies that could take advantage of these things. In the old days, it was the big gorillas, the great big corporations, the great big banks.

Could you talk a little bit about how the IRA changed that? And then I want to get from there to what Secured Carbon is doing to turbocharge that.

Tac (22:16.952)
Yeah, great, great time to talk about the IRA. You know, we're in an election cycle. There's red and blue. It's a very interesting time for this particular piece of legislation. was introduced in 2022, Joe Biden's administration, you know, ratified it. So it went into effect the first year that it was applicable was 2023. last year, 2024.

tax season, right, tax filings April 15 and then extension of is October 15. Most of the corporations that are involved in this that we're definitely involved with are filing on extension. So we're just about closing the window of the first year of this legislation being enforced. Right. So first year pilot, like it's, it's, it's pretty informational at this point, not yet what is actually going to happen. Right. We're just kind of.

early adopters. About 400, maybe between 400 and 500 projects have been registered with the IRA. And this is very unique. Part of the legislation says to qualify for these new IRA upgraded investment tax credits or PTC, Private Production Tax Credit, you need to

pre -register your project. This was never done before, right? So they've created a new compliance piece. This portal opened up December 22 of 2023. So it's fresh, right? We're not even a year into this thing being up and running. 50 companies have registered.

So you get a sense of who was playing before, they're nearby. We don't have all the exact data on this, you can get a sense it's going to be the old players who are now availing of the new mechanic of what's called a tax credit transfer. So the old model is tax equity, tax equity flip or tax equity partnership.

Tac (24:31.896)
And now the government says, hey, we can do a tax equity transfer. So there are two provisions in this bill that created two sections in the IRC, in the Internal Revenue Code, called Section 6418 and 6417, these two numbers. But 6418 is the transfer provision. And 6417 is a different provision for nonprofits who don't have tax liability like universities or hospitals, whoever.

that they actually could get paid in cash rather than as a tax credit.

Lincoln Bleveans (25:07.593)
Yeah. So, in other words, it's not just... I'll go back to my home mortgage analogy because maybe it's familiar to a lot of people. So, the bank no longer has to take the spare bedroom in your house. They can just be the bank. But whoever gets the tax credit now has the ability to very easily transfer it. Not very easily, but more easily transfer it such that...

Tac (25:09.314)
So crazy.

Lincoln Bleveans (25:37.183)
It becomes tradable. It becomes something that can be bought and sold and go to whoever values it the most and thus pays the most for it, which is really pretty astounding. a bit like going from... I'm going to switch to farming now. I'm full of analogies, but I'll switch to farming now.

a vegetable farmer and being able to sell your vegetables to only one buyer. And all of a sudden, those vegetables can go every which way to the benefits, can go every which way to whoever values them most. And thus, hopefully, catalyze a whole lot more economic activity and thus a lot more investment and thus a lot more climate change.

mitigation, adaptation, resilience, justice.

Tac (26:39.128)
And that's just to start. think your description is all true. 6418 is all of what you say. It's created a market for tax credits. This has never existed before. The old mechanic was a loophole. It's one that the government tolerated. Right. So it was intended that the tax owner received the tax benefit. That was the law. So the loophole that the $5 ,000 lawyer's created was tax equity. they said, you know, actually, if we have a joint bet, you know, they kind of schemed

this what we think of as a Rube Goldberg machine. Like, okay, if we bring the equity in this way and we do that, and then when we shave it off. So that was up until 2023. That's the way people did it. Interestingly, there's a lot of momentum behind that. So even the deals that are going through tax equity share a lot of the similar mechanisms that we saw with tax equity. For example, insurance.

Lincoln Bleveans (27:11.839)
Mm

Tac (27:37.088)
When we talked about Mother Nature, we talked about construction, there's an insurance for all of that. And the old way of tax equity transfer had many layers of insurance, construction insurance, weather insurance, like lots of layers there. So it's very lucrative for insurers to hang out around these tax equity deals because there's a lot of risk, it's big money, right? So even just the underwriting for one of these deals, the minimum

costs just for the underwriting, not the premium is about $50 ,000. You have to have a bunch of experts, engineers go through all of the documentation and see if there's any risks there. So many layers of underwriting going on. What the IRA did was said, rather than going through all of those bespoke things, we're going to set out some parameters for what qualifies as a project that can be transferred. And you have to register that.

before you even think about transferring and we'll give you a registration ID.

So now the IRS is set up to be a regulator of this market.

So they've stabilized this market in many, ways. They've said, hey, it's legal. That's a lot more stable than it's, you know, we'll tolerate it. They did say that you can only transfer the credit one time and it has to be for cash from the buyer to the seller. So they were very regulated in this transaction. They also said that when the transfer happens, both parties now have to file. This is like when you,

Tac (29:17.368)
you pay a subcontractor or an employee and you have a W2 form, for example, right, or a 1099. And then at tax time, both of you submit your equivalents and then the IRS matches these and says, okay, know, buyer and seller matched, right, that was, we're all clear. So they require this matching of the registration ID on the buyer and seller tax returns so that they can match and they can see that they haven't been double counted, right? So they put in a lot of thoughtful mechanics that,

are pretty de facto for tax accounting, but they're bringing this now to an audit function and they've laid out very rigorous rulings. The tax law itself is not that many lines, but the number of pages that has been written by the IRS about how to interpret this is in the thousands. And then the big law firms have also kind of generated theirs. So there's a big canon now of how this

mechanic works, right? How you register what's validating and so forth. So we've essentially taken the machinery of the U S government, the IRS to begin with, and we've now deployed it towards monitoring and validating. And the mechanic was designed so that the liability, if there's a problem, rests with the buyer. A lot of complaints about this, right? So, you know, if I make a solar farm, I sell my tax credits, the buyer buys it. If it turns out I did something wrong as the seller,

The buyer's liable.

Lincoln Bleveans (30:49.801)
which is that kind of makes you set up a notice, this idea that you're taking risk that you don't control. And thus, would think wanting to go through the same sort of massive due diligence exercise that the lenders and the insurers are going through so that you can be confident that you're

What you're buying is in fact not going to bite you somewhere down the line.

Tac (31:24.92)
Yeah, yeah, that's exactly right. So the liability is still in the, it's kind of an emptor, right? It's still the buyer's problem if they're buying a dud. So with this mechanic, so we have a professor on our team who's a tax legal expert. This mechanic is a risk control. Essentially the IRS is outsourcing the risk management, but they're not evaluating whether the credit is real. They outsource and say the market will decide.

Lincoln Bleveans (31:53.619)
which is a heck of a thing. The only analogy I can think of off the of my head is like buying a used car, I tend to do, old used cars. Nobody but you, the buyer, are taking that risk.

I mean, you can inspect the car all you want, but once you drive it off the used car dealer lot, it's your problem, whether the problem was apparent or not at the beginning. So has that really slowed things down? mean, it almost seems like we're back to a very kind of customized, bespoke, high transaction cost.

sort of environment.

Tac (32:55.8)
Yeah, true. This is true. This is why, you know, 450 credits registered and, right, and folks who have some familiarity with what they're doing, going through this is who we'd expect to try it, right? Because it's more illegal than the old way, but the perceived risk is about the same, right? It's kind of the same deal.

I'm still going to put in 50 ,000 of insurance underwriting and I'll go through all my legal due diligence. And that's true. We're seeing a good number of deals that are like that.

The other major innovation that the IRA did was particularly for ITCs, because we're dealing in percentage of the investment, is that it bumped up the award from 6 % award. It bumped up to 30%, so 5x. So whereas 6 % might be something that a bank would say, yeah, that's a big number. Most people are like, 6%, eh, no big deal.

A third of your investment comes back as tax relief now with the IRA. Under a bunch of extra little things you have to do, but 30%, that's a deal. Everybody wants that. there's a lot of people leaning in now. Definitely the old players are excited, right? They're happy because they were happy transacting at 6 % and now they're getting 30%.

Lincoln Bleveans (34:26.719)
Yeah. And just to do the very simple math, I'm sure people are doing it in their heads, but if you've got a billion dollar project, which is actually fairly common, that's $300 million. Three. I mean, I don't have that in this pair of jeans, maybe in another pair of jeans. I mean, that's just an astounding amount of money. 30 % of anything. But especially with the heavy metal.

Tac (34:46.136)
But.

Yeah. Yeah. Yeah.

Lincoln Bleveans (34:57.011)
So, but I could, again, I could go down, there are a bunch of rabbit holes here, how, let's talk about secured carbon because one of the things that that implies and almost compels is a way to make this both more efficient, know, lower transaction cost, but also open it up to players, to...

individuals and businesses and organizations that are not name brands, Fortune 500 giant companies. now I want to switch in the listeners at home. This is not going to be a commercial, but this is why I wanted to have tech on the web, on the podcast, because this is really cool. So I'll leave it to you.

Tac (35:54.616)
So it's really cool. was 30%. Right. mean, honestly, right. So again, we talk about tax. That's boring, but tax relief becomes interesting. And then 30 % tax relief. When you say, you know, 300 million on a billion, right. But once you start looking at these numbers, it's a deal. It's a really good deal, right. It's good business deal. Who would leave that money on the table? Right. So we're seeing a lot of interest in this. And what is ingenious about this mechanic is that

It is the government recognizing that 30 % of your investment is now an asset that can be traded. You're just giving you new asset class. called tax credit and it's legal. a market, it's a supported market. It's not a backroom &A thing. There's a way to file it. There's a way to validate it. You can essentially

Lincoln Bleveans (36:39.955)
Yeah. Yeah.

Tac (36:54.004)
check for some level of greenwashing, right? There's registration. it a real, was it really solar panels that were installed? I, know, IRS wants receipts when you register, right? They want to see contracts. So it's now a, and if you think about the IRS and audits, you know, the IRS is one of the foremost, law enforcement, entities in the world, right?

the tax man cometh. So when we think of the teeth of a regulation that would incentivize both investment, also adherence and some level of ethical, some abeyance, right? It doesn't have to be ethical. just, you have to obey the, you have to be compliant, right? Whether you believe in its purpose or not, if you can get a benefit. So it really appeals to anyone who is savvy about how they make and spend and save.

and grow their money. Tax efficiency is certainly a trick that if you don't learn it sooner, you don't accumulate as much. So we know the smart folks. There quite a few high -net -worth individuals who will spend tens of millions of dollars to get a tax loophole to save a percent. This kind of thing.

This is, this is known, right? It's, it's, and this is where it's large corporations and high network individuals who have the kind of balance sheets that a tax saving of a couple of percent is meaningful. They deploy these things because it's so complicated to deploy. they have all these Rube Goldberg machines to get these tax credits. 6418 is a scalpel. It's like, Hey, let's just do it this way. It's a straight shot. Now there's still risk around.

as we're playing through here, particularly the way that the enforcement mechanic the IRS put in requires that the buyer be the holder of the risk. So there's still risk. So secured carbon, our mission is to wrap this new asset class in enough risk mitigation that it becomes standardized, that becomes like.

Tac (39:18.168)
I hazard to say mortgage -backed security because that leaves a bad taste in everyone's mouth. But in its heyday, before it turned out that these things had some opacity and you were holding something that was subprime when in fact you thought you were holding it right. So there's a transparency problem there. These tax credits don't allow for much in the way of retrading. They actually require a single transaction.

Lincoln Bleveans (39:22.522)
Hehehehehe

Tac (39:43.22)
they're not going to be like mortgage -backed securities, but when we think of the potential market for mortgages and we look at the flow of institutional funds in the world today, the major flows of funds, treasuries, US treasuries are very popular, we know this, and then mortgage -backed securities are the next largest tranche. So these are the...

When you talk about multi -billion heading towards trillion dollar flow of institutional investment, those are the asset classes that move between countries and institutions. So there's potential for these tax credits to be similar. And in fact, they have an advantage over mortgage -backed security in that the enforcement of them is superior. There's this pre -registration. There are a lot more provisions in this.

It might be another conversation, just all the kind of really interesting little provisions. There's a domestic content adder that 30 % you get for certain conditions. But if you use materials that meet the domestic content requirements, meaning no Chinese steel, for example, then you get another 10 % credit. So you get up to 40%. And then there's some other reasons if you're building your facility in land that used to be fossil fuel.

you know, like oil and gas that's being revitalized, you get another 10 % energy community. So you get half to 50 % on this thing. So the numbers are the top line here is that it is very interesting because it is opening up this new asset class that any, pretty much any taxpayer can have access to. Unfortunately, individual taxpayers, it's restricted to a certain kind of income. Like not, not everyone can use this just for your salary, income tax. can't use it.

So there are some restrictions. It has to be on what's called passive income. So this is interest income or real estate income where you're not operating that you're holding. So for individuals, it's kind of restricted, but it is possible for an individual. And then for corporations, it's up to 75 % of their tax liability.

Tac (41:58.296)
So small businesses, everybody, 70 % of your tax liability. And if you can, as a project creator, if you can kind of set your project up right, you can get up to 50 % of this new asset. So it really makes it a lot easier to work out the ROI on a project that previously you might be marginal. So like a typical,

Fast EV charger these days takes like seven years to get a return on investment. You bring in a 30 % bump. You can pull it in by a bunch of years and then now you have a five or less year ROI. So what Secured Carbon is doing is we have been transacting a few, and we actually are, we just finished our second transaction. And this is, these are sub million transactions.

Lincoln Bleveans (42:34.559)
Great. Yeah.

Tac (42:56.888)
So the old transactions in the tax equity world are $150 million transactions parceled out to different banks, for example. And insurance, typically the old insurance wouldn't touch a deal under $50 million, maybe $30 million if they were hungry. And we've just completed two transactions. One of them was a quarter of a million, the other is half a million.

And the quarter of a million was to an individual taxpayer out in New York. And then the half million was to a small corporation. So this democratization, like getting access to these tax benefits is the win. And this is where the little secret wrinkle here is that while it's a tax benefit, it is not the government saying I'm going to just reduce my spending on something. They're actually transferring the benefit, like the relieving taxes.

for somebody who's willing to step up to this, right? So it's a benefit, it's tax reduction to the buyer and for the tax credit creator seller, it's an incentive to invest in an infrastructure and particularly domestic solar, for example, right? Like let's beat the Chinese panels, let's start installing US panels. So a lot of clever little wrinkles in this thing and it's...

And it's working, right? First year's through, we're starting to come on second year. The appetite here is tremendous. And our work is to, we built some fintech, some financial legal documents. We're actually in process of building a unique insurance wrapper that sits on top of the first layers that we call it, tax credit transfer agreement. It's a 6418 specific pension agreement. So as opposed to the old world where the lawyers, $5 ,000 would construct.

a bespoke transfer agreement. We have a standardized agreement and that agreement essentially wraps the law. So it wraps the internal revenue code 6418 and says, okay, you as the buyer, agree to obey the tax code, you as a seller, you agree to obey the tax code. And if you both agree to this, then here's all of your representations and warranties and here's how the contract works. And if one of you defaults, right,

Tac (45:22.06)
The law says you do this and you're signing up saying here that I, you know, I promise that I agree to this. So we're wrapping the agreement in a legal commercial agreement, which the law is not by itself, but we have that. And then we are then on top of that, putting an insurance wrapper on top of that legal agreement. So we have two layers of standardization we're bringing on top of this so that the tax credit transfer now can happen without the buyer having to develop a PhD and.

understanding clean energy or even hiring CPAs who need to do that because the agreements themselves identify and wrap all of the risks and isolate.

Lincoln Bleveans (45:59.807)
So really making it both comprehensible, but also standardized so that it's more like, maybe it's different species of apples, but it's apples to apples instead of apples to oranges. And then finally making it accessible by, instead of, we won't touch a deal. It isn't worth it to do this unless a deal is 30 million or 50 million or some very large number.

This is actually bringing it down to the level of the individual taxpayer. And so when I look at this, and we've only got a couple of minutes left, when I look at this, I think about this duality between purpose and prosperity. And I think about the purpose of all this, which is to catalyze all this green infrastructure, which we need to...

mitigate, adapt to, become resilient to find justice in climate change, but also this really unremarkable economic benefit. Whether you think about the policy outcomes or not, whether you think about the climate outcomes or not, you've got this incredible economic motivation to do these things that just happen to come out to these great results. I guess the one

You know, the one kind of comma, but in that is as a taxpayer, you know, ultimately that's where your money goes, your tax dollars go to the government. The government makes policy and decides to do these things. I happen to be just fine with that. I think it's a beautiful way to do it and incredibly necessary. But I guess that's the one, you know, that's the one compromise in my mind that we're making here is that we're

We are using tax dollars to subsidize these investments. But I think knowing that compromise, in my view, it is really a remarkable way to combine the prosperity and the purpose and what secured carbon is doing. And again, this is not a commercial for secured carbon. It's just really, really cool and really effective is making that accessible, democratizing it, as you said. So this can become

Lincoln Bleveans (48:27.035)
ultimately can become something that we talk about in the same way we talk about perhaps a mortgage tax deduction or something along those lines. We'll have to see where it goes.

Tac (48:38.002)
You know, a quick response about the potential negative that you're pointing out here and the democratization. So the answer to that is that if you see this as, you're, know, the tax dollars are being spent on something. The way to remove that problem is to buy a tax credit because then it's not your tax dollars going towards that, right? You are getting relieved from that. So you're out of the transaction of that.

Lincoln Bleveans (49:05.566)
You're getting...

Tac (49:08.184)
So in terms of the Republican view of this versus the Democrat, right, is that, you know, this allows for freedom to say, I don't want to pay taxes on that thing. So I'm going to do it by capital investment, you know, buying the credit that says I'm not going to pay for that thing. I'm pardoned. Right. That's, it's one mechanic just to point out there. The other thing is that the Texas North Dakota,

Lincoln Bleveans (49:30.399)
That's a great point.

Tac (49:37.208)
So energy states are by and large the major issuers or the companies in those states are the major issuers of these tax credits. And with these tax credits, the 30%, the little wrinkle that I mentioned here, can go to another conversation deeper in how this works, but it requires that the employees of these projects get paid what's called the prevailing wage in that area. So it's a minimum wage. Essentially, it's making good jobs that pay

essentially what you would pay a company that was contracting to the federal government. You're getting government wages. So like an electrician in California, like $74 an hour, according to this, right? So minimum, right? That's what you're, so he's creating really good jobs in states that are energy producing states. So when you talk about the Democrat Republican kind of view of this, there's actually, go online, look at this, there's quite a lot of Republican senators that they're saying, Hey, let's not repeal this. It's actually really helping our

our states create better energy jobs that are cleaner, don't have all the chemical problems and all this, we're energy independence. So there's a lot of really what I would consider republic -based benefits to this, not just democratic benefits.

Lincoln Bleveans (50:56.319)
And I think that's an excellent point. think the, such an important point, especially these days, because this has had and continues to have incredible bipartisan support. you know, just one last thing I was driving through, I grew up in the Midwest and I happened to be driving across country about 10 years ago. And that section of I -80 through Iowa, which used to be just farms is now, can,

You can almost see it during nighttime, given all the FAA lights on all on tops of all the wind turbines. And the farmers absolutely love the fact that they can keep farming, but they can also extract this value from this wind that has been blowing over their property. no, it's fantastic stuff. And thank you so much for being.

on the podcast, really appreciate it. And just for our listeners at home, I hope to get one of these out a week, every week, maybe every two weeks, we'll have to see. And I'll have a website up and running here very soon, as well as a few other things. So thanks for listening. I hope this was fun and enjoyable and understandable and inspiring, and hope to see you next time. Thank you very much.

Lincoln Bleveans (52:27.407)
and scene. There we go.