I-RECs vs Solar Tax Credits vs Carbon Credits
Solar developers are often told a project can earn three kinds of environmental revenue on top of its power sales. These are renewable energy certificates such as I-RECs, government tax credits, and carbon credits. In practice they are different instruments, sold to different buyers, valid in different countries, and treated very differently by lenders.
This article explains what each one is, where it applies, how much of it a lender will count toward debt sizing, and when a project can combine them without double claiming the same megawatt-hour.
Three Instruments, Three Different Claims
The simplest way to separate them is to ask what each one lets the holder claim.
I-RECs
An I-REC is an energy attribute certificate issued under the I-REC Standard for one megawatt-hour of renewable electricity. The buyer uses it to claim renewable electricity consumption in market-based Scope 2 reporting. It is not a carbon offset and cannot be used to compensate for emissions.
Solar Tax Credits
In the United States, solar projects can earn the investment tax credit under Section 48E or the production tax credit under Section 45Y. These are reductions in federal tax owed. They do not make an environmental claim at all, and they are monetized through tax equity or by selling the credits to a taxpayer for cash.
Carbon Credits
A carbon credit represents one tonne of CO2 equivalent avoided or removed, verified under a standard such as Verra or Gold Standard. The buyer uses it to offset or contribute toward emissions outside its own value chain. For solar, the credit rests on displacing fossil generation on the grid.
Side-by-Side Comparison
| I-RECs | Solar Tax Credits | Carbon Credits | |
|---|---|---|---|
| Unit | 1 MWh of renewable generation | Percentage of eligible cost (ITC) or a rate per kWh (PTC) | 1 tonne of CO2e avoided or removed |
| Where it applies | Mainly Latin America, Asia, Africa, and the Middle East. The US and Europe use their own certificate systems. | United States only | Global, but solar eligibility is limited to approved countries and methodologies |
| Buyer | Corporates reporting Scope 2 emissions | Tax equity investors or credit purchasers with US tax liability | Companies with voluntary climate targets, and governments under Article 6 |
| Main test | Metered generation from a registered device | Eligibility, timing of construction, and placed-in-service date | Additionality, baseline, and verification |
| Lender treatment | Small. Counted only if contracted with a creditworthy buyer. | Large. Often financed directly through a bridge loan against the credit. | Usually excluded from base case unless sold forward under a firm contract |
Solar Tax Credits After the 2025 Changes
For US projects, tax credits are still by far the largest of the three. They can cover a significant share of capital cost, and lenders understand them well. The rules tightened sharply in 2025, though.
Under the One Big Beautiful Bill Act, the Section 45Y and 48E credits end for wind and solar facilities placed in service after December 31, 2027, unless construction began by July 4, 2026. Transferability under Section 6418 survives, but credits cannot be sold to prohibited foreign entities, and new foreign entity of concern rules apply to project supply chains. See Sidley's summary of the Act for the detail. Battery storage under Section 48E is not subject to the same wind and solar cutoff.
IRS Notice 2025-42 also narrowed how a project proves it began construction. The 5% cost safe harbor no longer applies to most wind and solar projects, leaving the physical work test as the main route, with an exception for solar facilities of 1.5 MW or less. The Paul Hastings alert on Notice 2025-42 covers the mechanics.
How Lenders Treat Tax Credits
Where a project qualifies, lenders will finance the credit itself. A tax credit bridge loan advances against the expected credit and is repaid when the credit is sold or the tax equity investor funds. The lender's diligence focuses on eligibility, the begin-construction evidence, the placed-in-service timeline, recapture exposure, and the creditworthiness of the buyer. A credit that depends on hitting a 2027 placed-in-service deadline needs a credible construction schedule and contingency to match.
I-RECs: Real Revenue, Small Numbers
I-RECs are most relevant for solar projects outside the US and Europe, including commercial and industrial projects and utility-scale plants in emerging markets. A registered project issues one certificate per megawatt-hour, and corporate buyers purchase them to support renewable electricity claims for their operations in that country.
The revenue is real but usually modest compared with power sales. Prices vary by country, volume, and vintage, and the market is thinner than for tax credits. For that reason, lenders rarely give I-REC revenue much weight unless it is sold under a multi-year contract to a creditworthy buyer, often bundled with the power purchase agreement itself.
The more important point for structuring is ownership. If the PPA transfers the environmental attributes to the offtaker, the project cannot sell I-RECs separately. That allocation should be settled in the PPA before the financing model counts any certificate revenue.
Carbon Credits From Solar: A Narrower Path
Carbon credits from grid-connected solar were once common, but the market has moved against them. The core problem is additionality. In many countries solar is now cheap enough to be built without carbon revenue, so a credit claiming the project only happened because of carbon finance is hard to defend.
In August 2024, the Integrity Council for the Voluntary Carbon Market ruled that legacy renewable energy methodologies did not qualify for its Core Carbon Principles label, citing insufficient proof of additionality. The decision affected around 236 million unretired credits, according to Eco-Business reporting on the ICVCM decision.
There is now a route back for some projects. Verra's VMR0017 methodology for grid-connected renewables has been approved by the ICVCM as CCP-eligible, with stricter additionality testing and a defined list of eligible countries. It became active in April 2026 and will be mandatory for new Verra registrations from January 2027. For a wider view of the standards, see our comparison of Verra vs Gold Standard.
How Lenders Treat Carbon Credits
Carbon revenue from solar is uncertain on three fronts, namely whether the project qualifies, how long registration and issuance take, and what credits will sell for. Most senior lenders therefore exclude it from the base case and treat it as upside. It becomes financeable when sold forward under a firm offtake or prepayment agreement with a creditworthy buyer, or when it supports a separate carbon stream or prepay facility rather than the senior debt. Timelines matter too. See how long carbon projects take to generate credits.
Can a Project Earn All Three?
Tax credits and environmental certificates can generally coexist, because a tax credit makes no environmental claim. In the US the relevant certificates are RECs rather than I-RECs, but the principle is the same. The tax credit reduces tax owed, while the certificate is a separate product sold to a separate buyer.
I-RECs and carbon credits are harder to combine. Both are based on the same megawatt-hours of clean generation, so selling both risks two buyers claiming the same benefit. Standards and registries set specific rules on whether dual issuance is allowed and on what terms. Any project planning revenue from both should confirm the rules of each program before signing offtake contracts, and the buyer of each instrument should know what the other buyer is claiming.
Article 6 of the Paris Agreement adds another layer for projects in emerging markets. Where a host country authorizes credits for international transfer, it must make a corresponding adjustment to its own emissions accounting. That can raise the value of the credit but also adds government approval to the timeline.
What This Means for Financing
For debt sizing, the order of importance is usually clear. US tax credits can be financed directly when the project qualifies. I-RECs add a small amount of contracted revenue in emerging markets when sold to a reliable buyer. Carbon credits from solar are typically upside unless they are sold forward under a firm contract.
The financing case should be built on the instruments a lender will actually count. That means confirming eligibility and ownership of each attribute in the PPA, contracting environmental revenue before relying on it, and keeping uncertain carbon revenue out of the base case. For emerging market projects, see our work on solar debt placement in India and Africa and an indicative solar project finance term sheet.
FG Capital Advisors helps solar developers and investors structure these revenue streams into a financing case that lenders can underwrite. Lenders make their own credit decisions, and tax and carbon eligibility should always be confirmed with qualified tax and program advisers.
