Center for American Progress

Clean Energy Tax Incentives Will Help Fight the Climate Crisis

Clean Energy Tax Incentives Will Help Fight the Climate Crisis

Clean energy tax incentives will drive major climate investments and are a must-have element of any infrastructure package.

General view of an electric wind farm outside Boise, May 2021. (Getty/AaronP/Bauer-Griffin)
General view of an electric wind farm outside Boise, May 2021. (Getty/AaronP/Bauer-Griffin)

As discussions of President Joe Biden’s American Jobs Plan continue, progressive leaders in Congress and the White House have insisted that the investment package must meet the scope and scale of the climate crisis. This is essential, but there is no single climate policy that can serve as a simple litmus test, as success will require investments across the economy. Of all the climate-related funding in the American Jobs Plan, more than half comes through tax incentives, which are a powerful set of solutions now being redesigned and rescaled to drive the deployment of the proven clean energy technologies the country needs to build a 100 percent clean future. Fortunately, promising proposals for clean energy tax incentives have great potential for supporting good quality jobs and are already making their way through the Senate.

Last month, the Senate Finance Committee advanced legislation that would deliver many of the key elements of President Biden’s American Jobs Plan. Chairman Ron Wyden’s (D-OR) bill—the Clean Energy for America Act—proposes major new tax incentives for clean electricity, electric vehicles, advanced manufacturing, and more. Tax incentives such as these are impressively effective climate policy—especially when it comes to clean electricity and clean vehicles— and are a must-have in any infrastructure bill. From creating good-paying jobs to laying the foundation for a clean energy economy, the United States needs ambitious clean energy tax incentives.

Consider the power sector, which needs to decarbonize rapidly in order to cleanly power the rest of the economy. A report from the Rhodium Group in March found that 10 years of tax incentives for new zero-emission electricity generation like those included in the Clean Energy for America Act would transform the power sector. In combination with regulation under existing statutory authorities, maintenance of existing zero-emission capacity, and accelerated retirement of certain rural co-op coal plants, the incentives would cut air pollution, such as sulfur dioxide, by up to 84 percent in just five years and cut carbon dioxide to 76 percent below 2005 levels in a decade. By itself, this set of power sector investments could double the share of clean electricity generation at the end of the decade, from as little as 34 percent to as much as 69 percent, flooding the economy with abundant, affordable, clean electricity; creating good jobs; and jump-starting the achievement of a clean energy future. These investments could also lead to a net gain of more than 600,000 jobs annually in the electricity sector over the next decade.

This critical headway is not limited to the power sector, either. In another analysis this May, the Rhodium Group also found major opportunities from investment in transportation electrification like those included in the Clean Energy for America Act and the American Jobs Plan, especially when combined with strong vehicle emission regulations. The model shows such investments in charging infrastructure, trucks, and passenger vehicles would drive light-duty battery electric vehicle sales from 2 percent today to between 40 percent and 61 percent of all light-duty vehicles in 2031, depending on battery prices and regulatory actions. The stock turnover brought on by this jump in electric vehicle sales would result in major emissions reductions in the 2030s. Perhaps most significantly, the investments could make the total cost to own an electric vehicle as much as 16 percent less expensive than the average gas vehicle.

Even these impressive modeling results may understate the full impact of the Clean Energy for America Act, as the Senate Finance Committee included several additional policies that would further expand the tax incentives. For example, the committee would allow renewables to take the full value of the credit as a direct pay option instead of splitting the credit with Wall Street in exchange for costly tax equity financing. And new renewable capacity investments in low-income communities or energy communities would garner an additional 10 percentage points of federal investment credit. New, more powerful incentives that support investment in the areas that need it most will further accelerate the pace of renewable deployment.

These policy changes mark a new approach to federal investments. While tax incentives for wind and solar deployment have existed for many years, they have expired and been temporarily extended more than a dozen times since 1999. In some cases, this extension was provided as a retroactive windfall rather than a forward-looking incentive, and values are currently on the decline. Investment in the future of the electricity system won’t happen fast enough without stable and supportive policy.

Not only would the Clean Energy for America Act provide a long-duration extension at full value, it would also allow both wind and solar developers the option to take either the production tax credit or the investment tax credit, as best suits each individual project. The current credit programs are rigid, offering solar a credit based only on the cost of initial investment but allowing wind a credit based on the amount of electricity generated in the first decade of operation. This production-based credit is, increasingly, a more generous offer, and providing an option between the two will maximize total renewable deployment. The Union of Concerned Scientists recently found that a tax credit package offering this flexibility and full value crediting is more than twice as effective compared to a straight 10-year extension of the current credit system.

Unfortunately, negotiations on infrastructure spending to date have not focused on how to maximize the effectiveness of clean energy tax incentives but on whether clean energy tax incentives should be included at all. In response to the American Jobs Plan, in April, Sen. Shelley Capito (R-WV) led Republican negotiators to reject investment in clean energy and clean vehicles. The White House insisted that these are must-have investments, only to have Sen. Capito again reject clean energy and clean vehicle investments in May. This week, the White House moved on to explore whether there are other more viable solutions.

Any infrastructure legislation must invest in tax credits for clean electricity and clean vehicles. This means at least 10-years of full-value tax incentives for new and existing clean electricity generation—with direct pay provisions to bypass the expensive Wall Street tax equity market and with flexibility for wind and solar developers to choose the credit design that works best for each individual situation. For clean vehicles, this means incentives for new and used passenger electric vehicles available to consumers at the point of purchase; new commercial zero-emission trucks; charging infrastructure; and automotive and supply chain manufacturing. In both sectors, incentives and requirements for good wages and domestic content will lay a critical foundation for high-quality domestic jobs.

Tax incentives are just one of the many great tools that Congress should use to invest in a more just and equitable economy that is ready to compete globally in the clean energy future. Other important tools include a clean electricity standard; investments in environmental justice and energy transition communities; funding for green school facilities; grid modernization; industrial carbon capture; the creation of a civilian climate corps; rebates for replacing fossil fuel appliances with efficient heat pumps; and more.

In short, the United States needs the full scope of American Jobs Plan, and tax incentives are a major part of the plan.

Trevor Higgins is the senior director of Domestic Climate and Energy Policy at the Center for American Progress.

The author would like to thank Sally Hardin, Elise Gout, and Will Beaudouin from the Center for American Progress, John Larsen from the Rhodium Group, and Steve Clemmer from the Union of Concerned Scientists for their contributions to this column.

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Trevor Higgins

Senior Vice President, Energy and Environment