Congress should continue renewable energy credits but also make them more efficient

Sometimes moving the country forward demands big and bold initiatives or the courage to face down powerful interests. Sometimes, however, it also requires enough attention to detail to retain and repair a flawed approach with the potential to do much more. 

Combating climate change will indeed require plenty of bold action and political courage. We need the Senate to pass the full suite of clean energy tax credits in the House-passed economic plan last fall if we as a country are going to reduce emissions enough to curb climate change. These credits also will help us achieve greater energy independence and contribute to job growth across the country: wherever sunlight or wind are to be found. 

In the process of extending these credits, Congress also has the opportunity to do real good simply by correcting a wasteful inefficiency imbedded in the current system. The issue is in how we support clean energy deployment. 

Technological progress in recent years has been dramatic: After long lagging behind fossil fuels, clean energy has the increasing potential to outcompete them on price. 

Unfortunately, progress in financing mechanisms for these projects has not kept up with their technological potential. Unlike traditional power plants, which require costly fossil fuels as long as they operate, the costs of clean power are overwhelmingly borne at the outset of a project. They have some relatively minor maintenance costs, but nobody needs to “fill up” the Sun or the wind. The challenge therefore is finding the up-front capital to get projects built.   

Congress decided to help with this by enacting tax credits to support some of renewable energy projects’ costs. Financing is still primarily private, but the tax credits seek to allow renewable development without requiring developers to look too many years into the future for their return. 

Unfortunately, the current mechanism by which we deliver the tax credit is terribly inefficient. The developers typically have little or no taxable income in the years when they are building the projects.  They therefore do not owe much in the way of taxes and so cannot use the credits — which offset tax liability — directly. Neither can tax-exempt cooperatives. Instead, to raise the money they need, they must sell the tax credit to someone who does owe enough income tax to benefit from the credit. 

Selling these tax credits, however, turns out to be quite hard. The transactions are complicated, and only certain types of investors are allowed to engage in them. Just a handful of investors meet the requisite criteria, have enough tax liability to make the transaction worth their time, and have the expertise to put together the transaction. Just two large banks together control roughly half the market.

And as you might expect in a market with few companies offering a service on which others absolutely depend, the price they can charge is steep. Between the costs of proving compliance with tax credit rules and satisfying the lawyers and accountants, clean energy developers report the cost for selling tax credits for a project commonly reaches $3 million. 

That cost is a dead-weight loss — taxpayer money that does nothing to advance our energy independence, lower emissions, or create U.S. jobs. It also renders the tax credits largely useless for smaller projects, such as residential solar or distributed generation, where there just is not an extra $3 million to skim off the top. 

But transaction costs are just the beginning. Because so few investors engage in this market, those that do can demand high rates of return. Some make more than the projects’ owners do despite taking virtually no risk. Moreover, investors are likely to demand even larger returns in future years as off-shore wind and carbon capture projects compete for the already-limited capital through tax credit markets.    

This whole process makes no sense. It is inefficient and undermines the very purpose of the credit: rapid deployment of effective systems. Fortunately, House-passed legislation offers a straightforward fix. Instead of giving renewable energy project developers tax credits that they cannot use and have to sell, the federal government would simply pay those credits directly to developers for each qualified project. 

Direct payment of tax credits is not a novel concept. During the pandemic, we had the Treasury make direct payment to taxpayers of the “stimulus” credits. We could have just provided a credit that taxpayers could have claimed on their year-end tax returns and let them obtain refund anticipation loans to get the money in the interim — but this would have been wasteful and inefficient, and it would have failed to reach many taxpayers at all. The current means of delivering clean energy tax credits is just as wasteful and inefficient.

Direct payment cuts out the middle-people and applies 100 percent of the taxpayers’ dollars to building out renewable energy. It would expand incentives without any additional cost to the taxpayers. It also would redirect the return on investment in renewable projects to those taking the risks involved in developing them. Where borrowing for particular projects makes business sense, the developers can do so without obstruction from tax credit marketers demanding priority. The “direct pay” fix was an integral part of the House-passed climate change legislation. 

Congress has a rare chance to address several problems at once. It can check destructive climate change, increase our energy independence, create good-paying jobs across the country, and streamline existing government programs. It should not let this opportunity pass it by.

David A. Super is a professor of law at Georgetown Law. He also served for several years as the general counsel for the Center on Budget and Policy Priorities. Follow him on Twitter @DavidASuper1