Congress must fix clean energy tax credits to advance low-carbon future

President Joe Biden has raised the bar for climate action in the United States by setting a 50 to 52 percent emissions-reduction target by 2030 and a goal of reaching net-zero emissions by 2050.

To meet these ambitious goals, the United States must accelerate the deployment of low-carbon technologies. Tax credits can be an important policy lever to help expand the production of zero-carbon electricity, electrify the transportation, building and industrial sectors, improve energy efficiency, as well as build critical infrastructure including high-voltage transmission and electric vehicle charging networks.

Some low-carbon technologies such as wind and solar are already commercially available and are being deployed at a fast pace. In 2020, in the middle of the COVID-19 pandemic, installation rates for solar and wind were up by 65 percent and 178 percent compared to the previous year. Despite this progress, numerous studies have found that we need to increase U.S. renewable energy deployment at least two to three times from current levels to meet decarbonization goals.

Many of the technologies that will be needed for deep decarbonization — including low-carbon hydrogen and hydrogen fuels, carbon capture, utilization and storage (CCUS), advanced modular nuclear reactors and long-duration battery storage — are not commercially ready and need policy support to reach adequate levels of market penetration.

Tax credits can help deploy both technologies that are commercially available but have not reached mass deployment and technologies that are still in the early stages of commercialization. In addition, properly designed tax credits can support a virtuous cycle of innovation that improves the performance and cost-effectiveness of these technologies over time.

But there’s one problem: The current tax credit system is broken. And it’s up to Congress to fix it.

An outdated and flawed system

For years, Congress has been stuck in a cycle where tax credits are left to expire and then extended for short periods of time, often retroactively. As part of the omnibus spending package in December 2020, Congress passed temporary short-term extensions for many clean energy tax credits that will expire in a few years. In the past, extensions such as these have led to boom-and-bust cycles of clean energy technologies. This outdated and flawed system has caused uncertainty and discouraged long-term planning by the private sector.

The current set of tax credits do not include several technologies that are essential to deep decarbonization, such as energy storage, high-voltage transmission, medium- and heavy-duty electric vehicles and low-carbon hydrogen.

Most tax credits are non-refundable, which reduces their value because many renewable energy companies, for instance, do not owe enough in taxes to take advantage of them. Companies must often partner with banks to exchange the tax credits for financing. These middlemen take a portion of the money, lowering the value of the tax credit for the project developer.

Tax credits will be critical in maximizing the impact of Biden’s American Jobs Plan, should Congress pass legislation that includes the administration’s key clean energy priorities. To take advantage of the full potential of clean energy tax credits, and to meet the U.S. goal of cutting emissions in half by 2030, Congress must fix the system to spur innovation and ensure stability for the private sector.

How Congress can fix the system

Sen. Ron Wyden (D-Ore.) recently introduced the Clean Energy for America Act that takes steps toward streamlining the tax code and making clean energy tax credits more effective and accessible.

The legislation includes several provisions that would enable the deployment of low-carbon technologies and help put the United States on a path toward net-zero emissions by 2050. The bill would simplify the tax code by consolidating 44 energy-related tax credits into three technology-neutral tax credit buckets to advance clean power, zero-emission transportation and energy efficiency. In addition, the legislation would add new tax credits for transmission, energy storage as well as medium- and heavy-duty electric vehicles.

The bill would go a long way toward ensuring that tax credits reach their full potential as a tool to reduce emissions across the country.

The approach taken in the Clean Energy for America Act is largely consistent with the recommendations made by World Resources Institute in a new paper which outlines six criteria that Congress should consider to ensure that tax credits effectively incentivize innovation and accelerate the deployment of low-carbon and clean energy technologies across the U.S. power, transportation, industrial, and building sectors.

1. Incorporate technology-neutral design where possible to incentivize deployment across the board for various low-carbon technologies, while using technology-specific tax credits for technologies that are deemed to play a significant role in decarbonization.
2. Tie tax credit value to performance — such as amount of emissions reduced, clean electricity generated and energy savings realized — rather than monetary investment.
3. Ensure that tax credits are appropriately targeting producers and/or consumers of low-carbon technologies. In some cases, one may be more effective than the other.
4. Provide long-term certainty for energy developers but also incorporate clear phase-down and phase-out criteria to ensure tax credits do not become unnecessarily expensive.
5. Include a direct pay option to increase the tax credits’ effectiveness.
6. Make tax credits more accessible to low- and middle-income Americans.

Clean energy tax credits are a crucial tool to achieve the United States’ decarbonization goals, but they need a significant overhaul to make them effective. The Clean Energy for America Act would do just that. To create good American jobs, compete on the global stage and reduce the harmful impacts of climate change, Congress must take bold action to fix America’s flawed patchwork of clean energy tax credits and that means putting the Clean Energy for America Act into law.  

Dan Lashof is the director of World Resources, United States. Follow him on Twitter: @DLashof