How To Improve Clean Energy Tax Credits in U.S. in New Infrastructure Legislation
As the White House and Congressional leaders spar on the details of infrastructure spending legislation, House Democrats have pushed for tax credits for clean energy and energy efficiency programs. Back in August, reconciliation efforts included pushback on the Biden administration’s proposed production tax credit for energy storage. Climate conscious Democratic leaders from the House are pushing for long-term extensions and expansion of the production tax credit and investment tax credit programs for renewable energy projects. The Biden administration has also proposed $174 billion for tax credits and other incentives to promote the manufacturing and purchasing of electric vehicle batteries in the United States.
In the past, energy related tax credits, including the investment tax credit (ITC) and the production tax credit (PTC) have garnered bipartisan support and have constituted the bulk of public support to energy investment and production in the U.S.
In a new study, Climate Policy Lab highlights policy improvements that could make tax credits a more cost-effective tool for promoting low-carbon energy and thereby reducing U.S. greenhouse gas emissions.
First and foremost, fixing the problem of the durability and predictability with duration of offered tax credits should be top priority. Tax credits for clean energy have historically been subject to lapsed authorization and threatened sunsetting of the programs numerous times over the years. This policy uncertainty has been a significant problem for major project developers who need to make investment decisions taking into account tax provisions well into the future. The defaulting to shorter periods for the duration of tax credits to get them passed in Congress has led to boom and bust investment cycles, particularly in the wind industry. Given the huge potential for offshore wind to contribute greatly to U.S. clean energy generation and related jobs, Congress should proceed with provisions that authorize the consolidated clean energy tax credits until clearly specified targets are met. The credit either should be refundable or provided as a cash grant to avoid diluting the value of the government subsidy for developers with limited tax appetite. Detailed provisions for phase out improve the program. The Clean Energy for America bill proposed phase-out of the EV subsidy is a good example of a clearly delineated target for ending the subsidy.
The study also recommends focusing investment tax credits and other purchase subsidies to early-stage (or nascent) technologies to overcome new-technology investment risks and setting production tax credits and setting production tax credits and other usage-based subsidies at levels consistent with the unpriced damages from competing polluting technologies, such as the social cost of carbon. Finally, the study calls on Congress and states to consider ways to identify and remove barriers to make incentives and credits more accessible to underrepresented groups.
To read the policy brief, click here.
by Professor Gilbert E. Metcalf