Carbon reduction tax credit: An investment we can’t afford not to make

Congress is poised to address the climate crisis with decisive action that could begin to reverse a threat Secretary of Defense Lloyd Austin calls “existential.” The budget reconciliation bill is expected to put as much as $500 billion behind critical efforts to combat climate change. The bill’s size and priorities mean it could transform not just infrastructure but entire industries, focusing them on limiting their emissions.

The scale of the problem, however, is so great that we cannot afford to leave good solutions on the cutting room floor. We must emphasize those programs that provide the most “bang for the buck” — the ones that provide the greatest emissions reductions at the lowest cost to the taxpayer and can be deployed immediately. While the reconciliation bill has great initiatives to expand renewable energy, it should also emphasize efforts to promote energy efficiency and limit energy consumption. That is where the most cost-effective, easiest-to-implement solutions lay.

Chief among those is the reduction tax credit (RTC). It alone will not address the entire climate crisis; no single solution will. Yet the RTC would have a dramatic impact on emissions and cost far less than, say, the $200 billion cost of cleaning up after Winter Storm Uri. All told, the RTC could prevent more than 30 million tons per year of carbon from reaching the atmosphere and heating our planet — for less than $1 billion a year.

It would be like taking 6.5 million cars off the road.

The RTC is simple. It rewards utilities and other administrators of demand-side electricity efficiency measures for reducing carbon emissions and helping their customers save energy, and ultimately, money. It is not a grant. It is pay-for-performance. Taxpayers only pay if they get what we desperately need, namely substantial reductions in carbon emissions. Electricity generation is responsible for a quarter of America’s greenhouse gas emissions, so we need to help utilities minimize their climate footprint.

While the RTC is relatively small, it is also profound. It would properly align climate outcomes and economic incentives, supporting utilities to focus on the energy services their customers need. The RTC is “technology neutral.” It doesn’t care how utilities and others reduce emissions, as long as they do it. So, while some utilities will promote home efficiency measures to reduce their energy consumption, others might implement smart technology solutions that shift energy use away from times of high carbon emissions on the grid. Others may do both, and still others might surprise us with their ingenuity.

When all is said and done however, the RTC could prevent the emission of 300 million tons of carbon over 10 years (This calculation is based on using the current carbon intensity of electricity generation in the U.S. and applying it to the proposed 1.5 cents per kilowatt hour for the wind production tax credit, which tells us how many tons of carbon would be saved for $10 billion over 10 years.)

On top of the carbon savings, all of this innovation and education leads to clean jobs and energy savings for customers. The energy efficiency industry is a proven jobs producer, having created 400,000 jobs just between 2015-2020. The RTC could create hundreds of thousands more, as utilities and energy producers hire people to educate consumers, research new technologies, or hunt for cleaner sources of energy. The jobs the RTC creates would be local ones. It’s impossible, after all, to outsource a job installing smart appliances and home weatherization improvements. Customers benefit directly from the RTC, too. Utilities will have a real incentive to help customers need less energy and, in turn, lower their energy bills.

If we are looking for climate solutions that keep deficits under control, the RTC is one of the best around.

No climate solution is free, of course. But the RTC’s costs are low. At approximately $33 per ton of carbon saved, the cost is well below the Biden administration’s established social cost of carbon of $51 per ton. The reconciliation bill is set to spend hundreds of billions on climate mitigation, the most the RTC program could cost the taxpayer is $10 billion over 10 years.  The RTC is money well spent.

Finally, this is a well-contained program that would put itself out of business as the grid gets cleaner. As we move towards a carbon-free electric grid, there is less carbon for utilities to save and thus fewer reductions they can take credit for. Eventually, utilities’ innovations and efficiency efforts would have them hitting the point of diminishing returns. That, coupled with the program sunsetting after ten years, would mean budget hawks can rest assured the RTC is not a “forever entitlement.”

There is no single fix to a threat as massive and complex as the climate crisis. Rather, there are thousands of fixes, large and small, that we must embrace to prevent nightmare scenarios like major American cities rendered unlivable. From record heat and drought, to dangerous flooding and mudslides, America is in a climate emergency.

RTC is one of the most promising fixes. It is actionable and would yield immediate results. It would limit the damage we do to the planet while we wait for more renewable sources of energy to come online. We can afford to implement the RTC. Most of all, we can’t afford not to.

Alice Madden is Executive Director of the Getches-Wilkinson Center for Natural Resources, Energy, and the Environment at the University of Colorado School of Law.