Tax policy helped power-sector emissions fall 40 percent, can do more

Tax incentives helped to propel an energy transformation that may have taken a century to take shape in just two decades, driving private sector dollars into clean energy development and deployment. The market signals generated by these tax incentives and private sector investment have led to innovation and economies of scale for clean energy technologies.

The Business Council for Sustainable Energy (BCSE), a coalition representing the energy efficiency, natural gas and renewable energy sectors, has seen many parts of the American clean energy industry mature and thrive with the support of stable and predictable tax policy.

Tax credits support technologies in early commercialization, such as carbon capture and storage; long-standing generation technologies such as biomass, biogas, geothermal, hydropower, solar, waste-to-energy and wind; as well as combined heat and power, fuel cells and energy efficiency. This technology-inclusive approach has seen consistent, bipartisan support by Congress.

Proven tools for clean energy growth

What makes tax measures effective? We see the highest impact when they are in sync with industry’s investment and project development cycles. Long-term and durable credits lead to steady growth.

Let’s look at the impact on wind power capacity additions in the U.S. After the Production Tax Credit (PTC) was extended for four years in the 2009 American Recovery and Reinvestment Act, the wind industry responded with steady growth, reaching a then-record level in 2012. Even though the credit has been extended ever since, it has not always been done consistently and in a predictable manner. In some years, the PTC was left to lapse, only to be extended retroactively, with a one- or two-year window for use. In both circumstances, project developers and investors were unsure if the PTC would be available from one year to the next and this uncertainty greatly reduced investment and deployment.  The growth witnessed in recent years is due to other factors, such as technological improvements, falling technology costs and state policies.

The trajectory of the Investment Tax Credit (ITC) offers the same lessons. For example, the eight-year extension of the ITC in 2008 took the solar industry from less than half a gigawatt of yearly installations to a record 10.2 gigawatts in 2016.

Tax credits have an important role in the uptake of energy efficiency measures and investments, too. A Department of Energy study found that a 10 year extension of the Section 25c residential energy efficiency tax credit would increase technology sales by 54 percent and save consumers an average of $1.3 billion on energy every year. In 2018, extending the 179D tax credit for commercial building energy efficiency investments was calculated to create between 40,000 and 77,000 jobs. An ACEEE study of energy efficiency tax credits found them to be highly cost effective, with the federal cost between $0.02-$2.33 per million British thermal unit (Btu) of energy saved compared to the cost of energy at $10 per million Btu.

Considerations for future clean energy tax policy

The December 2020 COVID-19 recovery package included significant tax credit enhancements reaching an estimated $15 billion, benefiting a broad set of technologies; see the figure below from the 2021 Sustainable Energy in America Factbook.

President Biden’s American Jobs Plan includes new and expanded tax credits for carbon capture and storage, electric transmission, energy efficiency, energy storage, hydrogen and renewable energy, among other areas. Congress is also introducing bills that support tax incentives for these technologies as well as the modernization of the measures overall. Though details are still emerging, BCSE urges the adoption of clean energy tax policy and the expansion of the technologies and resources that can benefit. Investment tax credits for energy storage, hydrogen, sustainable transportation and electric transmission are particularly timely, given U.S. decarbonization and grid modernization objectives.

In addition, Congress should look to modernize the measures by ensuring the tax credits fit the project cycles of all the eligible technologies. For example, a number of PTC technologies such as biomass, biogas, geothermal, hydropower and waste-to-energy have long project development cycles and a one- or two-year extension does not impact deployment. For energy efficiency, reforms should also be made to improve their market impact. 

Tax credits not only help projects break ground; they send market signals, while leveraging private sector dollars. Long-term tax credits guarantee that demand will stay high, which drives companies to compete to offer the best technology at the best price. BCSE is heartened to see the Biden administration and Congress advancing and expanding these proven solutions, and we hope that the bipartisan support for clean energy tax policy continues.

Jacobson is president of the Business Council for Sustainable Energy.