How tax credits can help fight soaring fossil fuel prices — and climate change

As Americans prepare to celebrate the Fourth of July, people in highway rest stops and grocery stores across the country this weekend will be feeling the pain of near record-high gas prices and soaring inflation.

President Biden has proposed a tax holiday that would suspend the federal gas tax for three months. But a far better solution — for people and the planet — would be for Congress to provide direct support to families and enact key tax credits that will help Americans save money in the near term, while also providing greater economic and energy security in the future.

High prices may be taking a toll on consumers, but this is just a preview of the damage that unmitigated climate change will take on the economy — and our wallets. Without further emissions reductions, the annual economic damages from climate change could reach 1 to 3 percent of U.S. GDP — or up to 10 percent in the worst-case scenario — by the end of the century. To put that in perspective, in 2020 the entire food and agriculture sector made up about 5 percent of U.S. GDP.

Quickly phasing out fossil fuels is key to prevent the most dangerous impacts of climate change, but this can only happen as rapidly as clean energy can fill the gap. There’s no question that progress on clean energy is accelerating, but it’s not yet at the speed and scale needed to address the climate crisis. Over the last two years, the U.S. has seen record-level installations of wind, solar and battery storage — one reason that some critics have suggested that additional support to these industries is not needed. However, that is simply untrue: even this rate of growth must be doubled or tripled if we are to align the electricity grid with the country’s goal of reaching net-zero emissions by 2050. And even the recent pace of installation is in serious jeopardy going forward, driven in part by supply chain issues and longstanding challenges around project siting and interconnection.

The president’s recent announcement of a two-year exemption from retroactive tariffs for solar parts from Cambodia, Malaysia, Thailand and Vietnam is a welcome response to previous supply chain uncertainty created by an ongoing investigation into tariff circumvention and solar products from those countries, which will help boost renewable energy adoption in the U.S. in the short term. However, more durable action is needed. We need the long-term tax credits in the reconciliation package passed to provide an enduring signal to the market, which will be necessary for the industry to scale as required.

An additional part of the recently invoked Defense Production Act aims to expand domestic production of solar panels, heat pumps and other clean energy infrastructure. However, these provisions won’t be effective unless Congress provides funding to back it up.

Current rates of electric vehicle (EV) adoption in different states reveal how big an impact tax credits and other supportive policies can make. In the first quarter of 2022, EVs (including plug-in hybrids) made up 18 percent of the car market in California, and 10 percent in Washington and Oregon. In Mississippi, North Dakota, Louisiana and West Virginia — states that don’t provide incentives supporting EVs — less than 1 percent of the market share is EVs. State policy clearly matters, and national average EV market share needs to quickly catch up (and then surpass) where California is now if we are to reach the national goal of 50 percent EV sales nationwide by 2030.

The clean energy incentives and investments currently under consideration for inclusion in a climate-smart reconciliation package in the Senate will not only help the economy overall, they will directly benefit household budgets, reducing average energy costs by $500 per year according to analysis by Rhodium. And according to recent analysis by RMI, the clean energy tax credits under consideration would save U.S. consumers $5 billion annually by 2024.

A successful clean energy tax credit package should include several key components.

First, it should use direct pay to help drive down project costs and widen the pool of entities eligible for tax credits. Direct pay is a critical reform that reduces the need for private tax equity investors in projects and allows groups without a sufficient tax liability, including nonprofit and tax-exempt entities such as rural electric cooperatives (co-ops) and public power utilities, to access these tax credits. These entities serve almost 30 percent of retail utility customers in the U.S.; in a joint letter to Congress last year, the associations representing rural electric co-ops and public power utilities stated how direct pay is a needed reform to ensure federal tax credits work for all electricity providers.

Second, it should include measures that reduce energy costs for households. For example, to make EVs more affordable and accessible to lower-income households — and to make those households less reliant on fluctuating gasoline prices — Congress should provide incentives to make sure EV charging is available to residents in multi-family housing, at workplaces and at homes, and for people purchasing used EVs. They should provide tax credits for energy efficiency, which can reduce home energy bills year-round (including during dangerous heat waves and snowstorms, when failing to pay the bill could be deadly). And they should use measures such as direct pay to ensure that low- and moderate-income communities get better access to rooftop solar.

Third, it should incorporate tax credits that boost manufacturing. This includes providing bonus credit amounts within the primary renewable energy credits (the investment tax credit and production tax credit) for projects that use certain domestically produced materials. Relevant tax credit provisions also include incentives for advanced manufacturing in the U.S. including within the clean energy, clean transportation and industrial sectors. Past drafts of legislation have also included support for domestic transportation and zero-emission vehicle manufacturing.  

Climate change threatens the security and prosperity of all Americans and accelerating the speed and scale of the clean energy transition is essential for the U.S. to meet its climate protection goals. However, this transition simply won’t happen fast enough if the government doesn’t put measures in place to accelerate it. It is imperative for Congress to act.

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