Climate provisions in Build Back Better Act will be critical to decarbonize US economy

Last month the House passed the Build Back Better bill, which includes more than $500 billion in climate investments. It is hard to overstate the importance of this legislation; if enacted and implemented, it will be the biggest investment in climate action in the nation’s history. In fact, building on the recently enacted Infrastructure Investment and Jobs Act, the Build Back Better Act can keep the climate goals set by the Biden administration — reducing greenhouse gas (GHG) emissions 50-52 percent by 2030 (relative to 2005 levels) and reaching net-zero emissions by midcentury — within reach.

Meeting the nation’s climate goals will require faster deployment of existing low-carbon technologies such as wind, solar, electric vehicles and heat pumps, as well as new technologies that are not yet widely available, such as clean hydrogen, advanced nuclear, and carbon capture and storage. Even though low-carbon technologies are increasingly cost-competitive, market forces alone will not drive the pace and scale of deployment we need to confront the climate crisis.

We need to supercharge the pace at which we adopt low-carbon technologies, and federal policies can play a major role in spurring technology deployment, market transformations and investments in this decade.

Among the many tools available to the federal government for decarbonization are tax credits; targeted investment and spending in climate-smart programs and infrastructure; sector-specific performance standards such as a clean electricity standard and zero-emissions vehicle standard; and carbon pricing. The specific challenges of decarbonizing each sector of the U.S. economy require distinct combinations of these policy tools.

Tax credits are central to the Build Back Better Act’s climate provisions, which include tax credits for clean electricity generation, high-voltage transmission lines, new and used electric vehicles, energy efficiency, carbon capture and sequestration, as well as clean hydrogen production. These tax credits will play a valuable role in enabling the deployment of both early-stage technologies that are seeking entry into the market and more mature technologies that have not yet reached widespread adoption. Furthermore, these tax credits are tied to high labor standards, requiring the payment of prevailing wages and use of qualified apprentices, as well as domestic content requirements. This will create millions of high-quality domestic jobs for U.S. workers.

A new World Resources Institute analysis shows that it is technically and economically feasible to decarbonize the U.S. economy and highlights the important role that tax credits similar to those in the Build Back Better Act can play in this process. Our analysis, done in collaboration with Energy and Environmental Economics, Inc., identifies near-term policies and federal investments that can catalyze emissions reductions from now to 2030 and set up the economy for deeper emissions reductions in later decades. We focus on tax credits, infrastructure investments, and sector-specific performance standards and estimate how different combinations of these policy tools can form the building blocks for a successful decarbonization strategy.

Our analysis compares a business-as-usual scenario with three increasingly ambitious and comprehensive mitigation scenarios. The provisions in the Build Back Better Act most closely resemble our second scenario, which focuses on tax credits: both extending current tax incentives — including for renewable energy and electric passenger vehicles — and adding new tax credits for other low-carbon technologies to drive broader adoption of key technologies. This scenario also includes increased investment in infrastructure, such as for electric vehicle charging and transmission and distribution.  

This suite of tax credits, in combination with federal spending on infrastructure, could rapidly reduce annual emissions up to 43 percent and 63 percent in 2030 and 2050, respectively. An additional scenario, which layers in sector-specific performance standards and an economy-wide net-zero emissions cap, shows that it is technically and economically feasible for the U.S. to cut emissions in half by 2030 and reach net zero by 2050. With reference oil prices, net costs are $40 billion (0.2 percent of U.S. GDP) higher in 2030 than in a business-as-usual scenario. By 2050, however, net costs are $113 billion less, meaning there is a net savings of 0.3 percent of GDP. In contrast, in the business-as-usual scenario, emissions decline only 31 percent and 34 percent by 2030 and 2050, respectively.

Our research finds that the impact of tax credits similar to those in the Build Back Better Act would be most visible in technology deployment in the power, transportation and building sectors. Power sector decarbonization happens the fastest, with 87 percent emissions reduction (compared to 2005 levels) by 2030. Tax credits for vehicle electrification and adoption of heat pumps would lead to a respective 62 percent and 78 percent emissions reduction by 2050 in the transportation and building sectors.

Although tax credits are crucial to move the needle on emissions reduction in certain sectors, tax credits by themselves are not sufficient to help the country reach net-zero emissions. Industrial sector emissions are expected to increase with economic growth, highlighting the difficulty of decarbonizing this sector. While tax credits for carbon capture and sequestration enable some reduction in GHG emissions from large industrial sources compared to the baseline, they do not address most of this sector’s emissions. In addition, in our scenario that relies primarily on tax credits, methane emissions from agriculture and the oil and gas industry would only decline modestly.

Additional policy tools beyond those included in the Build Back Better Act will be needed to attain our 2030 and 2050 climate goals. Our analysis shows that layering on performance standards — including the adoption of a clean electricity standard, a zero-emissions vehicle standard and aggressive vehicle fuel economy standards, as well as enhanced methane standards — can significantly cut dependence on carbon-intensive fuels and technology in the 2030 to 2050 time frame, thereby enabling the United States to reach net-zero emissions by 2050.

Congress has an immediate, not-to-be-missed opportunity to take action to prevent the most catastrophic impacts of climate change. The climate provisions in the Build Back Better Act are essential to keep our emissions reduction targets within reach and put the United States on the path to a net-zero economy by midcentury. Congress should pass the legislation without delay.    

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

Devashree Saha is a senior associate at World Resources Institute, United States. Follow her on Twitter: @Devashree_Saha