How the Clean Energy for America Act Improves Tax Credits
Note: This article was updated in June 2021 to reflect changes made to the Clean Energy for America Act.
Under the Biden administration’s infrastructure plan, tax credits for clean energy and technologies are expected to play an important role in achieving a 50% reduction in greenhouse gas emissions by 2030.
The Clean Energy for America Act, introduced by Senator Ron Wyden (D-OR) in April 2021, takes vital steps toward streamlining the tax code and making clean energy tax credits more effective and accessible. This bill proposes replacing the more than 40 existing clean energy tax credits with three categories of technology-neutral tax credits to incentivize clean electricity, clean transportation, and energy efficient homes and commercial buildings.
What’s wrong with the existing clean energy tax credits?
As the proposed new legislation points out, existing clean energy tax credits are a patchwork of outdated and intermittently available incentives that do not allow companies and developers sufficient time to plan and develop large-scale projects. It can take many years to plan and obtain permits for large energy projects, but tax credits are routinely extended for only one-year intervals and are often extended retroactively.
In December 2020, Congress passed temporary extensions for many of the existing clean energy tax credits. However, these extensions are set to expire within the next few years. Similar short-term extensions have historically led to boom and bust cycles of clean energy technologies, and this sputtering progress will not get the United States to 50% emission reductions by 2030.
Existing tax credits are also inaccessible to many Americans who need them. For instance, the electric vehicle (EV) tax credit is non-refundable, which prevents the taxpayer from fully claiming the credit if they do not owe more federal taxes than the credit is worth. Additionally, this tax credit is not available at the point of sale; taxpayers must wait until after filing taxes in order to receive the credit. There is also a cap on the number of vehicles that can qualify for the tax credit from each manufacturer, which disincentivizes electric vehicle production from industry leaders like Tesla and General Motors.
The current energy efficiency tax credits for residential and commercial buildings are also non-refundable, leaving many building owners unable to access them. Furthermore, residential energy efficiency tax credits use 2006 building standards, which are severely outdated, and numerous one- or two-year extensions of the credit have led to continued uncertainty among developers. These issues stifle innovation and deployment of new technologies.
Finally, the major clean energy tax credits in the power sector — the investment tax credit (ITC) and production tax credit (PTC) — have mostly been claimed by solar and wind technologies, while other renewable energy generation and storage technologies, such as geothermal, storage and green hydrogen, are not eligible for these credits.
What does the Clean Energy for America Act do?
The Clean Energy for America Act addresses many shortcomings in the current tax credit system.
First, it extends the availability of the credits for many years and provides clear phaseout criteria. This means that companies will be able to innovate and develop new technologies, and developers can plan long-term projects with confidence that tax credits will be available for years to come. Under the proposed legislation, power sector investment and production tax credits will phase out over a period of four years after the sector’s emissions fall 75% from 2021 levels. In the transportation sector, clean fuel tax credits will phase out after the sector’s emissions fall 75% from 2019 levels, and EV tax credits would phase out when EV sales reach 50% of annual new vehicle sales.
This legislation also makes the EV tax credit refundable and removes the per-manufacturer cap. Commercial operators are able to claim a 30% tax credit on all cargo electric transportation options that are powered primarily by an electric drivetrain and only use renewable fuels for any fuel combustion processes. Clean fuel producers are eligible to receive a tax credit if the fuel life cycle emissions are 75 kgCO2e/MMBtu at most through 2027. In 2028 and 2029, the life cycle emissions on the fuel must be lower than 25 kgCO2e/MMBtu. For reference, current diesel and gasoline lifecycle emissions are approximately 100 kgCO2e/MMBtu.
In the power sector, tax credits are extended to all power generation technologies if the facility has zero greenhouse gas emissions. Improvements to the transmission grid that are vital to modernizing the sector, including energy storage and high voltage transmission, are also eligible for the new tax incentives. Homeowners installing zero emission energy generation technologies would be eligible for a 30% investment tax credit, as well.
The proposed legislation also updates building efficiency standards, using the latest nationally recognized standards for residential and commercial buildings. In the industrial sector, incentive levels for direct air capture (DAC) are increased to $175/ton CO2 for geologic storage and $150/ton CO2 for other uses, compared to the current level of approximately $30/ton CO2. This recognizes the importance that DAC will play in reaching net-zero emission targets and its ability to reduce emissions in hard-to-abate sectors.
The bill also requires project developers to pay wages that meet or exceed prevailing local rates and utilize registered apprenticeship programs to qualify for the credits. Furthermore, investments qualifying for clean electricity, energy storage and transmission credits located in low-income areas would receive higher incentives.
Finally, the new bill eliminates preferential tax subsidies for fossil fuel exploration and drilling costs. This is a crucial step in shifting away from fossil fuels and toward clean energy.
What changes have been made to the Clean Energy for America Act?
On May 26, 2021, the Senate Committee on Finance held a committee hearing to consider amendments to the Clean Energy for America Act. After voting on the proposed amendments, the committee voted to send the bill to the Senate floor. The changes made by the committee addressed some shortcomings in the current tax code and took on some of the recommendations outlined in a recent WRI paper.
Important changes were made to the bill to make the tax credits available to more Americans. These changes also provide incentives that benefit “energy communities,” which are communities that are most affected by the pollution from and closure of fossil fuel power plants. In the revised version of the bill, the clean electricity production tax credit and investment tax credit have been made refundable with a direct payment option. The incentives have also been increased for nascent technologies, facilities located in energy communities and facilities that use steel, cement and manufactured products that are made in the United States. In each of these scenarios, the value of the credit increases by an additional 10%.
The electric vehicle credit has been increased from $7,500 to a maximum of $12,500 for vehicles assembled by union workers in the United States, and a vehicle price cap of $80,000 has been included in order for vehicles to qualify for the credit. The revised bill also includes a clean hydrogen production tax credit and a hydrogen investment tax credit for production technologies that are 50% cleaner than hydrogen production from natural gas, and the incentives for these credits increase for facilities that offer an even greater reduction in emissions.
The carbon capture and storage tax credit increased for direct-air capture and storage (DACS), and enhanced oil recovery will retain its access to this credit until 2027. This is crucial for advancing carbon and capture storage (CCS) and DACS infrastructure and technologies like near-term geologic storage.
WRI released a working paper that analyzes and provides recommendations for revising the current clean energy tax credits. In its current form the Clean Energy for America Act addresses many of these recommendations, but there remain important improvements that could be made to the proposal.
How can the Clean Energy for America Act be improved?
While the latest revisions to the Clean Energy for America Act vastly upgrade the existing clean energy tax credits, there are a few ways that the bill could still be improved.
First, making the EV tax credit refundable in the form of a rebate at the point of sale — the most effective form of refundability — would ensure the greatest level of availability for individual and corporate taxpayers and would drive greater adoption of zero-emission vehicles. In addition to tax credits, providing support for the used vehicle market through subsidized financing, supporting charging infrastructure, and extending battery warranties would make EVs affordable for more Americans.
The existing EV tax credit has been criticized for mostly helping taxpayers in higher income brackets who can afford more expensive EVs. While the revised bill places an $80,000 cap on the vehicle price in order to qualify for the EV credit, this high price cap is still well above the median price of new vehicle sales. A lower price cap would drive automakers to manufacture more affordable vehicles and focus the credit on moderately priced vehicles.
Electric heat pumps — which run on electricity and use heat from the environment to heat a home — are a crucial technology for decarbonizing buildings, but high upfront costs, including electrical upgrade costs, pose a significant barrier to homeowners, particularly when compared to natural gas heaters. Increasing the credit amount for air-source heat pumps substantially from the proposed $800 would go a long way in enabling faster adoption of this technology. As heat pumps catch on, and as manufacturers achieve economies of scale, heat pumps are likely to become more cost-effective, and at this point the tax credit should be phased out.
In the industrial sector, decarbonizing heating processes is essential to reducing emissions. Therefore, a tax credit aimed at electrifying low- and medium-temperature heating processes, as well as using waste biomass and hydrogen in high-temperature heating processes, would provide incentives for companies to start adopting these technologies. Reintroducing investment tax credits for low-carbon manufacturing — for example, bringing back the 48C manufacturing tax credit, which was first passed in 2009 and offered tax credits for the production of clean technologies and expanding it to include low-emissions cement, steel, and ammonia production – could help drive emission reductions in the industrial sector. Doing so would also spur domestic clean energy manufacturing across the country.
Finally, while the proposed phaseout criteria provide clear, long-term guidance for developers and innovators, the inclusion of additional criteria could avoid locking-in suboptimal technologies and unnecessary and inefficient tax expenditures. Tax credits should be seen as one tool in the federal decarbonization toolbox that can bridge the cost differential between established fossil fuel technologies and emerging cleaner technologies, enabling the latter to gain a foothold in the market.
To that end, tax credits should be paired with other policies to address the myriad of challenges facing the faster deployment of various low-carbon technologies. Phaseout criteria should contain provisions that reduce or eliminate tax credit incentives when more effective and efficient policies are implemented, such as sector- or economy-wide decarbonization policies like a clean energy standard or a carbon tax.
Realizing the Full Decarbonization Potential of Tax Credits
Advancing a portfolio of policies is critical if the United States is to achieve its decarbonization goals. Tax credits are a crucial policy tool and play an important role in incentivizing innovation and deployment of clean energy and low-carbon technologies. It is past time to reform the outdated tax code and provide durable, predictable, and effective federal support for low-carbon technologies. The Clean Energy for America Act is a much-needed step in this direction. It provides critical support for clean energy and technologies that are essential for U.S. climate goals and facilitates an equitable and clean energy future for all Americans.