Energy Economy

Does Congress Vote on Tax Credits Improve Climate Change?

As U.S. tax credit policies near the end of their legislative lives, both houses of Congress are currently considering extending or expanding existing credits to support a goal of achieving net-zero carbon dioxide emissions by 2050 or sooner. While the Trump administration and the Republican-controlled Senate resist a head-on effort to reach that goal, there remains a possibility to make progress in deploying clean energy technologies that help reach the zero-emissions goal.

That’s the conclusion of a new report from Rhodium Group published Thursday. The report examines the use of tax credits to speed up clean energy development in six key technologies: renewable energy; nuclear power; energy storage; electric vehicles (EVs); biofuels; and carbon capture, utilization and storage.

The current Business Energy 30% investment tax credit and the Renewable Energy production tax credit of 2.5 cents per kilowatt-hour have contributed significantly to the build-out of solar and wind projects that currently produce about 8% of all U.S. electricity. These credits begin phasing out next year unless Congress takes action to renew them. If the credits are extended, the development of new clean energy generation could push power sector emissions down by 42% to 48% of 2005 emissions levels in 2030. Congress’ decision comes as concern about climate change has intensified and evidence mounts that the weather is worsening in certain parts of the world. Here are the places where weather is getting worse because of climate change.

Nuclear energy currently generates about 20% of all U.S. electricity, but high operating and maintenance costs that can’t compete with cheap natural gas and renewables threatens to reduce nuclear-generating capacity from 98 gigawatts (GW) currently to 32 GW by 2030. Most of that zero-emissions capacity would be replaced by natural gas generation, which emits less carbon dioxide than coal but is nowhere near zero. The recent closure of the Three Mile Island nuclear generation plant was hastened by the failure of the Pennsylvania state legislature (and the federal government) to enact subsidies to help keep the plant going.

An investment tax credit large enough to prevent the closure of any nuclear plants that have not already announced their shutdown dates could save 24 to 33 GW of nuclear capacity through 2025. Maintaining that capacity offers a substantial and immediate reduction in carbon emissions. The savings are only temporary, but they buy time for Congress to come up with long-term plans to decarbonize U.S. electricity generation.

Energy storage (using huge batteries to store and deliver electricity when the sun isn’t shining and the wind isn’t blowing) currently do not receive any support from federal tax credits. New, longer duration storage technologies may be needed to support the variable generation limitations of solar and wind power. Tax credits could help drive the development of these new technologies.

Electric vehicle adoption has been spurred by a federal tax credit of up to $7,500 per vehicle. However, the credit is only available on the first 200,000 vehicles sold, and both Tesla and General Motors have reached that cap. Tax credits for these two EV makers will disappear in 2020.

By extending the tax credit through 2025 with no cap on the number of vehicles sold, Rhodium Group estimates a total of 4.4 million to 8.1 million new all-electric and plug-in hybrid vehicles will be sold, raising the percentage of EVs in the U.S. fleet from a range of 3% to 4% if the credit is not extended to a total of 4% to 7%.

A catch is that the electricity needed to run these vehicles continues to be generated primarily by fossil fuels and the short-term reduction in carbon emissions is relatively small. However, Rhodium Group notes, “[I]f the US does decarbonize electric power, then the emissions benefit of extending EV tax credits through 2025 would expand [from 1 to 7 million metric tons] to 9 to 21 million metric tons in 2025.” These are the 10 best-selling electric cars of 2018.

Ethanol accounts for 88% of the U.S. biofuel supply. Advanced biofuels such as cellulosic ethanol and biodiesel are expensive to produce and are subject to unreliable federal support. As a result, these alternative biofuels currently account for less than 1% of U.S. liquid-fuel demand. Going forward, Congress needs to extend existing incentives and, Rhodium Group suggests, “consolidat[e] all advanced biofuels tax credits into a single low-carbon transportation fuel credit with a value based on the lifecycle carbon intensity of the fuel relative to fossil fuels.”

Carbon capture is “the only technology that enables fossil-fuel-fired power plants to play a significant role in a decarbonized electric system.” That’s why one of the initiatives announced earlier this week at a highly publicized meeting of CEOs of the world’s largest oil and gas companies was to drive “large-scale investment in carbon capture, use, and storage (CCUS), a crucial tool to achieve net-zero emissions.”

An existing federal tax credit provides up to $50 per ton of carbon captured and directly sequestered and up to $35 per ton for carbon used in products or sequestered by using it for enhanced oil recovery. CCUS technology and the existing tax credit could reduce carbon emissions by 74 million tons annually, according to Rhodium Group.

Tax credits can effect a reduction in carbon dioxide emissions, the report concludes, by providing “market certainty and accelerated deployment of technologies that are key for long-term decarbonization of the US energy system.” Extending and expanding credits for clean electricity generation and CCUS “can deliver meaningful progress in reducing emissions over the next decade.”

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