A Powerful 1-2 Punch: Renewable Energy Tax Credits and the Clean Power Plan

May 10, 2016 | 9:46 am
Jeff Deyette
Director of State Policy and Analysis

The clean energy transition is well underway in the United States, but strong policies are needed to keep the momentum going. Today the Union of Concerned Scientists is releasing a new analysis showing how two federal measures—the recently extended wind and solar tax credits and the Clean Power Plan—can work together to provide a powerful and affordable boost for clean energy while helping to cut power sector carbon emissions. What’s more, our analysis finds these policies can also deliver significant economic and health benefits to consumers nationwide.

A powerful 1-2 policy combination punch

Last December, in a rare but welcome demonstration of bipartisanship, Congress passed a 5-year extension of the production tax credits (PTC) and investment tax credits (ITC) for renewable energy.

These important tax incentives have been a major driver of new wind and solar development over the past decade. With the PTC expiring at the beginning of 2015 and the ITC set to expire this year, a significant slowdown loomed for near-term growth. Now, these industries have the market certainty they need to forge ahead through at least the year 2021. That’s when the EPA’s Clean Power Plan moves in and continues the clean energy momentum.

The recent extension of federal tax credits for solar and wind energy

The recent 5-year extension of federal tax credits for solar and wind energy will help accelerate the nation’s transition to a clean energy economy. Photo credit: Grid Alternatives

Finalized last summer, the Clean Power Plan sets state-by-state targets that will lead the US power sector to curb carbon emissions by an estimated 32 percent below 2005 levels by 2030, with the first compliance date starting in 2022. States have the option of using both renewable energy and energy efficiency as key components in their compliance strategies. And with the tax credit extension in place, states now have an even greater incentive to capitalize on near-term renewable energy development to help them achieve their Clean Power Plan targets.

In our new analysis, we use an energy planning model developed by the National Renewable Energy Laboratory (see the technical appendix for details on our methodology and assumptions) to examine the impacts of this powerful policy combination on the US power sector. In particular, we compare our Clean Energy Transition case (which includes tax credits extension and assumes full compliance with the Clean Power Plan) with a Reference Case scenario (which assumes no new state or federal policies). The resulting benefits to consumers, the economy, and the environment are truly impressive.

Renewable energy development soars

Under our Clean Energy Transition Case, the federal tax credits help spur 113 gigawatts (GW) of new renewable capacity by 2020. Led primarily by wind and solar, that growth represents 71 GW (or 170 percent) more than the renewable energy capacity developed under the Reference Case. The Clean Power Plan continues to drive progress through 2030 when new renewable energy capacity reaches 202 GW (for a total of 297 GW). That projected level of development, which is consistent with findings from two recent similar analyses—would stimulate more than $227 billion in new capital investments by 2030.

Rapid, sustained growth in renewable energy and energy efficiency helps to diversify the US power supply, and reduces dependence on fossil fuels. Under the Clean Energy Transition Case, non-hydro renewable energy sources account for more than 21 percent of total US power generation by 2030 (Figure 1), triple their share today. Electricity sales are also nearly 7 percent lower than the Reference Case by this time, as a result of $64 billion in energy efficiency investments.

Figure 1. The Clean Energy Transition Policies Case Diversifies Our Nation’s Electricity Mix

Figure 1. The Clean Energy Transition Case diversifies our nation’s electricity mix

As renewables and efficiency expand over the forecast period, electricity generation from fossil fuels declines. For example, under the Clean Energy Transition Case, coal generation is 19 percent lower than the Reference Case by 2030. Natural gas generation is also 4 percent lower in 2030 compared with the Reference Case, and 10 percent lower compared with 2014 levels. Keeping natural gas power generation in check is critical for limiting the serious consumer, health, and climate risks associated with its over-reliance as we transition away from coal.

Carbon emissions drop

As dependence on coal and natural gas declines, power sector carbon emissions—which are the biggest single contributor to US global warming emissions—fall along with it. Combined, the tax credit extension and the Clean Power Plan help drive down annual carbon dioxide (CO2) emissions from the power sector to 33 percent below 2005 levels by 2030 (See Figure 2).

Figure 2. Clean Energy Transition PoliciesReduce Power Sector Carbon Dioxide Emissions

Figure 2. Clean energy transition policies reduce power sector carbon dioxide emissions

It is also worth noting that the near-term renewable energy development driven by the tax credits helps to deliver emission reductions earlier, so that the cumulative reductions from 2016 to 2030 are much greater what would occur than the Clean Power Plan alone. The tax credits help curb CO2 emissions by an additional 31 percent cumulatively (equivalent to 854 million tons) through 2030 (see figure).

In addition to cutting CO2 from power plants, the Clean Energy Transition Case would also cut NOx emissions by 24 percent and SO2 emissions by 22 percent in 2030. Our analysis estimates the monetized health and economic benefits from reducing CO2, NOx, and SO2 emissions at $127 billion through 2030.

Consumer benefits from a clean energy transition

Accelerating the transition to a cleaner energy economy is both affordable and can provide important health and economic benefits to consumers. In fact, our analysis shows that the Clean Energy Transition Case delivers net savings to the power sector every year from 2016 to 2030. Cumulative net savings to power sector consumers during this period reach $30.5 billion. Net savings reflect electricity system expenditures—including the costs of implementing the Clean Power Plan as well as the renewable energy and efficiency investments—plus revenues generated from the trading of carbon allowances (see below).

Net power sector savings also translate into lower electricity bills for the typical household. Diversifying the power supply with more renewable energy helps stabilize electricity prices and greater investments in efficiency helps household power use. As a result, residential consumers would see modest electricity bill savings every year from 2016 to 2030. By 2030, annual household electricity bill savings under the Clean Energy Transition Case are $17 (or 1.9 percent below the reference case).

The auctioning of carbon allowances for Clean Power Plan compliance would also generate significant revenues that can be used for public benefit in all states. By setting a carbon cap and issuing allowances equal to state Clean Power Plan targets, auctioning those allowances, and participating in a nationwide interstate carbon trading program, states can generate a combined average annual revenue of $6.8 billion from 2022 to 2030 under the Clean Energy Transition Case. These revenues could then be reinvested for public benefit, including for assistance to communities of color and low-income communities that are disproportionately burdened by pollution from coal-fired power plants, worker training and other economic-transition support for coal-dependent communities, and additional deployment of renewables and efficiency.

Boosting a power sector already in transition

Progress toward to a clean energy economy is already well underway in the United States thanks in large part to the eroding economics of coal, falling costs of wind and solar, and state-level policies like renewable electricity standards, energy efficiency resource standards, and carbon caps. Combined, the federal tax credit extension and Clean Power Plan can provide a critical boost for keeping clean energy momentum going and helping to achieve our global warming emissions reduction commitments under the recent Paris Climate Agreement. To make this clean energy future a reality, however, states must take advantage of the tax credit extension to accelerate renewable energy development today, and continue to pursue plans to comply with the Clean Power Plan.

The recent Supreme Court decision to stay the Clean Power Plan does not change the very significant economic and public health benefits from making the shift to renewables and efficiency, nor does it change the urgent need to cut carbon emissions to limit climate change.

As my colleague Rachel Cleetus writes, in order to fulfill the promise of the Paris Climate Agreement and limit the most dangerous effects of climate change, we can and must reduce carbon emissions much further than what the Clean Power Plan and tax credit extensions will deliver. But that journey must start by fully capitalizing on these powerful policy tools today.