2023 TOP 10 BLOG

VJEL Staff Editor: Nick Bondurant

The Issue with Climate Based Tax Incentives

President Biden signed the Inflation Reduction Act (IRA) into law on August 16, 2022. This law provided a slurry of tax incentives to fight against climate change. This bill enacted unprecedented deficit reduction while reducing carbon emissions. While the benefits of this historic piece of legislation are undeniable, there are questions of the need and workability of the tax incentives.

The IRA shook the foundation of what has been done in the United States and how tax incentives will continue to develop in the future. The history of tax incentives in the United States are unequivocally different than the incentives provided by the IRA. This historic change has also sparked the question of whether the tax incentives are worth it and what sectors of the economy will be affected. In short, the IRA is expected to reduce inflation and carbon emissions through these incentives.

The backdrop for the IRA is important for setting the stage of the country’s current situation. Tax credits are a dollar-for-dollar reduction for the tax that one owes. Historically speaking, the Internal Revenue Service (IRS) adopted a punishment approach. Punishments shaped the financial sphere, not incentives. The IRA enacted more tax incentives than any other piece of legislation before it. This stemmed from lessons learned when the Build Back Better Act (BBBA) enraged everyday Americans by providing tax breaks to wealthy Americans. To gain bi-partisan support, Biden had to hit multiple targets with one arrow. This arrow transformed into incentives when the IRA financially encouraged the fight against climate change while keeping classist tendencies in mind. No family making less than $400,000 is affected by these changes to the tax code. The lessons learned from the BBBA are what jettisoned the IRA to being signed into law.

These climate-friendly tax incentives come in various forms. Most of these forms effect the energy sector in one form or another. Specifically, the IRA targets transportation, energy, and industry with these tax incentives. All these incentives promote the reduction of carbon emissions.

The tax incentives affecting the transportation sector vary widely. The first set of incentives focus on production of cleaner sources of fuels outside of the fossil fuel industry. These includes renewable energy, hydrogen, and cleaner aviation fuels. In addition to these fuel incentives, consumers are also encouraged to purchase low to zero emission vehicles. This incentive includes electric and fuel cell cars. Importantly, commercial cars are included in this set of incentives. By covering clean vehicles and fuel sources, consumers and members of industry are encouraged to partake in carbon free sources of transportation.

Additionally, there are numerous tax incentives provided for the energy sector that support the fight against climate change. Some enable clean energy while enabling homeowners and businesses to take part in these programs. Firstly, existing tax incentives are prolonged through 2024. These tax credits exist for renewable energy production and investment. These tax credits turn into a technology-neutral credit in 2024. Next, carbon sequestration is incentivized through its existing credit and is actually enhanced by incentivizing reserving land for geologic storage and direct air capture. Next, incentives are given for nuclear energy facilities that still provide electricity production. These incentives last until 2032. Additionally, homeowners and businesses are incentivized to take part in making their structures more energy efficient. These incentives apply to new construction, existing structures, and energy efficient places of business. Lastly, homeowners and businesses are encouraged to install battery storage. All of these actions will accumulate to huge steps in the fight against climate change.

Industry is the last sector that gets to take advantage of these tax incentives. These incentives include “development of domestic supply chains for critical energy technologies while also driving investments in solutions such as carbon capture, transport, utilization and storage systems consistent with net-zero emissions goals.” Another section of incentives also include manufacturing the materials and structures needed to support and construct renewable energy infrastructure. These incentives will hopefully lead to the manufacturing sector becoming and supporting the transition to a carbon free country.

These are the tax incentives that the IRA provides or reinvigorates, but some are concerned about whether the incentives burden taxpayers too much and if they are even worth the trouble. Plainly, some worry that the parties taking advantage of the tax incentives would have already partaken in that climate-friendly activity without the incentive. Additionally, critics worry the cost of these tax incentives poses a great burden on taxpayers.

The answer to the first issue, would parties have taken the climate-friendly action without the incentive, is not a definite yes or no. Of course, some parties would have already taken part in these activities without the tax incentive. Critics should note that some of these parties are mostly economically influenced. When it comes to the larger industries, they would not take part in these activities without an economic incentive to decarbonize their sector. So, there certainly are some benefactors that did not need the incentive to take part in these green initiatives. Even with the individuals who would continue with these activities, why shouldn’t they be financially awarded with their climate-friendly behavior? This positive reinforcement could lead the United States towards a cleaner future.

Lastly, critics worry about the cost to taxpayers with these incentives. Overall, the IRA is projected to cost $433 billion and will raise $739 billion. Ultimately, these incentives will reduce carbon emissions in the United States by 40% by 2030. Without the IRA, carbon emissions would only fall by 30% by 2030. The tax incentives are well worth the lost raise in revenue for the government.

Overall, the Inflation Reduction Act provided an important carrot in the form of tax incentives to engage various sectors to fight against climate change. Transportation, energy, and manufacturing sectors are engaged on both the individual and sector wide level. Without these tax incentives, the United States could continue the spiral down to a bleak future. Policies like this are of vital importance in the fight against climate change for a capitalist focused country.