In some ways, it’s a peculiar time for Congress to be heaping tax credits onto the electric vehicle industry.
Despite that robust business, the Inflation Reduction Act, which the Senate approved Sunday and is likely to be passed into law by the end of the week, will pump $36 billion to incentivize more electric car purchases over the next decade. It’s part of $369 billion in the bill for tax subsidies and other measures designed to speed up the clean energy transition.
A wide range of economists and energy and climate experts agree the money will be a powerful tool to reduce carbon emissions and transition America’s economy to one that contributes much less to global warming. Yet even if the federal money becomes available, a lot else will have to come to pass to make the investment pay off.
An entire supply chain of rare minerals, semiconductors, batteries and financing has to fall into place before Americans give up their combustion engines. American consumers can only claim the full $7,500 credit for an all-electric engine if their manufacturers displace Chinese batteries by 2024 and minerals from China or other countries lacking free-trade agreements by 2025 — a threshold that automakers are warning could be impossible to meet. And China, furious right now over House Speaker Nancy Pelosi’s recent visit to Taiwan, will be watching as the United States openly strives to liberate itself from manufacturing in the People’s Republic.
Nonfinancial barriers — such as local opposition to building wind and solar farms or a lack of transmission lines — must be overcome. And with roughly 40 tax credits in the legislation, some of those aimed at transforming the energy economy from automobiles to wind turbines to heat pumps will inevitably miss the mark. Some portion of those funds will be pocketed when they aren’t entirely needed — many companies have promised to transition to clean energy irrespective of federal policy.
And some money will go to projects that never materialize or fail altogether. The 2009 stimulus bill, the largest investment in clean energy before the new bill, created a clean energy loan program that infamously funded the failed solar start-up Solyndra, which became an embarrassment for the Obama administration. And it poured billions of dollars into a high-speed-rail system in California that has still not come to fruition.
“It’s very hard to try to target incentives to activities that wouldn’t otherwise happen,” said N. Gregory Mankiw, a Harvard University economics professor and chairman of President George W. Bush’s Council of Economic Advisers. “Some dollars are wasted, but that’s the nature of government subsidies.”
Proponents argue that the money in the bill will help overcome these many potential obstacles.
“The tax incentives are good because we know that they work,” said Matt Casale, director of environmental campaigns at U.S. PIRG, a public interest group. “They do a good job of moving that investment forward and leveraging that investment.”
The electric vehicle benefits are a good illustration of these dynamics. Existing tax law provides $7,500 tax credits for each of the 200,000 electric vehicles made by an individual manufacturer. After that, the credits are phased out for that manufacturer over the course of a year. If GM’s customers since April 2019 got the full tax credit, they would have received $200 million to $300 million for doing something they did anyway.
But the Inflation Reduction Act would sweeten the pot, with the government extending the full $7,500 tax credit through 2032 while scrapping the 200,000 unit ceiling, which has already affected Tesla, GM and Toyota. For more modest income earners, the tax credit will be refundable, meaning that regardless of the buyer’s income, the purchase price reflects the full tax credit. That won’t matter for buying Teslas, which generally sell in the $65,000 range, but GM is offering the Bolt for less than $30,000.
GM and other major carmakers say they have ambitious plans for increasing electric vehicle sales, plans that are essential if the United States is to meet its climate change targets. Bolt’s 2021 sales number set a record, but it still came to a measly 24,827 — about a seventh of 1 percent of all the cars sold in the United States last year.
Looking to 2030, by comparison, GM is investing $15.7 billion to convert much of its entire fleet to electric vehicles — and it’s counting on Congress for a boost.
“The reason why these types of policies are so important is because it is an accelerator of EV adoption,” said Matt Ybarra, a GM spokesman.
The Inflation Reduction Act would cover a much broader array of projects than simply EVs. One of the bigger items in the bill, a $44 billion production tax credit, would promote wind, solar, battery storage and hydrogen technologies. Other credits totaling about $9 billion would spur the installation of efficient heat pumps and electric stoves. Credits that have been extended every two years will now last a decade, increasing certainty about the future.
In a number of cases, the Inflation Reduction Act aims to accelerate efforts already underway.
For example, the bill demands that the oil and gas industry either capture leaks of methane, a very harmful greenhouse gas, or pay a hefty fee for failing to do so. But much of the industry has already agreed to abide by proposed regulations clamping down on methane leaks.
The legislation also could accelerate investments in massive renewable energy projects that major energy companies are already pursuing. Production tax credits worth about $30 billion are designed to accelerate U.S. manufacturing of solar panels, wind turbines, batteries and critical minerals processing. The investment tax credit would provide $10 billion more to build clean technology manufacturing facilities.
Even as energy giants BP and Shell continue to drill for oil and gas in the Gulf of Mexico, they along with Equinor, another major energy firm, are among the companies now funding the construction of wind turbines in waters off New Jersey, Massachusetts and New York.
“I have one client looking at Texas and New Mexico. Having this extension will help them make that decision, and they will be able to pull the trigger,” said Devin Hall, a tax partner at the public accounting, consulting and technology firm Crowe dealing with big energy companies.
Yet even with this new federal support, other barriers might stand in the way.
Off the Atlantic coast in the New York area, developers must deal with “local opposition from certain communities and fishing groups, the need for interconnection and transmission upgrades, and the usual array of commercial, technical, legal, and financial hurdles that accompany billion-dollar infrastructure projects, particularly those that involve installation of towers the size of a Manhattan skyscraper at sea,” Carl Valenstein and Jonathan Wilcon, lawyers at Morgan Lewis, wrote in an analysis in December.
The pair said that under the Jones Act, only U.S. ships can be used for trade within U.S. borders, making it difficult to tap more advanced European vessels.
The oil and gas industry is also interested in other provisions, especially the generous tax provision for projects that would capture carbon — and store or use it. The tax credit would provide $85 a ton for burying the carbon dioxide underground, $60 a ton for utilization or injection for enhanced oil recovery, and $180 a ton for capturing directly from the air.
The act would also bestow $30 billion to the nuclear industry by providing tax credits to the owners of existing reactors — not to incentivize them to do something but to just stop them from closing down, as many have threatened to do. The United States has 92 reactors, but seven have closed in the past decade, according to the Energy Information Administration.
“We continue to review the provisions, but a significant and positive impact of the act will be the production tax credit for nuclear that would help preserve the long-term operation of New Jersey’s and our nation’s largest source of carbon-free power generation,” said Marijke Shugrue, spokeswoman for PSEG, a large New Jersey-based utility that operates two nuclear generating stations in New Jersey and is part-owner of another in Pennsylvania.
The new legislation would also establish a federal “green bank” with $27 billion to use for loans to energy-related projects, including solar, wind, battery storage and much more. That money could be leveraged three to four times, extending its influence to $75 billion to $100 billion of projects.
Not all of those work out. A $535 million loan to Solyndra was lost after the solar panel company went bankrupt, one of a handful that failed, prompting intense scrutiny from Congress. But overall the Energy Department under President Barack Obama received far more in interest payments than the sum lost by those failures.
On balance, while private capital has already been flowing into clean energy projects, many projects have been unable to nail down financing, said Reed Hundt, co-chair of the Coalition for Green Capital, whose network of 20 state and local green banks has an unfunded backlog of $21 billion.
Those include scores upon scores of projects, including a new public bus fleet in the Washington, D.C., area; geothermal projects to help lithium extraction in the Salton Sea; efficient affordable housing in Texas; and $20 million to replace and electrify the heating systems in 924 units of a World War II-era housing development in Connecticut near an immigrant community that was rezoned.
“Investment is moving in this direction,” said Jeffrey Schub, the former executive director of the Coalition for Green Capital. “If time wasn’t of the essence, we wouldn’t need a green bank. But we need to speed up the clock. It’s a question of putting our foot on the gas and moving more money in this direction.”
The geothermal firm Dandelion Energy is also eager for the reconciliation bill to be adopted.
“It’s going to benefit us — a lot,” said Michael Sachse, Dandelion’s chief executive, who has been in talks with Lennar, the nation’s second-largest home builder and an investor in Dandelion. “Suddenly all the math makes sense.”
The legislation would increase the amount of tax credits for geothermal investors and it would extend the time period to 10 years, similar to credits available for solar projects. A home builder or other investor can pay for the geothermal system and lease it back to home buyers, who will end up paying a fixed fee that would be less than they would have paid for air conditioning.
Sachse said Dandelion has installed geothermal in about 600 homes this year and plans to double the pace next year.
But even with tax credits, transforming the U.S. economy and bringing climate change measures to millions of purchasing decisions isn’t so easy. Installing geothermal in existing homes can be difficult because drilling equipment is large and can’t squeeze in. Currently, geothermal provides less than 1 percent of U.S. energy capacity, the Energy Department said, and 90 percent of projects are in Nevada or California.
Matt Casale and his wife are logical customers for the sort of energy efficiency measures and tax breaks that lie at the heart of the proposed legislation. Through his work, Casale is an advocate for heat pumps, solar panels, electric vehicles and energy efficiency for buildings.
“I’ve been trying to do this with my own home,” Casale says. “We’re penciling out the numbers.” The kitchen was already electric when they moved in so buying a new electric stove was “an easy choice” and with an old roof, it seems like the right time to replace it and install solar panels.
The furnace, while old, is not broken. “We’re expecting it to go in the next two years, so we’re planning to go in for a heat pump then,” Casale said. That will cost them anywhere from $4,000 to $8,000 — without the new federal tax credits. That is still “a big purchase,” Casale said, and “one of the challenges for people, is that it’s a system you don’t replace often.”
For rooftop solar, they’ve received estimates around $40,000. “Our roof is pretty old,” he said. “Those financials look to be penciling out nicely.”
But after all of those investments, Casale plans on waiting a few years before switching to an electric vehicle and getting a charging plug at home. “So, we’re not yet all electric, but we’ve made a road map for how to get there,” he said.
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