Tax Incentives to Promote Climate Mitigation
Governments use tax incentives to encourage or incentivize specific economic activities. An entity’s tax obligation can be reduced by participating in certain economic activities. Tax incentives can shape economic development and opportunities. The United States and many countries around the world provide tax incentives as one way to retain and encourage economic investment and growth.
Tax expenditures are defined by law as “revenue losses attributable to provisions of the Federal tax laws which allow a special exclusion, exemption, or deduction from gross income or which provide a special credit, a preferential rate of tax, or a deferral of tax liability.” These exceptions may be viewed as alternatives to other policy instruments, such as spending or regulatory programs.
Tax expenditures are special provisions of the tax code such as exclusions, deductions, deferrals, credits, and tax rates that benefit specific activities or groups of taxpayers.
These provisions are meant to support favored activities or assist favored groups of taxpayers. Thus, tax expenditures often are alternatives to direct spending programs or regulations to accomplish the same goals. The Office of Management and Budget (OMB) and the Congressional Joint Committee on Taxation (JCT) each year publish lists of tax expenditures and estimates of their associated revenue losses. The US Department of the Treasury prepares the estimates for OMB.
Deductions and exclusions reduce the amount of income subject to tax. Credits reduce tax liability dollar for dollar by amount of credit.
Governments around the world are using sustainability tax measures to address climate change. They are using these incentives for a wide variety of things including reducing emissions, meeting their commitments on carbon neutrality, raising revenue and funding important policy objectives.
Many countries including the United States and China offer significant subsidies for domestic green technologies.
United States & Inflation Reduction Act
The recently enacted Inflation Reduction Act (passed by the U.S. Congress and signed into law by President Biden) will:
- Incentivize the deployment of American clean energy;
- Lower energy bills and costs for efficiency upgrades;
- Create good jobs through domestic manufacturing and clean procurement;
- Support climate-ready agriculture, forestation, and resilience; and
- Advance clean air through clean transportation.
The Inflation Reduction Act (IRA) was intended to cut Americans’ energy costs, create good jobs, and significantly advance efforts against climate change. The IRA includes $369 billion in clean energy and climate investments. The IRA provides opportunities for state and local governments wanting to ramp up their efforts on clean energy and carbon neutrality. The IRA also provides direct benefits to American families and seniors.
The IRA is the largest, most ambitious climate legislation Congress has ever passed. It includes investments that are projected to reduce critical emissions to between 31 percent and 44 percent below 2005 levels. Multiple independent analyses show the bill will reduce U.S. greenhouse gas emissions some 40% below 2005 levels by 2030, a big step toward President Biden’s goal of cutting them in half by 2030.
The Inflation Reduction Act builds on the initial climate funding opportunities passed into law in the Infrastructure Investment and Jobs Act (IIJA) to support projects across:
- electric vehicle (EV) charging,
- power infrastructure, and
- climate resilience.
The IRA provides new funding to accelerate the growth of clean energy and support consumer rebates for home electrification and EVs, and it dedicates significant resources to American-made products to boost domestic manufacturing and regional economies.
The IRA includes tax credits for residential solar and battery storage systems, along with other measures aimed at encouraging individuals to cut their carbon emissions. Money in the Inflation Reduction Act would make it cheaper for Americans to curb their own climate-warming emissions.
More specifically, the IRA includes the following tax credits:
- Money for efficient electric appliances.
- Includes money for the home upgrades needed to support them.
- The first home benefit Americans would see is a tax credit for energy efficiency upgrades.
- It revives a credit that ended last year, making it retroactive for all of 2022 and extending it for a more than a decade.
- Down the line, the bill would set aside more than $8 billion for two rebate programs, aimed at lower- and middle-income households.
- One would incentivize replacing old appliances with new energy efficient ones, as well as the home upgrades necessary to support them.
- One would cut down on energy wasted at home.
- Money for residential solar panels and energy storage.
- Increases existing tax credits for residential solar.
- Offers credits for home energy storage systems (basically giant batteries).
- Electric vehicle tax credits that aim to help low- and middle-income buyers.
- The credits could be transferred to car dealers in order to apply at the time of sale.
- However, these credits exclude many vehicles and include restrictions.
- Eligible buyers can’t make more than $300,000/year on a jointly filed tax return when claiming the credit for a new EV.
- The money can’t apply to a car that sells for more than $55,000, or truck/SUV/van priced higher than $80,000.
- Half of the tax credit amount is tied to gradually increasing requirements that critical minerals used to make EV batteries come from North America or the U.S.’s free trade partners.
China Leading in Clean Energy Investments
China is a leader in low-carbon spending. In 2022, China once again topped the world in clean energy investments. This is a trend that could challenge U.S. efforts to develop more manufacturing at home.
Nearly half of the world’s low-carbon spending took place in China, according to a recent analysis from market research firm BloombergNEF. The country spent $546 billion in 2022 on investments that included solar and wind energy, electric vehicles and batteries.
That is nearly four times the amount of U.S. investments, which totaled $141 billion. The European Union was second to China with $180 billion in clean energy investments.
European Union & Green Deal Industrial Plan
The European Union introduced a proposal offering a tax credit plan to compete with the United States and China. The plan is a response to the Inflation Reduction Act. It would relax some state-aid rules in order to increase investment.
The European Commission wants to use its Green Deal Industrial Plan to boost national support for companies through investment aid and tax credits. Further, the European Commission wants to utilize common European funds to support key projects involving sectors such as hydrogen and quantum computing.
Challenges Utilizing Tax Incentives to Promote Clean Energy
Tax incentives can help incentivize behavior and advance developments to address climate change. However, there are drawbacks to utilizing tax policy to drive behavior. Tax policy should be carefully targeted and revisited to ensure goals are being met.
Key points to keep in mind:
- Incentives should reward innovators rather than support well entrenched incumbents.
- If properly targeted, tax incentives have the potential to accelerate innovation in clean energy technologies that are poised to be adopted rapidly.
- Tax incentives intended to accelerate the deployment of clean-energy technologies were expanded significantly in the 2000s.
- However, design flaws and changes by Congress have limited their impact on innovation.
- The U.S. tax system can be a very powerful tool to accelerate clean energy innovation.
- Congress should target opportunities when they are ripe, drive the market forward, and sunset federal support as technologies mature.
U.S. Tax Incentives Done Right?
According to some reports, climate benefits from clean energy credits are about four times the costs. An EPIC-Rhodium Group analysis finds that tax incentives to boost clean energy generation (a key part of the Build Back Better Act) are among the most cost-effective climate policies and lead to some of the largest reductions in emissions compared to politically feasible alternatives.
Key details from the EPIC-Rhodium Group analysis include:
- The benefits from reduced carbon emissions alone are roughly 3-4 times greater than the costs.
- The incentives would lead to a 64-73 percent reduction in electric power sector carbon emissions from 2005 levels by 2031.
- When stacked up against other policies, the clean energy tax credits are one of the least expensive ways to reduce carbon emissions, costing around $33 to $50 per ton.
Creating Environmentally Friendly Tax Incentives
There are several factors that should be considered when creating energy tax incentives. Environmentally beneficial tax incentives are often one of many tools used together to address specific environmental problems. The following are key points to keep in mind when considering tax incentive policies.
- Some belief it is far more effective to utilize several tools, such as a tax combined with a tax credit.
- Arguably this works better and at a lower cost than a stand-alone tax.
- In general, which policy instrument or which instrument mix is chosen should be based on a thorough analysis of different aspects including:
- Tax policy arguments,
- How a specific policy objective can be achieved at the lowest cost and with the highest probability of achieving a stated goal.
- Finally, aspects of political acceptance also play a role.
- A combination of a tax incentive and an environmental tax can increase the acceptance of a tax and help with implementation.
1 OECD (Organisation for Economic Development and Cooperation), “Principles to Enhance the Transparency and Governance of Tax Incentives for Investment in Developing Countries,” available at https://www.oecd.org/tax/tax-global/transparency-and-governance-principles.pdf
2 U.S. Department of the Treasury, Office of Tax Analysis, Frequently Asked Questions Regarding Tax Expenditures, available at https://home.treasury.gov/policy-issues/tax-policy/tax-expenditures#:~:text=Tax%20expenditures%20describe%20revenue%20losses,a%20deferral%20of%20tax%20liability.
4 The Tax Policy Center, Urban Institute and Brookings Institution, “Briefing Book – A citizen’s guide to the fascinating (though often complex) elements of the US tax system,” available at https://www.taxpolicycenter.org/briefing-book/what-are-tax-expenditures-and-how-are-they-structured.
5 EY, Tax and Law Guides, Keeping pace with sustainability incentives, carbon regimes and environmental taxes, (Nov. 1, 2022), available at https://www.ey.com/en_gl/tax-guides/keeping-pace-with-sustainability-incentives-carbon-regimes-and-environmental-taxes.
6 Jorge Valero, “EU Offers Funding, Tax Credit Plan to Compete with US China,” Bloomberg Law, (Feb. 1, 2023), available at https://news.bloomberglaw.com/environment-and-energy/eu-unveils-a-green-investment-plan-to-compete-with-us-and-china.
7 Chris Chyung and Sam Ricketts and Kirsten Jurich, “How States and Cities Can Benefit From Climate Investments in the Inflation Reduction Act,” Center for American Progress, (Aug. 25, 2022), available at https://www.americanprogress.org/article/how-states-and-cities-can-benefit-from-climate-investments-in-the-inflation-reduction-act/.
8 Senate Democrats, “Summary: The Inflation Reduction Act of 2022” (Washington: U.S. Senate, 2022), available at https://www.democrats.senate.gov/imo/media/doc/inflation_reduction_act_one_page_summary.pdf.
9 Will Ragland and others, “11 Ways the Inflation Reduction Act Will Help Americans” (Washington: Center for American Progress, 2022), available at https://www.americanprogress.org/article/11-ways-the-inflation-reduction-act-will-help-americans/.
10 Fred Krupp, “The biggest thing Congress has ever done to address climate change,” Environmental Defense Fund, (Aug. 12, 2022), available at https://www.edf.org/blog/2022/08/12/biggest-thing-congress-has-ever-done-address-climate-change.
11 Ben King, John Larsen, and Hannah Kolus, “A Congressional Climate Breakthrough” (New York: Rhodium Group, 2022), available at https://rhg.com/research/inflation-reduction-act/.
12 Krupp, “The biggest thing Congress has ever done.”
13 Meredith Alexander and others, “How States Can Use the Bipartisan Infrastructure Law to Enhance Their Climate Acton Efforts” (Washington: Center for American Progress, 2022), available at https://www.americanprogress.org/article/how-states-can-use-the-bipartisan-infrastructure-law-to-enhance-their-climate-action-efforts/.
14 Chyung and Ricketts and Jurich, “How States and Cities Can Benefit.”
15 Laura Benshoff, “3 ways the Inflation Reduction Act would pay you to help fight climate change,” NPR – All Things Considered, (Aug. 13, 2022), available at https://www.npr.org/2022/08/11/1116769983/3-ways-the-inflation-reduction-act-would-pay-you-to-help-fight-climate-change.
17 Sarah Schonhardt, “China Invests $546 Billion in Clean Energy, Far Surpassing the U.S.,” Scientific American, (Jan. 30, 2023), E7E New, available at https://www.scientificamerican.com/article/china-invests-546-billion-in-clean-energy-far-surpassing-the-u-s/.
23 Valero, “EU Offers Funding.”
25 David M. Hart and Elizabeth Noll, “Less Certain Than Death: Using Tax Incentives to Drive Clean Energy Innovation,” Center for Clean Energy Innovation (Dec. 2, 2019), available at https://itif.org/publications/2019/12/02/less-certain-death-using-tax-incentives-drive-clean-energy-innovation/.
26 Energy Policy Institute at the University of Chicago (EPIC), The Climate Benefits from Clean Energy Tax Credits are About Four Times the Costs, (Feb. 9, 2022), available at https://epic.uchicago.edu/news/the-climate-benefits-from-clean-energy-tax-credits-are-about-four-times-the-costs/ .
29 Angela Köppl and Margit Schratzenstaller, “How to Design Environmentally Beneficial Tax Incentives,” Council on Economic Policies, (March 4, 2021), available at https://www.cepweb.org/how-to-design-environmentally-beneficial-tax-incentives/.
Dawn Levy O’Donnell Quoted in The Washington Post
Dawn Levy O’Donnell highlighted in Roll Call article
D Squared Tax Strategies Opens its Doors in Partnership with alliantgroup (in September 2011)
May 1, 2012 (Washington, DC) – Dawn Levy O’Donnell, a former Max Baucus Finance Committee Tax Counsel and, until recently, the EVP of Tax for DC lobbying giant Cassidy and Associates, officially announced the creation of the new innovative consulting firm, D Squared Tax Strategies. D Squared Tax Strategies will work with businesses on the development and implementation of tax solutions in Washington, D.C. D Squared clients will enjoy the benefit of a partnership with alliantgroup, the nation’s premier tax incentives services firm.
“I’m so excited to be forming D Squared which will allow me to continue to work with my wonderful, established clients as well as new clients, providing guidance on tax issues and information on current and emerging tax policy. As part of the creation of D Squared, I am particularly pleased to announce the formal relationship with the unique tax firm alliantgroup, especially since my friend and former Senate Finance Committee colleague, Dean Zerbe works for them.”
Dean Zerbe, National Managing Director of alliantgroup and former Senior Counsel and Tax Counsel to the Senate Finance Committee for Senator Grassley said, “I have seen first-hand that Dawn’s combination of determination, drive, and ebullient personality translates into success on tax issues for her clients. I am really pleased to be working with Dawn at alliantgroup as we did on the Senate Finance Committee. It’s like bringing peas and carrots back together – a great relationship for businesses and jobs.”
“This new partnership will allow my clients to benefit from alliantgroup’s enormous knowledge of tax – particularly in the areas of R&D, manufacturing, and energy. alliantgroup’s technical strengths are a perfect fit for the needs of many of my clients,” said Dawn.
alliantgroup is a very special tax services firm with more than 300 professionals nationwide, assisting clients in manufacturing, R&D, high-tech, architecture/engineering, and energy in benefitting from the credits and incentives provided in the tax code for their industry. They don’t just have lawyers and accountants on staff. They employ individuals with technical expertise – engineers, biologists, chemists, architects, computer software experts, etc. – to assist clients. “I’ve never seen a tax firm like it before,” said Dawn. “They are a very interesting and unique breed.”
Dhaval Jadav, CEO of alliantgroup said, “The passion and energy that Dawn brings to helping businesses have their voice heard in DC is amazing. alliantgroup is committed to assisting Dawn. We get to see in real time how the tax code is working or not working on the ground – and what is needed to help businesses grow jobs. Dawn will be able to convey that knowledge to lawmakers.”
Dawn also will be joining alliantgroup’s prestigious Strategic Advisory Board. Current members of the Board include former IRS Commissioner Mark Everson, former Senator Kit Bond, former Congressmen Jim Ramstad and Rick Lazio, and former Governor Bob Riley.
“We are pleased to provide our clients with the benefit of Dawn’s perspective. Together we will leverage our shared strength and diverse experience to help clients work within the current tax landscape and plan for a bright future,” said Dhaval.
“With the formation of D Squared Tax Strategies and my partnership with alliantgroup, my clients will have an opportunity to benefit from both my first-hand guidance on taxes and Capitol Hill as well as the intricate insight and knowledge provided by alliantgroup’s impressive tax experts. It’s a new model of consulting firm for DC,” said Dawn. “Exponentially creative tax services.”
For more information, contact Dawn Levy O’Donnell, D Squared Tax Strategies, 703.623.7317 or firstname.lastname@example.org, or visit www.dsquaredtax.com and www.alliantgroup.com.
The action is in the committees on TheHill
Dean Zerbe’s Forbes Blog