More than tax credits are needed to decarbonize the power sector

More than tax credits are needed to decarbonize the power sector
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President BidenJoe Biden White House: US has donated 200 million COVID-19 vaccines around the world Police recommend charges against four over Sinema bathroom protest K Street revenues boom MORE’s ambitious target of reducing greenhouse gas pollution by 50 to 52 percent by 2030 from 2005 levels reflects the urgent need to embark on a path toward economy-wide decarbonization. An essential step towards achieving this goal is the rapid decarbonization of the power sector. But doing so will require more than tax credits, spending on transmission lines, and other public largesse: Congress must pass either a carbon tax or a sectoral policy like a clean electricity standard.

In recent research, Daniel Stuart and I examined the ability of various power sector policies to attain at least an 80 percent reduction in emissions by 2035 (a threshold that could be accelerated to 2030). The volatility of the past dozen years underscores that future energy prices and economic activity are far from certain. We therefore sought policies that would robustly lead to deep decarbonization, regardless of future prices and demand.

What we found was sobering. A strategy of simply extending the renewable electricity investment and production tax credits falls far short of robust deep decarbonization, even if accompanied by accelerated state-level renewable and clean energy standards like those in California, New York, and Massachusetts. In fact, if electricity demand is high and natural gas prices remain low, carbon emissions barely fall under these policies, relative to 2019. Recent independent work by Resources for the Future, using a different model, reaches the same conclusion.

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To achieve robust deep decarbonization, it will instead be necessary to have either a well-crafted sectoral standard or a carbon tax.

Why?

It is not enough to make new clean energy investments less expensive: Existing fossil fuel generation must also incorporate at least some of the climate costs it imposes on current and future generations. And a sectoral standard will be more effective if it recognizes that, from both climate and public health perspectives, not all fossil fuels are created equal: natural gas is cleaner than coal.

Pairing a well-crafted clean electricity standard with an extension of the renewable energy tax credits can robustly achieve deep decarbonization while holding down or reducing electricity prices. While a tax credit extension adds to the debt, paring it with a smart sectoral standard gets the decarbonization job done. Future generations will have to pay off the debt, but they will benefit from a cleaner future with less warming.

Suppose Congress decides, again, not to pass meaningful climate policy and instead simply extends the renewable tax credits. This strategy might work — if natural gas prices were to rise significantly and renewables get even cheaper than is generally expected. We keep getting surprised by low renewables prices, but then again, we keep getting surprised by low natural gas prices: There is innovation in fracking technology too. A more likely outcome is that merely extending tax credits would lead to only modest power sector emissions reductions. This would require a sharp turn in policy later — leading to higher electricity prices, faster job dislocations, and another lost decade of high emissions.

If Congress fails to act, the Administration could return to Clean Air Act regulation. In January, the DC Circuit Court of Appeals vacated the Trump administration’s Affordable Clean Energy Rule, and the decision opened the door to an aggressive new rule. If paired with a tax credit extension, a well-crafted, ambitious rule could achieve deep decarbonization without raising electricity rates. But such a rule would take years to go into effect — if it survived litigation.

Legislation, not regulation, is the better way to shoulder our shared responsibilities for a durable and efficient climate policy.

By a large majority, Americans support climate action. A smart power sector standard, paired with tax credit extensions, can robustly decarbonize the power sector by providing the certainty that the industry needs while reducing retail prices. But failing to adopt smart sectoral standards or a carbon tax will, most likely, fail to achieve decarbonization goals and lead to much more costly policies in the future.

James H. Stock is the Harold Hitchings Burbank Professor of Political Economy, Harvard University. He served as a member of President Obama’s Council of Economic Advisers in 2013-14. Daniel Stuart, a Ph.D. student at the Harvard Kennedy School, contributed to this piece.