For a smarter, cheaper clean energy plan, the US should look overseas

California energy
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California energy

As Congress and the White House look for a way forward on the Build Back Better Act and the president’s broader climate agenda, they could learn something from how other countries support new energy technologies. Over the years, many states have backed away from broad-based subsidies like the ones used in the United States. In doing so, they have saved money and increased the political appeal of supporting low-carbon energy. The United States can and should learn from these best practices. 

Consider an unexpected outcome observed in Europe due to high electricity prices: The subsidy for offshore wind in the United Kingdom has turned negative, so wind projects are now paying money to the state. The reason is that the United Kingdom supports offshore wind through a “contracts for difference” structure. The scheme pays developers the difference between the price they need to make an investment and the market price. Normally, this system produces a subsidy. But if prices rise enough, as they have now, developers give money back.

The approach was part of an evolving effort to tailor support for low-carbon energy. In the 2000s, countries often used feed-in-tariffs, which set a fixed price for output. This was a blunt instrument that attracted investment but also proved costly during the takeoff phase. Countries then turned to auctions, which let the market set the premium for new technologies. Auctions had their own challenges, of course, because projects can win by making promises they cannot keep. But carefully designed, auctions only offered the subsidy that the market needed. 

The United States, by contrast, still lives in the era of blunt instruments to support clean energy. The tax credit for carbon capture, utilization and storage (CCUS) is a fixed fee (depending on whether the carbon is sequestered or used to produce more oil). Support for wind, solar and other technologies is similarly structured around a fixed credit. The cost of renewable energy may decline, and it can vary across the country, but until Congress writes a new tax credit, the support level is the same. 

This blanket approach has its merits, to be sure. It is administratively simple, which appeals to a Washington averse to governance. Tax credits also appear even-handed since no bureaucrat is deciding what project gets support (in practice, channeling funds through the tax system imposes its own costs and narrows who is eligible to get help). And fixed credits are easier to score for legislative purposes than dynamic support systems. 

But blanket support is also costly and ineffective. Consider carbon capture, utilization and storage. The National Petroleum Council estimated the credit needed for carbon capture, utilization and storage in a number of end uses. The result is a curve that starts from $25 per ton of carbon sequestered to almost $300 per ton. Cement projects, for example, typically need a price three times higher than ethanol. Trying to find one “right” price for the practice is madness. Either the credit is too low to stimulate investment or it is too high and delivers a windfall (often, it is both ineffective and unfair). 

Such disparities are evident across the energy system. One can imagine a different way. The credit for carbon capture, utilization and storage, for instance, could vary by application. Or the federal government or states could run auctions for certain volumes of carbon sequestered, awarding credits to the most competitive projects. Or states could use a cost-plus model for select infrastructure. There are many ways to tailor support without resorting to a blanket check. 

Such finetuning would save money and make support for renewable energy more politically palpable. Consider another example: the fixed credit for electric vehicles runs to December 2031, but analysts expect that electric vehicles could compete with internal combustion engine vehicles in a few years. The federal government could be subsidizing electric vehicles past the point where consumers need an incentive to switch. A smarter credit would change over time. 

Targeted support would also better align with other government targets. The Build Back Better Act has a clean hydrogen production credit that reaches up to $3 per kilogram (kg) of output. Meanwhile, the Department of Energy wants to lower the cost of clean hydrogen to $1 per kg by 2031. So a facility could start construction in 2028 and claim a $3 per kg credit just as the country nears its $1 per kg target. That does not seem right. 

Support for renewable power generation suffers from a different problem: it applies the same credit across technologies with different cost structures. (Some credits extend to 2031, rather than 2026, and the support falls after 2031.) Once again, there is no effort to adjust the subsidy to cost developments or market trends. The result is that the United States might overpay for some renewable energy development while not getting enough of another. 

A more tailored strategy could act as a lower-cost replacement for the Build Back Better Act, if it does not pass, or it can remedy some of its side effects if it passes and is successful. It is easy to imagine a scenario where costly but unnecessary subsidies become a political liability in this decade. Such outlays could also weaken support for future programs that really need help. The reforms described above could offer a path forward. 

Such a policy architecture does not have to run through some big federal bureaucracy. States can administer these programs, backed by federal funds, although federal oversight could ensure geographic and sectoral diversity. In markets like offshore wind, governments already rely on auctions or leases, but they do not use that screening process to modulate the level of support or offer a more dynamic support structure. They could. 

The point is that a modest amount of governance can lower costs relative to a passive, blunt process. The premium that low-carbon technologies require to be economic changes all the time and varies by application and geography. Static, country-wide, long-lived incentives make no sense. A more nimble approach is possible. The extra money spent on administration can save billions in outlays. And, as the United Kingdom shows, well-designed subsidies can even return money to taxpayers — a win for the climate and the public purse. 

Nikos Tsafos (@ntsafos) is the James R. Schlesinger Chair in Energy and Geopolitics at the Center for Strategic and International Studies (CSIS).

Tags Carbon capture and storage Climate change policy Emissions reduction Energy Energy economics Feed-in tariff Low-carbon economy Renewable energy commercialization Renewable energy economy Sustainable energy

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