By Benjamin Storrow
In 2019, a prominent economist at the University of Chicago co-wrote a paper that said state renewable portfolio standards were among the most costly climate policies.
Now he’s finding different results for a similar program.
An analysis released today by Michael Greenstone, the economist and former adviser to President Obama, and a team of researchers at the University of Chicago and the Rhodium Group found that passing the tax credits for wind and solar included in the “Build Back Better Act” are among the cheapest ways to cut carbon emissions.
There are important differences between tax credits and renewable portfolio standards. The first provides a subsidy to developers to build renewable energy facilities; the second generally mandates utilities to derive a certain amount of power from renewable sources.
But there are similarities, too. Both are aimed at increasing the amount of renewable electricity generation rather than directly reducing emissions.
“It’s not a policy that was targeted at the enemy. The enemy is carbon,” Greenstone said in an interview yesterday. “It’s a policy that’s targeted at something that’s related to the enemy. Those kinds of policies usually get expensive.”
The finding that federal tax credits for renewable energy are cost-effective is a reflection of the rapid maturation of wind and solar, the costs for which have fallen steeply in recent years. The findings are also tied to the proposed reforms to renewable tax credits in “Build Back Better.”
The legislation, which was passed by the House of Representatives last year, aimed to increase the flexibility in how developers can use the tax credits.
“We’re real close to fossil fuels not being a big part of the electricity system, and this just accelerates that transition,” Greenstone said. “This policy would accelerate this transition.”
The analysis comes as climate policy in Congress has ground to a standstill. “Build Back Better” contained some $300 billion in clean energy spending, with tax credits for technologies ranging from wind and solar to carbon capture, hydrogen and sustainable aviation fuels. But the bill ran into a roadblock when Sen. Joe Manchin, a West Virginia Democrat, declined to support it.
Today’s report attempts to put a price tag on inaction by conducting a cost-benefit analysis of the clean electricity tax credits in “Build Back Better.” It compares the benefits of extending the tax credits for wind and solar to a range of social-cost-of-carbon estimates. It finds that the benefits of extending the tax credits range from $335 billion to $1.8 trillion. The costs, by comparison, range from $130 billion to $309 billion.
Greenstone called the findings striking.
“The choice of the social cost of carbon was irrelevant to whether or not the benefits exceed costs,” he said. “Even one that is almost impossible to justify at this point, $51 per ton, still had benefits that exceeded costs substantially.”
The Obama administration used $51 per ton as its social cost of carbon estimate, a figure the Biden administration has adopted as an interim estimate. The analysis also examined scenarios in which the social cost of carbon was estimated at $121 per ton and $250 per ton.
The researchers found that the clean energy tax credits proposed by Congress would cost between $33 to $50 per ton of CO2 abated. Renewable portfolio standards, by contrast, cost between zero and $200 per ton, while a low-carbon fuel standard ranged from around $100 per ton to more than $3,000 per ton.
“If you did the study 10 years ago with the same model, it would be a completely different story,” said John Larsen, a Rhodium partner who contributed to the analysis. “That’s because wind and solar are just so mainstream and so cost-effective now.”