The latest report by the Intergovernmental Panel on Climate Change concludes that the world must reduce net greenhouse gas (GHG) emissions to zero by 2050 to limit global temperature rise to 1.5 degrees C (2.7 degrees F) and avoid the worst impacts of climate change. The Biden administration has committed to reducing economy-wide GHG emissions by 50%-52% by 2030 relative to 2005 levels and to cut domestic GHG emissions to net-zero by mid-century.
Achieving these goals will require rapid deployment of existing zero- and low-carbon technologies — such as renewable energy and electric vehicles, as well as emerging solutions including clean hydrogen and carbon capture and storage (CCS) — and coordinated action by all levels of government, the private sector and civil society.
To get an idea of how this might work, WRI conducted an economy-wide decarbonization modeling study with Energy + Environmental Economics, Inc. (E3)i to evaluate the emissions reduction potential of federal climate policies and investments and identify combinations of policies required in key economic sectors in the United States. This analysis reveals that tax credits for a range of low-carbon technologies, combined with federal investment in climate-smart infrastructure, would significantly improve adoption of these technologies and help curb emissions.
But these policies alone won’t get the U.S. to its net-zero goal. That will also require sector-specific performance standards, especially in the absence of economy-wide carbon pricing, as well as negative emissions technologies that remove and sequester carbon dioxide directly from the atmosphere and increased carbon sequestration by natural and working lands — including forests, farms and wetlands — to offset emissions from hard to mitigate sectors.
The recently enacted bipartisan Infrastructure Investment and Jobs Act invests in improved transportation, energy and water infrastructure and lays the foundation for U.S. climate action. But there is more to do. Our analysis demonstrates that the House-passed Build Back Better Act — which contains more than $500 billion to combat climate change including tax credits for various clean energy and low-carbon technologies — is essential for Congress to put the country’s climate goals within reach. While our analysis focuses on federal action, recent work from the America Is All In coalition shows how state and local governments, businesses, civil society and other climate leaders can complement federal action and play a critical role in accelerating climate progress.
3 Scenarios to Curb Emissions
WRI’s analysis does not explicitly evaluate the impact of all the climate provisions included in the Infrastructure Investment and Jobs Act and the Build Back Better Act. However, it does model several types of provisions included in both pieces of legislation, including tax credits for low-carbon technologies and federal investment in clean infrastructure.
Our analysis compares the progress toward a net-zero goal offered by different policy packages that overlap and build on one another, which are modeled under three mitigation scenarios (Figure 1). We focus on the role played by tax incentives, infrastructure investments, targeted spending and sector-specific performance standards as building blocks for a successful decarbonization strategy.
Scenario 1 (S1) includes the extension of current tax incentives, along with increases in spending programs that target infrastructure to help drive early adoption of clean energy and energy efficient technology.
Scenario 2 (S2) layers on advanced tax credits for low-carbon technologies such as heat pumps and electric vehicles (EVs) in the medium- and heavy-duty vehicle segment to drive broader adoption of various clean technologies. The policies in this scenario most closely resemble those included in the Build Back Better Act (see Table 1).
Scenario 3 (S3) builds on S2 to add stringent sector-specific performance standards and an economy-wide net-zero emissions cap, required to achieve net-zero emissions by 2050.
These mitigation scenarios are compared to a Reference Scenario that accounts for existing federal policies and state-level actions such as Renewable Portfolio Standard targets and zero-emission vehicle targets.
Figure 1. Description of Mitigation Scenarios and Building Blocks Underlying Each Scenario
Note: CAFE = Corporate Average Fuel Economy; CES = clean electricity standard; LDV = light-duty vehicle; MHDV = medium- and heavy-duty vehicle; NSPS = New Source Performance Standards; RPS = Renewable Portfolio Standard; ZEV = zero-emissions vehicle. Please see Table 1 and Technical Appendices B-C in WRI working paper for more details about individual policies included under each scenario.
Table 1: Comparison of Tax Credits Assumptions in WRI’s Mitigation Scenario 2 and the Build Back Better Act
Sector: Energy
| Tax Credits | WRI Mitigation Scenario 2 | The House- Passed Build Back Better Act |
|---|---|---|
| Clean energy production tax credit | 2.3 cents/kWh through end of 2035. | 2.5 cents/kWh through end of 2031 for projects meeting prevailing wage and apprenticeship requirements.* (Sections 136101, 136801) |
| Clean energy investment tax credit | 30% of capital investments through end of 2035, lowering to 10% through end of 2050 (40% for emerging technologies including advanced nuclear power, CCS and flow batteries through end of 2050). | 30% through end of 2031 for projects meeting prevailing wage and apprenticeship requirements.* (Section 136102, 136802)
Solar and wind projects can receive a 10% or 20% bonus credit depending on their contribution to environmental justice communities. (Section 136803) |
| Investment tax credit for transmission | 30% of transmission and distribution grid investments through end of 2050. | 30% through end of 2031 for projects meeting prevailing wage and apprenticeship requirements. (Section 136105) |
Sector: Transportation
| Tax Credits | WRI Mitigation Scenario 2 | The House- Passed Build Back Better Act |
|---|---|---|
| Consumer electric vehicle tax credit | $10,000 incentives from EV tax credit and retirement voucher through end of 2035, $5,000 retirement voucher between 2036-2050. | $4,000-$12,500 for light-duty vehicles between 2022 and 2031.** (Section 136401)
$2,000-$4,000 for previously owned light-duty vehicles acquired before end of 2031. (Section 136402) |
| Medium- and heavy-duty electric vehicle tax credit | $7,250 for medium-duty vehicles and $13,750 for heavy duty vehicles through end of 2050. | Tax credit of up to 15-30% of the cost of a vehicle or the incremental cost of a vehicle compared to a comparable alternative, whichever is less, through end of 2031. (Section 136403) |
| Medium- and heavy-duty fuel cell electric vehicle tax credit | $20,000 for medium duty vehicles and $31,000-$40,000 for heavy duty vehicles through end of 2050. | Extends with credit level modifications existing credits for fuel cell vehicles and refueling property through end of 2031. (Section 136404 and Section 136405) |
Sector: Buildings
| Tax Credits | WRI Mitigation Scenario 2 | The House- Passed Build Back Better Act |
|---|---|---|
| Residential energy efficiency and electrification tax credits | Extends existing tax credit through end of 2030.
$5,000 tax credit for purchase of electric heat pumps through end of 2050. |
Extends existing residential energy efficiency tax credit through 2033. The credit rate is 30% through end of 2031, and then 26% in 2032, and 22% in 2033. Adds qualified battery storage technology as eligible property. (Section 136302)
Extends existing energy-efficient new home credit through end of 2031, increasing credit to $2,500-$5,000 (from $1,000-$2,000). (Section 136304) |
| Non-business energy property tax credit | Extends existing tax credit through end of 2030. | Extends existing tax credit through end of 2031, increasing the rate to up to 30%, with an annual per-taxpayer limit of $1,200 and a per item limit of $600. (Section 136301) |
| Commercial buildings energy efficiency and electrification tax credit | Existing tax credit extended through end of 2030.
Tax credit of $100/ton of cooling capacity installed through end of 2050. |
Modifies existing tax deduction through end of 2031, lowering efficiency improvement threshold and offering a greater incentive for projects meeting prevailing wage and apprenticeship requirements. (Section 136303) |
Sector: Industry
| Tax Credits | WRI Mitigation Scenario 2 | The House- Passed Build Back Better Act |
|---|---|---|
| Carbon capture and storage tax credit | $50/metric ton of carbon dioxide captured, through end of 2050. | $60-$180/metric ton of carbon oxide captured through 2031 for projects meeting prevailing wage and apprenticeship requirements***. (Section 136106) |
Source: Building Blocks for a Low-Carbon Economy, 11/03 Build Back Better Act, Associated Section-by-Section, Congressional Research Service Report
Notes: Table 1 is not meant to be an exhaustive list of all provisions outlined in the Build Back Better Act (BBBA) and only provides a very high-level comparison of key overlapping tax credit provisions between S2 and the BBBA. Both S2 tax credit assumptions and BBBA provisions are high-level summaries, and the table does not fully describe key features of tax credits in the BBBA (such as refundability or the option of direct pay for eligible entities.)
*Clean electricity credits would sunset prior to 2031 if emissions from the electric power sector decline 75% from 2021 levels.
**Plug-in hybrid EVs with a battery capacity of at least 10 kWh would receive $4,000. EVs with a battery capacity of at least 40 kilowatt hours (50 kilowatt hours after 2026) that have a gas tank capacity of no more than 2.5 gallons would receive $7500. EVs assembled in the U.S. by workers represented by a union would receive an additional $4500. EVs using batteries that meet domestic content requirements would receive an additional $500.
***Credit is $60 per ton of captured CO2 used for enhanced oil recovery or other qualified uses. Credit is $85 per ton for CO2 captured for geologic storage. Electricity generating facilities must capture at least 75% of the CO2 they would otherwise emit to qualify. Direct Air Capture projects receive $130 per ton of CO2 used for enhanced oil recovery or other qualified uses and $180 per ton of CO2 captured for geologic storage.
Please see sources for more complete details.
The Impact of Federal Tax Credits and Spending
Our analysis shows that tax incentives and federal spending on climate-smart infrastructure can play important roles in deploying low-carbon technologies and reducing net annual GHG emissions rapidly up to 2030, by 39% and 43% (relative to 2005 levels) in S1 and S2, respectively — though neither scenario hits the 2030 U.S. climate target (Figure 2). In both S1 and S2, the pace of emissions reduction slows significantly between 2040 and 2050, and the availability of tax credits and federal spending is not sufficient to help the country reach net-zero emissions by 2050.
Figure 2. Net Annual Greenhouse Gas Emissions across the U.S. Economy by Scenario through 2050
Clean energy tax credits emerge as an important near-term policy tool to drive clean energy deployment, especially in the power sector. Extension of the production tax credit (PTC) and investment tax credit (ITC) through 2035 and the expansion of tax credits to support transmission investments and storage technologies results in significant growth in renewable energy generation, enabling the power sector to achieve an 87% reduction in emissions (compared to 2005 levels) by 2030, under both S1 and S2. This result is noteworthy given the power sector’s pivotal role in decarbonizing the U.S. economy by mid-century.
In the transportation and building sectors too, the continuation and expansion of EV tax credits and tax credits for building electrification and energy efficiency improvements significantly increase the adoption of EVs and heat pumps. The combined impact of tax credits and investment in climate-smart infrastructure in S2 results in 78% and 62% emissions reduction by 2050 in buildings and transportation, respectively.
Tax credits, on the other hand, do little to curb industrial sector emissions, which continue to increase in both S1 and S2, highlighting the challenges of decarbonizing the sector. Section 45Q tax credit enables reductions in GHG emissions from large industrial sources compared to the baseline; however, it is not enough to address this sector’s total emissions.
Figure 3. Annual Gross Greenhouse Gas Emissions by U.S. Sector by Scenario and Net GHG Emissions and Removals by Scenario through 2050
The Path Toward Net-Zero
Layering in sector-specific performance standards, such as a clean electricity standard (CES) and strict emissions standards for the transportation sector, in addition to federal tax credits and climate investments drive emissions to net-zero by 2050 in S3. Measures including the adoption of a CES, zero-emissions vehicle standard and tighter fuel economy standards result in a 50% economy-wide emissions reduction by 2030 and a net-zero economy by 2050.
As renewable sources like solar and wind power become the primary sources of electricity generation and the economy becomes increasingly electrified, firm clean energy sources will be required to maintain sufficient system reliability. CES adoption ensures that rising electricity demand due to widespread electrification in S3 is served by generation from sources such as natural gas with CCS (18% of total generation in 2050) and nuclear (10% of total generation in 2050) as well as wind and solar. Under this policy scenario, the power sector achieves a 97% reduction in emissions (relative to 2005 levels) by 2035 and 100% reduction by 2050, with the share of renewables in electricity generation reaching 82% and 72% by 2035 and 2050 respectively.
Significant changes are needed to decarbonize the industrial sector. An economy-wide emissions cap implemented from 2030 to 2050 would enable the electrification of existing natural gas heat processes and industrial energy use, while hydrogen is required to meet energy demand for heating processes that cannot be electrified. In this scenario, hydrogen demand reaches 14% of final energy demand in 2050, with industry accounting for 68% of total hydrogen demand. Hydrogen production in S3 in 2050 is divided between green hydrogen produced from curtailed renewable energy (63% of total hydrogen produced), and hydrogen made from sustainable bioenergy with CCS (BECCS), which accounts for the remaining 37%.
In addition to performance standards, NETs are needed to tackle residual emissions from harder-to-abate nonelectric sectors such as heavy transport and industry. CCS in the net-zero scenario is driven by BECCS hydrogen production and by requiring cement and iron and steel manufacturers to employ CCS to capture process emissions.
This analysis also shows that reductions in agricultural emissions through improved management of enteric fermentation, manure, soil and fertilizer, and increased carbon sequestration by natural and working lands are required for a net-zero economy. Without significant action on fugitive emissions in the oil and gas sector, however, this does not result in net negative nonenergy emissions. S3 sees a 73% reduction in fugitive emissions from oil and gas activities, which together with agricultural emissions reduction and enhanced natural carbon sinks, leads to net negative nonenergy emissions by 2050.
The Costs of U.S. Decarbonization
Fully decarbonizing the U.S. economy is economically and technically feasible. While this will require substantial investments for the deployment of clean technologies and supporting infrastructure, it can also cut costs through reduced energy bills and avoided expenditures on fossil fuels. Results vary under different fuel price assumptions and suggest that achieving economy-wide, net-zero emissions under reference oil and gas prices only costs $40 billion more than the Reference Scenario (RS) in 2030, representing 0.2% of U.S. GDP, and actually saves $113 billion by 2050 (or 0.3% of GDP) relative to the RS (Figure 4). This potential for long-term cost savings demonstrates the importance of decarbonizing the economy with effective and efficient policies. Furthermore, federal policies and investments to support the transition to a net-zero economy can be an engine for clean energy job creation and offer substantial health, social and economic benefits which are not captured in these results.
Figure 4: Net Modeled Costs in 2030 and 2050 for S3 Relative to Reference Scenario (in Billion 2019$) under Different Fuel Price Assumptions
Note: Modeled costs were calculated under three fossil fuel price assumptions from the Annual Energy Outlook 2020. Under a low oil price trajectory, net modeled costs in S3 are $70 billion higher in 2030 (0.3% of U.S. GDP) and $96 billion higher in 2050 (0.3% of U.S. GDP), compared to the Reference Scenario (RS). Under a high oil price trajectory, S3 results in net savings of $70 billion in 2030 (0.3% of U.S. GDP) and $428 billion in 2050, relative to the RS (1.2% of U.S. GDP).
Essential Next Steps for Congress
Our analysis reveals that tax credits for various low-carbon technologies, in combination with federal spending on infrastructure, can significantly reduce emissions in the power, transportation and building sectors, and thereby serve as critical building blocks for enabling the United States to meet it 2030 and 2050 climate goals. This makes it imperative that Congress quickly pass the Build Back Better Act.
In addition to extending the PTC and ITC through 2031, the bill makes such tax credits refundable for a 10-year period and allows clean energy developers to select either an ITC or PTC depending on their needs, providing them more flexibility and stability. Additionally, the bill establishes an ITC for building out high-voltage transmission lines. Such provisions can expand and modernize the U.S. power grid to support the transition to a clean energy economy.
The bill also outlines various other provisions which can support emissions reductions across different sectors of the U.S. economy. The bill provides a point-of-sale tax credit of up to $12,500 for EVs which can make EVs more affordable to a larger section of the U.S. population. In the buildings sector, the bill also establishes investments for energy efficiency improvements along with a consumer rebate program for the purchase and installation of heat pumps.
Furthermore, measures such as tax credits for clean hydrogen production and incentives for domestic manufacturing of clean energy components and hard-to-abate industrial sectors such as cement, steel, and aluminum can not only support emissions reductions, but also make U.S. industry producers and industries more competitive in a low-carbon future. Tax credits for carbon capture facilities and funding for agriculture, forests, and the country’s natural carbon sinks are other vital components of the bill as our analysis indicates NETs and enhanced natural carbon sinks have an important role to play in helping the United States reach net-zero by 2050.
Transitioning to a net-zero economy by 2050 will require a suite of federal policies including tax credits for low-carbon technologies, investments for building out critical infrastructure to support a low-carbon economy, and sector-specific performance standards, especially in the absence of an economy-wide carbon pricing mechanism. The Build Back Better Act offers vital tax credits and investments that can make clean energy and low-carbon technologies more affordable and accessible. Along with the bipartisan Infrastructure Investment and Jobs Act, passing the Build Back Better Act can boost the United States’ ability to confront the climate crisis and enable the nation to transition to a clean energy economy.
1Modeling by E3 estimated reductions in GHG emissions over the next 10 and 30 years under different policy and federal spending scenarios. The evolution of U.S. energy demand and supply and emissions reductions under these scenarios were assessed using E3’s PATHWAYS and RESOLVE models.
