Article Summary –
The Inflation Reduction Act’s energy tax credits are still being implemented, but discussions are already opening up on the Tax Cuts and Jobs Act provisions, set to expire at the end of 2025. A recent Brookings Institution study explored options for climate tax policy changes for when they expire, including the potential implementation of a carbon fee. The study also explored extending the Inflation Reduction Act’s energy credits and discussed the cost-effectiveness of various aspects of these provisions, with the goal of providing a roadmap for potential legislative changes.
Future of Climate Policy & Energy Tax Credits Within Tax Code
As the Tax Cuts and Jobs Act provisions prepare to expire in 2025, tax experts are gearing up for the complex negotiations surrounding a potential new tax bill. Focal points of these discussions will likely be a carbon fee and the Inflation Reduction Act’s (IRA) tax credits. The use of the tax system as a means of enacting climate policy is largely due to congressional budget rules.
Extending all elements of the Tax Cuts and Jobs Act could cost an estimated $4 trillion over a 10-year budget window, suggests Kimberly Clausing of the University of California Los Angeles School of Law. However, the opportunity exists for fiscal resource building and efficient decarbonization through the implementation of a moderate carbon fee.
IRS Role in Climate Policy
The IRA has significantly expanded the IRS’s role in implementing climate policy. A new study from the Brookings Institution predicts that the tax code will continue to be a key tool for crafting climate policy, considering options from repealing the IRA’s energy credits to extending them and incorporating a carbon fee.
The Brookings study outlines potential outcomes if the IRA credits are expanded, repealed, or a carbon fee is added. These alternatives each carry their own estimated cost per unit of emissions, with a carbon fee and partial repeal of the IRA considered the most economical at $18, compared to $69 for maintaining the current law without new emissions rules.
Considerations for IRA Expansion
Expanding the IRA’s credits would incur an estimated fiscal cost of $530 billion between 2026 and 2035. However, the introduction of a carbon fee could raise $590 billion over the same period. This could further increase to $1.39 trillion with a partial repeal of the IRA’s credits.
Evaluating IRA Efficiency
An assessment of the efficiency of each of IRA’s provisions is challenging given that many proposed regulations are yet to be finalized. According to estimates, the production tax credit and investment tax credit for the electricity sector are the most efficient, ranging between $27 and $87 per ton. Conversely, the credit for carbon capture is estimated at $129 – $418 per ton of carbon dioxide.
Carbon Fee Potential
The reintroduction of a potential carbon tax is a viable option. As stated in the Brookings study, carbon taxes can accelerate decarbonization and increase the deployment of carbon capture and sequestration and hydrogen. There are numerous potential plans for a carbon tax, including various rates and potential exemptions.
The shape of any future bill around energy tax changes is uncertain, due to the impending election. However, experts suggest that the options outlined in the Brookings study offer a valuable insight into the future possibilities for energy tax policy.
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