Costs and Climate Benefits of the Tax Incentives
Note: The value of gross benefits of tax incentives as captured by $51, $121, and $250 SCC. Net benefits are $205-245B under $51 SCC, $436-581B under $121 SCC, and $1-1.5T under $250 SCC, depending on the cost scenario. Gross benefits and costs are presented in 2020 USD, discounted at 2%, and year-specific SCC is applied.
Source: Assessing the Costs and Benefits of Clean Electricity Tax Credits, February 2022
Tax credits to boost clean energy deployment were an important part of the climate provisions within the Inflation Reduction Act. EPIC and Rhodium Group measured how the benefits of broadly similar incentives stacked up to the costs. The credits are expected to reduce carbon emissions by 5.1 billion to 8.1 billion metric tons by 2050. Using various estimates of the social cost of carbon (SCC)—the monetized damages of an additional metric ton of CO2—as a guidepost, these reductions would translate to $335 billion to $1.8 trillion in benefits, depending on technology costs and the value of the SCC. On the cost side, the incentives would increase operating costs for electricity generation and require start-up costs for the government to fund them. Combined, these costs range from $130 billion to $309 billion. These costs are significantly less than the benefits that would result from the reduced emissions. In fact, the benefits outweigh the costs by as much as 4:1, depending on the scenario. It is important to note that these benefits do not include co-benefits from reductions in conventional air pollution, which would likely further improve the cost effectiveness.
When stacked up against other policies, the tax credits are one of the least expensive ways to reduce carbon emissions, costing around $33 to $50 per ton. This is lower—and likely significantly lower—than the value of the social cost of carbon, currently set at $51 per ton but recent evidence suggests that it is likely 3-5 times higher. In other words, the benefits of reducing carbon emissions are likely significantly higher than the cost per ton of reducing emissions through the tax incentives.