Carrots and Sticks

What makes an effective climate policy? From a government’s perspective, stimulating the clean energy transition needed to protect us from climate change is much like trying to drive a stubborn mule. You can give it a whack with a stick (establish punishment-based rules and regulations), or dangle a carrot in front of it (provide positive incentives). Both work, especially in combination, but relying too much on the stick can make the mule aggressive or, eventually, depressed.

All stick and no carrot makes Scruffy sad :( Source.

Similarly, lawmakers are often hesitant to pass regulations that are overly-prescriptive or economically constraining when it comes to climate action, preferring broader, relatively toothless goals like the US’s unofficial commitment to cutting greenhouse gas (GHG) emissions 50 to 52 percent below 2005 levels by 2030 or California’s law requiring GHG emissions be 40 percent below 1990 levels by 2030. These act as market signals indicating the direction and speed the government would like to go, which, along with some nice juicy incentives, are akin to showing Scruffy both stick and carrot and letting him choose.

This has been the most successful strategy we’ve yet come up with for kickstarting and accelerating the transition to things like renewable energy, clean transportation, and energy efficient technologies, and it’s worth taking a closer look at some of the specific policies that have been enacted along with their effects to get a better idea of where we are and where we are headed. We’ll focus our attention on the US in part one of this blog and California in the second as, respectively, the single largest historical contributor to climate change and the national leader on climate action.

U.S. Climate Policies

Let’s start with the United States joining the United Nations Framework Convention on Climate Change (UNFCCC) back in 1992, one of the very first significant climate actions taken by the country. This historic agreement put in place the diplomatic building blocks for individual nations to start regulating their climate emissions, and coincided with Congress passing the Energy Policy Act of 1992 that created the first federal renewable energy production tax credit (PTC). This provided ongoing tax credit opportunities that were based on actual units of renewable electricity produced, supplementing an early version of a renewable investment tax credit (ITC) that had been allowed to expire for most renewable technologies. This ITC had provided tax credits of between 10 to 15 percent of the cost of the renewable energy project (mostly wind turbines at that time) but failed to require equipment to be functional or effective, resulting in significant tax credits being given to low-quality, unreliable technologies. The Energy Policy Act made the ITC permanent for solar and geothermal, but limited the credit to only 10 percent.

The next year, the Clinton Administration released a federal Climate Change Action Plan that established a goal of returning to 1990 GHG emission levels by 2000 and numerous programs like ENERGY STAR® designed to help meet that goal. This plan was one of the nation’s first big steps toward meaningful GHG reductions, although the US’s refusal to sign the UNFCC’s Kyoto Protocol in 1995 (which would have put an international legal backing to climate pledges) was a clear signal that this nation was not ready to step up and be a global leader on climate action. This back-and-forth commitment to meaningful climate policy would become characteristic of the United States, typically reflecting which political party was in power.

Two notable exceptions to this trend occurred during the second Bush Administration, which saw the expansion of the solar ITC from 10 to 30 percent in 2005 as well as the federal Environmental Protection Agency (USEPA) beginning to collect and publish GHG emission records from major sources in 2007. Tripling the ITC fundamentally changed the economics for solar projects across the country, reducing risk and driving new investments, aided by an extension through 2016 by the Emergency Economic Stabilization Act of 2008. These factors were instrumental in helping mature the industry from high-cost, low-efficiency technologies to the cheap, efficient, and reliable panels of today — especially in conjunction with USEPA’s new GHG record-keeping (akin to posting “Scruffy’s Weekly List of Sins” on the barn). This expansion of USEPA was the culmination of eight years of legal decisions that ended with a 5-4 vote in the Supreme Court to require the agency to regulate GHGs as air pollutants, a weighty responsibility USEPA had done its best to avoid.

But by 2009 the agency had come around and officially declared GHGs to be hazardous to human health and welfare due to their climate-changing effects. The American Recovery and Reinvestment Act (ARRA) was signed by President Obama the same year, which, among other things, invested over $90 billion in the clean energy economy through incentives like grants, loans, rebates, and tax credits, as well as seed funding for the Department of Energy’s Advanced Research Projects Agency-Energy (ARPA-E) program. These investments added over 2 million news jobs to the economy by Q1 2010, expanding the clean energy workforce by 80,000 jobs and stimulating the development of new technologies that further drive market growth.

This important milestone was followed by 11 years of our Congressional Branch being either divided on climate action or resolutely set against it. However, despite the dearth of new or expanded incentives the clean energy industry saw significant growth throughout this period due to pre-established programs and regulations like the solar ITC, which saw a roughly 15-fold increase in awarded credits between 2010 and 2021. These long-term, reliable incentives proved themselves successful in building investor confidence and shifting project economics in favor of clean technologies, evidenced by the explosive increase in both wind and solar generation during this time. Their popularity helped push through a few extensions to keep them going through 2021, decreasing the credit percentage annually.

Fortunately, 2021 also saw a presidential administration and unified Congress committed to a green economy transition, resulting in the Bipartisan Infrastructure Law (BIL) later that year and the Inflation Reduction Act (IRA) the next. These historic bills not only provided nearly $2 trillion in climate and infrastructure investments, but reconfigured the way in which those funds would be distributed to drive more dollars toward American manufacturing, workers, and communities in need. The IRA alone created or modified 20 tax credits and allocated tens of billions of dollars through grant and loan programs. The ITC and PTC were both extended through 2024 and are set to be replaced post-2024 with technology-neutral, emissions-based versions that will run through 2036. These credits also received bonus adders for achieving labor standards, domestic content goals, and low-income community benefits that can boost their total value up to 70% of project costs or $3.35 per kWh.

While the full impacts of these investments haven’t yet been fully realized, the Energy Information Agency forecasts that US solar production will nearly double by 2025 compared to 2023, and wind production will grow by 46 billion kWh. The slew of new and enhanced incentive carrots, particularly the 14-year guarantee of lucrative tax credits, will keep industry growth rates high through the coming decade — as long as climate-hostile forces are kept out of power this November.