Introduction

The Inflation Reduction Act, passed in 2022, contained many provisions designed to curb the impact of climate change while also addressing economic issues. The main approach to achieving this involves offering residential tax credits for clean energy. These credits enable Americans to get back up to 30% of their expenditure on clean energy upgrades for their homes as a Tax Credit. This credit applies specifically to the cost of new clean energy equipment, such as solar panels and solar water heaters. Originally part of the Build Back Better Act, these tax credits were incorporated into the Inflation Reduction Act after the former failed to become law.

Renewable energy is better for both the environment and human health than the continued use of fossil fuels, which have a destructive impact. According to the United Nations, “more than 13 million deaths around the world each year are due to avoidable environmental causes, including air pollution. In 2018, air pollution from fossil fuels caused $2.9 trillion in health and economic costs, about $8 billion a day.” Transitioning to Renewable Energy will not only improve air quality by reducing pollution but also yield positive economic benefits by reducing the costs associated with pollution.

However, the process of switching from fossil fuels to renewable energy sources is expensive and labor-intensive. It is estimated that the cost of moving the US power grid from fossil fuels to renewable energy will be approximately $4.5 trillion. The residential tax credits for clean energy create a strong incentive for consumers and businesses to invest in renewable energy technology like solar panels. However, environmentalists and policymakers disagree about whether a tax credit is the best way to bring about widespread use of renewable energy. 

Arguments in Favor

Advocates of the policy highlight the benefits of renewable energy as a rationale for introducing residential tax credits. A cost benefit analysis shows that the benefits of reduced CO2 emissions and air pollution far outweigh the monetary cost of the tax credit. In the time since the Inflation Reduction Act was passed, more businesses and consumers have made use of it than originally anticipated, showing it works as an effective incentive. In other words, this tax credit will bring Americans the numerous benefits of reduced fossil fuel use. 

The tax credit is also predicted to lead to economic development, in line with the goals of the Inflation Reduction Act. The residential tax credit for clean energy is projected to save American households around $5 billion per year by 2024. This credit not only reduces the initial expense of transitioning to renewable energy but also leads to lower electricity expenses because electricity from renewable sources is lower than that of electricity from fossil fuels. Moreover, the growing demand for renewable energy equipment like solar panels will encourage investments and innovation in the renewable energy sector. This, in turn, will stimulate job creation as workers will be required to construct the necessary infrastructure for expanded renewable energy usage.

Arguments in Opposition

Opponents of the tax credit argue that the policy could result in economic challenges rather than benefits. A key concern is that a tax credit would incur government expenses, leading to higher spending and an increased deficit, potentially undermining economic stability during an inflation crisis. Additionally, if the tax credit successfully boosts renewable energy adoption, its cost would likely rise—indeed, the current cost has exceeded initial projections. Some also contend that while proponents claim the tax credit will drive economic growth and innovation in the renewable energy sector, the effects of a market-distorting subsidy like a tax credit are often uncertain. It might even discourage innovation among renewable energy companies, as the tax credit alone could create sufficient demand for their products.

Another criticism is that tax credits are an inequitable way to achieve the goal of a faster transition to renewable energy. A study from the University of Chicago found that tax credits for clean energy have historically disproportionately aided high-income Americans, as “the bottom three income quintiles have received about 10% of all credits [since 2006], while the top quintile has received about 60%.” This is because a lot of Americans don’t have sufficient tax obligations to fully utilize a tax credit. Consequently, many who oppose the tax credit propose a more equitable alternative: residential direct pay. This approach enables beneficiaries to receive a payment equivalent to the tax credit they would have qualified for.

Looking Forward

Both positive and negative future developments are expected to come from the residential tax credit for clean energy. Its efficacy in increasing clean energy usage is likely to spur economic development and reduce the costs of renewable energy as demand goes up, thus also leading to a beneficial environmental impact. However, this increased demand will also likely increase American dependence on foreign manufacturing, as solar cells do not need to be American-made in order to qualify for the tax credit, and the majority of the world’s solar cells are currently made in China. Increased demand for solar panels will lead to US consumers buying more solar cells imported from China. 

The residential tax credit for clean energy is anticipated to bring about both positive and negative outcomes in the future. Its effectiveness in promoting clean energy adoption is expected to drive economic growth and lower renewable energy costs through increased demand, yielding positive environmental effects. Nevertheless, this heightened demand may also lead to greater reliance on foreign manufacturing, particularly from China, since solar cells are not required to be American-made to qualify for the tax credit. As a result, the surge in solar panel demand could lead to increased purchases of imported solar cells from China by American consumers.

While most policymakers agree that switching to renewable energy will be beneficial for Americans in the long run, there remains debate about whether subsidizing renewable energy with a tax credit is the best way to bring about this switch as opposed to alternatives like residential direct pay or simply allowing market forces to work uninterrupted.