Is the Solar Tax Credit Going Away?

Federal Tax Credit (1)

Back in the dark ages of 2007 there were only 8,775 megawatts of solar energy on the US grid—less than one-tenth of 1 percent of America’s electricity supply. At that time, Congress had just passed a bill that gave solar a fighting chance: It allowed businesses and individuals to deduct 30 percent of the cost of installing new solar panels from their taxes. The tax credit became essential to helping solar expand not only with solar panel installations, but also to attract investors in the solar installation companies. Today there are well over 50 gigawatts (GW) of installed photovoltaic capacity.

“If you want to encourage people to make the big investments into solar installation companies, you need these long-term stable policies to encourage that,” says Ed Fenster of SunRun.

Riding on the tail of this massive scale success, Congress extended the credit a few years ago for another eight years. However, now the solar industry’s tax break may be coming to an end!  Starting in 2020, the value of the subsidy will fall for three years until it ends for residential solar and permanently drops to 10 percent for commercial solar. In response, a bipartisan trio of representatives and one Democratic senator brought the Renewable Energy Extension Act to Congress, which would keep the tax credit at 30 percent for another five years, but don’t count on it extending this time.

Abigail Ross, the CEO of the Solar Energy Industry Association recently stated, “The impact of the tax policy on our industry has been incredibly consequential.”  She cited a 10,000 percent increase in solar capacity, nearly a quarter-million new jobs, and $140 billion in investment as evidence of the subsidy’s effect.

In July of this year (2019), more than 1,000 solar companies also signed a letter in support of the new bill. Previous extensions of the tax credit received broad bipartisan support, however the current presidential administration has been antagonistic to clean energy, which is what makes the possibility of this extension far from certain.

No one can argue that the solar investment tax credit has done wonders to put America’s solar industry on the map. However, there are some experts who now argue that this subsidy is not the most effective way to reduce greenhouse gas emissions and fight climate change.  Despite the facts which clearly show the tax credit fueling investment in renewable energy in the first place, this is just another roadblock to getting an extension for the current tax credit.

There is another option.  It’s called a production tax credit, which gives money back based on how much energy gets produced, rather than the current credit which is based on how much money is invested. Wind energy companies have actually relied on this kind of subsidy since 1992. They receive 2.4 cents per kilowatt-hour of energy produced during the first 10 years that a wind farm is in operation. Although there is some support for this type of incentive in the solar market, it hasn’t gained the popularity it did with wind energy.  Hopefully we will see more traction with this option before the current tax credit dies. 

Back when the production tax credit was first introduced, it was the first time in history that the US government allowed companies to choose what kind of subsidy they wanted. It was also a rare opportunity to study one subsidy versus the other in a real-world scenario. Last year, Todd Gérardin, an economist at Cornell University, coauthored a paper for the National Bureau of Economic Research which showed that, on average, subsidizing wind energy production, rather than investment in wind farms, tended to be more cost-effective for the government and produced more electricity. By extension, this means production credits are more likely to reduce carbon emissions from coal and natural gas plants.

The reason for this, Gérardin says, is that wind farms operating on a production subsidy are incentivized to produce as much energy as possible. To the extent that the amount of electricity produced by wind farms reduces the amount of electricity produced by fossil fuels, production tax credits are therefore more effective at reducing pollution. Although Gérardin and his colleagues focused on wind energy in their research, he says the same logic could apply to solar energy.

Fenster, however, says there is still good reason to support an investment tax credit for solar energy rather than a production credit. More investors are attracted to an investment tax credit because they can see its payout the same year a solar facility is built, rather than over 10 years. Given that solar energy still represents only 3 percent of the United States’ energy production, Fenster sees investment tax credits as the more effective route, and he isn’t alone.

“The real reason you’d want to extend the tax credit is we know we need more of this type of energy,” Fenster says. “It’s economics 101: If you want more of something, make it cheaper.”

But if the goal is to reduce greenhouse gas emissions, Gérardin says that subsidizing renewables is only the “second best” option. He states that it would be better to place a carbon tax on coal and gas plants resulting in pushing the energy producers to implement technologies like carbon capture, as well as invest in more wind, solar, nuclear, and hydropower.

That’s exactly what the wind industry is now pushing for. Its production tax credit is also winding down starting this year. Instead of campaigning for its renewal, the American Wind Energy Association is advocating for carbon tax credits as well as subsidies that support offshore wind farms and wind energy storage technologies. The problem, of course, is that taxing pollution from nonrenewable energy is an incredibly divisive political issue. It involves overcoming entrenched political support for the fossil fuel industries as well also accurately assessing just how much that tax should be, a far from trivial calculation and a battle that requires maneuvering at the highest level of our government.

So lacking political support for a carbon tax—Washington state’s failed attempt to implement one last year was the most recent test—climate-minded politicians are left to approach the same old indirect ways of curbing emissions.

In June, Nevada senator Catherine Cortez Masto wrote a letter urging her fellow senators to support an extension of the solar investment tax credit. Cortez Masto highlighted its importance to supporting 240,000 solar jobs and its role in fueling the solar industry’s ongoing growth. But most importantly, she pointed out that it’s the only major federal policy supporting the deployment of renewable energy.

“In the absence of any other national policy or program to deliver carbon reductions that are essential to making progress on climate change, we must continue the tax incentive policies that constitute the single most effective tool our nation has had for investing in renewables,” Cortez Masto wrote.

The solar investment tax credit may not be the best way to reduce greenhouse gas emissions, but it’s better than no policy at all—which is what we’ll have if it’s not extended.  Every homeowner is urged to get involved in the fight for renewable energy growth.  Whether you’ve already experience the money saving effects of solar or you are still considering its benefits, the collective voice of homeowners is key!

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