The United States, unlike its peer countries, does not have a carbon tax. The long-running question is whether the country needs one. Some carbon tax advocates were hoping to see such a measure in the Biden administration’s recently enacted Inflation Reduction Act, but the new law leaves that question unanswered. Rather than implement a carbon tax, the administration has decided to expand several clean energy tax credit programs and offer new tax credits.
Some may see this as a missed opportunity for the United States to align its carbon policy with that of other countries and put a price on carbon emissions. But the reality is that carbon taxation — specifically carbon pricing — is not a guaranteed solution to the global climate crisis. There is no globally agreed-upon price floor, so prices fluctuate considerably between countries. Meanwhile, international bodies such as the IMF and OECD are warning that current carbon prices are generally too low to seriously offset emissions. The current global average is $6 per metric ton of CO2. The IMF says it should be $75 per metric ton by 2030.
However, the Biden administration’s decision to encourage emissions reduction through green technology provides a different approach that bypasses carbon pricing concerns while promoting environmentally sustainable technologies. But the real proof will be in the results: The White House has set a target for the United States to halve emissions from their 2005 level by 2030.
The White House had contemplated a carbon tax in the fall of 2021. At the time, lawmakers were negotiating over the administration’s now-defunct Build Back Better bill, and both the White House and some congressional Democrats were interested in a minimum price of $15 per metric ton of carbon.
The Inflation Reduction Act is a pared-down version of the Build Back Better bill — which later died in the Senate — and its climate provisions do not veer into carbon pricing. Notably, the act dramatically increases the section 45Q tax credit for various forms of carbon capture, utilization, and sequestration projects. For example, the credit for carbon capture and storage from industrial and power generation facilities has increased from $50 per metric ton to $85 per metric ton. In the case of direct air carbon capture and storage, the credit more than tripled, from $50 per metric ton to $180 per metric ton.
The Inflation Reduction Act also makes it much easier for carbon capture, utilization, and sequestration projects to qualify for a 45Q credit. Previously, direct air capture facilities had to remove 100,000 metric tons of CO2 to qualify. Now, the threshold has been reduced to 1,000 metric tons. The law also makes it easier for facilities to benefit from the credit because they can receive it as a direct payment, rather than as a reduction in their tax liability.
Another big change involves investment tax credits and production tax credits for solar, electric, and wind power. The law earmarks $10 billion in ITCs for the creation of clean technology manufacturing facilities, such as those for electric vehicles, wind turbines, and solar panels. And a new clean electricity ITC under section 48E provides a credit of up to 30 percent, plus 10 percent bonuses, for facilities that are placed in low-income communities or meet other parameters.
On the production side, some of the Inflation Reduction Act's offerings include a new 10-year production tax credit for clean hydrogen under section 45V, which offers a credit of up to $3 per kilogram of clean hydrogen. And a new credit for clean electricity production under section 45Y offers a credit of 1.5 cents per kilowatt of clean electricity. Other major credits include a nuclear power production tax credit under section 45U and a new clean fuel production credit under section 45Z.
All told, these are sweeping changes that could significantly transform America’s green energy sector. They also present an interesting test case for whether the Biden administration’s carrot-vs.-stick approach of incentivizing green production, rather than taxing carbon emissions, will further the country’s goals.