Clean Energy Policies and Incentives: Driving the Transition to a Renewable Future
As a society, we’re constantly hearing about the dangers of climate change and pollution, yet changing how we generate and use electricity has been a complex and lengthy process. Thus, local, state, and federal governments have been incentivizing American individuals, businesses, and utilities to invest in renewable energy.
Global spending on clean energy has increased substantially since the beginning of the Covid pandemic. In fact, over $1.2 trillion has been invested since early 2020. The World Economic Forum estimates that global energy investments could continue to increase to $2 trillion annually by 2030.
In this article, we will delve into the federal policies and incentives available to American business owners, homeowners, tenants, and commuters to aid in the transition to clean, renewable energy. It will take these incentives, investments, policy changes, and more to reach the US goal of net zero carbon emissions by the year 2050.
Commercial Tax Credits for Renewable Energy
The US government offers several major tax credits to encourage businesses and utilities to invest in and generate renewable electricity. These incentives drive innovation by inspiring new and cleaner ways of generating electricity.
They have created jobs and new industries that didn’t exist even a few decades ago, all while reducing the carbon footprint and pollution emissions of the power generation industry.
Business Energy Investment Tax Credit
The Business Energy Investment Tax Credit (ITC) is a federal income tax credit that encourages commercial and industrial facilities to invest in and generate renewable energy. This one-time credit is determined based on the dollar amount of the investment and is earned once the equipment is placed into service.
For projects that initiate construction before December 31, 2024, the Inflation Reduction Act of 2022 extends the ITC. This allows for a credit of up to 30% of the installed equipment’s cost. Certain projects may also qualify for bonus credits.
These tax credits are available for investments in renewable energy installations such as solar panels, heat pumps, windmills, batteries, or other energy storage devices like fuel cells. They are also offered for lesser-known sources of renewable energy such as biomass or landfill gas collection and microturbines.
Renewable Electricity Production Tax Credit
Companies already generating electricity from renewable sources can benefit from tax breaks provided by the Renewable Electricity Production Tax Credit (PTC). This provides a tax credit for every kilowatt-hour (kWh) of electricity generated by renewable energy sources. These sources include solar, wind, tidal, biogas, geothermal, and hydropower.
The exact credit amount is dependent on the energy generated and its source, and it is adjusted annually to account for inflation and other factors. The energy producer can claim this tax credit on their federal income tax return.
As with the ITC, the PTC has been expanded in the Inflation Reduction Act of 2022 in an effort to drive additional growth in the renewable energy sector.
Modified Accelerated Cost-Recovery System (MACRS) for Renewable Energy
The Modified Accelerated Cost-Recovery System (MACRS) is a method that many US businesses use to calculate the depreciation of assets over time. Doing so allows businesses to deduct the costs of equipment investments, as many purchases will lose value over time.
The MACRS was modified by the Inflation Reduction Act of 2022, allowing companies to expense 100% of the cost of certain renewable energy equipment and property. This means the entire system cost can be deducted in the year it is placed in service, reducing taxable income and increasing cash flow for the business making the purchase.
If the equipment doesn’t qualify for the 100% expense, it can still benefit from an accelerated depreciation period. This allows businesses to deduct a larger portion of the renewable energy equipment’s cost earlier in its useful life.
These tax benefits effectively reduce the payback period for an investment in renewable energy. This reduces overall risk and leads to quicker profitability, making these qualified investments in renewables increasingly attractive for all businesses.
Residential Incentives for Renewable Energy
While you probably aren’t managing a power plant or transforming your backyard into a wind farm, there are still plenty of opportunities for the average person to be part of the renewable energy movement.
The US government has implemented a range of targeted policies, incentives, and tax breaks to empower Americans to invest in and incorporate renewable energy into their daily lives.
These initiatives are designed to increase the adoption and utilization of clean energy sources. When homeowners take action to use efficient electric appliances, vehicles, and home heating and cooling, we will see considerable improvements in reducing carbon emissions and air pollution across the energy industry.
Residential Clean Energy Credit
If you are looking to make clean energy investments where you live (whether you rent or own), take advantage of the Residential Clean Energy Credit. This credit will provide up to 30% of the cost of a new, qualified, clean energy installation for your home (installed between 2022–2033). It includes:
- Solar electric panels
- Solar water heaters
- Wind turbines
- Geothermal heat pumps
- Fuel cells
- Battery storage technology (beginning in 2023)
This credit is a wonderful incentive to invest in your home and inspire your neighbors to do the same! In addition to going green, these investments can also increase the value of your home.
If you want to sell your home or upgrade in the future, these investments may make your home more attractive to potential home buyers. All of the details on the Residential Clean Energy Credit can be found on the IRS website.
Energy Efficient Home Improvement Credit
If you’re working with a smaller budget but still looking to make an impact, there are government incentives available for improving the energy efficiency of your house or apartment.
It all starts with a home energy audit, which is a professional assessment of your specific home and appliances to determine where improvements can be made to increase the energy efficiency of your home. The home audit itself, along with qualified improvements, can all be expensed on your taxes and qualify for the Energy Efficient Home Improvement Credit.
You can improve your home’s energy efficiency by investing in weatherproofing and improved insulation. This will prevent heat loss during the winter and heat gain during the summer.
You can also upgrade your equipment, such as your air conditioner, water heater, and furnace, to a more energy-efficient model. All of these improvements qualify for the tax credit, which covers 30% of the cost.
Plug-In Electric Drive Vehicle Tax Credit
Travel and commuting are major contributors to air pollution and carbon emissions. According to the International Energy Agency (IEA), in 2021, transportation had the greatest dependency on fossil fuels among all sectors, requiring 37% of the CO2 emissions generated by end-use sectors.
Fortunately, the US government provides incentives for people looking to get away from traditional gasoline-fueled cars and invest in the future of electric cars.
New electric, plug-in hybrid, and fuel cell electric cars that are purchased in 2023 (and later) may be eligible for a federal tax credit of up to $7,500. Before you purchase, you can confirm the requirements and applicability of this tax credit here.
Note this credit applies to personal vehicles, but if you have commercial use for clean energy vehicles, there is a separate tax credit that applies to businesses.
There is also a great incentive if you are looking to purchase a pre-owned electric vehicle (EV). Thanks to the Federal Tax Credit for Pre-Owned Electric and Fuel Cell Vehicles, you can get a credit of up to $4,000 when you buy a used electric car.
Alternative Fuel Vehicle Refueling Property Credit
The use of electric vehicles will only grow if we also increase the number and availability of electric charging stations. For this reason, the Alternative Fuel Vehicle Refueling Property Credit covers up to 30% of the cost of installing EV chargers.
This tax credit applies to both homeowners (maximum of $1,000) and business owners (maximum of $30,000) who want to install charging stations.
The Future of Clean Energy Policies and Incentives
The threats of climate change and pollution have made clean, renewable energy a top priority for individuals, companies, and governments worldwide.
We can all make improvements in our homes, commutes, and spending habits to support investment in renewable energy. These government incentives and tax credits make it easier to invest in a more sustainable future.
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About the Author:
Natalie Szymiczek is a passionate freelance copywriter dedicated to researching and writing about topics that contribute to a better world. She strives to create informative and engaging content that raises awareness and inspires positive change. When she’s not crafting compelling articles, you can find Natalie immersed in a good book, shuttling her kids to their various activities, or killing it on the pickleball court. Learn more about her on LinkedIn.