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Don't Let Congressional Grinches Turn the Lights Out on the Energy Efficiency Tax Incentives

Meg Waltner

Posted December 10, 2013 in Curbing Pollution, Health and the Environment, Moving Beyond Oil, Solving Global Warming, U.S. Law and Policy

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The clock is ticking for four important energy efficiency tax incentives for home and business property owners and manufacturers that are set to expire at the end of this month. 

Energy efficiency is the cleanest, cheapest resource we have to cut our nation’s energy bills, while creating jobs throughout the economy and reducing emissions for years to come, making it truly the gift that keeps giving. But there are some grinches in Congress poised to allow the demise of tax incentives that play an important role in accelerating the availability of energy-saving products and practices by encouraging homeowners and businesses to invest in high-performing buildings, equipment, lighting, and appliances.

Also at stake are critical incentives for clean energy, which my colleagues Kit Kennedy and Pierre Bull detailed yesterday. These renewable energy incentives – crucial for the continued expansion of clean onshore wind power and investment in offshore wind – are also set to expire at year’s end.

Adding insult to injury, while these clean energy provisions that save money and cut pollution will disappear, the 100-year-old suite of fossil fuel giveaways will keep lining the pockets of Big Oil while pumping carbon and other dangerous pollution into the air.  

In contrast,  ACEEE estimates that the energy efficiency incentives alone, if extended and enhanced, could add $8.3 billion to the nation’s gross domestic product through 2030 and create hundreds of thousands of jobs, while averting  16.4 quads of fuel use (about equal to 16% of total US energy use in one year)  and 3.2 million gigawatt hours of electricity (for comparison, total electricity sales in 2011 were 3.7 milllion gigawatt hours) cumulatively over 15 years.

The expiring energy efficiency incentives are:

  • The deduction for commercial building owners who improve their building’s efficiency by 50 percent compared to a code baseline (Section 179D);
  • The credit to builders who reduce energy use in new homes by roughly 30 percent compared to a 2006 code-built home (Section 45L);
  • The credit to manufacturers of super high efficiency dishwashers, refrigerators, and clothes washers (Section 45M); and
  • The credit to homeowners who invest in energy efficiency improvements that meet certain efficiency criteria, such as a new high efficiency air conditioner or new windows (Section25c).

Why the Incentives Are Needed

Although energy efficiency is beneficial to both consumers and businesses as it saves them money on their energy bills, people often don’t invest in more efficient products even though any additional upfront costs quickly pay back in utility savings. The reasons vary, but can include lack of upfront capital, insufficient information on potential energy savings, unavailable products, or because the person making the purchasing decision isn’t the one who benefits from the energy saving (such as a landlord buying an air conditioner when the tenant pays the electricity bills).

The government has a role to play to encourage investment in energy efficiency for multiple reasons, including:

  • Energy efficiency creates jobs. For example, manufacturers hire workers to make the more efficient products, which lead to energy savings that consumers and businesses can spend on other goods and services that generally provide more jobs per dollar spent than electricity production.
  • Efficiency reduces our nation’s electricity use, which means less coal is burned and less pollution emitted that exacerbates asthma and other health problems. Dirty power generation also contributes to global warming, increasing the risks of extreme storms, drought, food shortages, and other problems.
  • Reduced electricity use also means less strain on our transmission grid, leading to fewer power outages, which can be deadly for the sick and elderly.

As explained in detail in NRDC’s new Issue Brief, tax incentives play an important role in transforming the market for high-performing products. For instance, when the tax credit for new energy efficient homes (45L) was enacted in 2005, almost no houses on the market met the criteria of a roughly 30% improvement. After a few years of a $2,000 incentive for each home that met the efficiency target, the market share climbed to 10 percent. This is impressive on its own, but the reach of the incentive has actually been much further. To comply with the credit, builders must rate their home with the Home Energy Rating System (HERS). This helped familiarize builders with the HERS system, which combined with other factors, has resulted in its use with a whopping  40 percent of the new homes market. Most recently, the newly updated 2015 national model energy code will allow builders for the first time to comply with it using a HERS rating – and the code requires much higher  efficiency levels than the original version of 45L. While the tax incentive can’t take all the credit, this likely would not have happened without it and is an example of how all of these policies work together to transform the market and at a very low cost to the federal government.

While the new homes credit has arguably been the most successful of the four tax incentives, all of the performance-based incentives have helped shift markets towards greater efficiency products. While in a perfect world, we would have the opportunity to modify and enhance the incentives – upping stringency levels, making sure they all pay for performance, and restructuring them to increase utilization – the important thing now is to extend them so as not to cut off this source of support for energy efficiency. These incentives have been incredibly effective overall at making our homes and workplaces more efficient, reducing energy bills, cutting pollution and creating jobs throughout the economy.

Congress should act swiftly to extend them.  If it doesn’t, we’ll see clean energy suffer while Big Oil keeps polluting and pocketing billions in taxpayer dollars.  Now, no one is quite certain why anyone would support that kind of outcome—perhaps, like the Grinch, their hearts are two sizes two small.

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Switchboard is the staff blog of the Natural Resources Defense Council, the nation’s most effective environmental group. For more about our work, including in-depth policy documents, action alerts and ways you can contribute, visit NRDC.org.

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