America should lead the equitable clean energy transition, and the tax code can help

A small, relatively inexpensive tweak to the tax code could help by unlocking billions of new investments. That money could deliver thousands of new jobs, a cleaner grid, and homegrown leadership in critical industries.

Helen Kendrick of SunPower Corp. walks alongside SunPower Corp. solar panels that were installed on four buildings on the Microsoft Corp. campus in Mountain View, Calif. TONY AVELAR/BLOOMBERG NEWS

As world leaders meet at this year’s UN Climate Change Conference in Glasgow, American leadership and competitiveness are being tested. China is rapidly becoming the world’s largest builder of solar panels, batteries, and wind turbines because of aggressive state-led policies.

The United States should seize that same opportunity to drive 21st-century innovation, not with state-directed development, but with smarter and more equitable incentives to encourage the kind of public-private solutions that have driven the American economy for the past two centuries. President Biden’s new Build Back Better framework sets the right tone, with the largest effort to combat climate change in American history. It includes financial incentives for American-made climate solutions that promise to deliver more affordable and cleaner energy to Americans, reduce carbon pollution by well over a gigaton by 2030, and create hundreds of thousands of good-paying union jobs.

A small, relatively inexpensive tweak to the tax code could unlock billions in new climate investments from retail, accredited, and institutional investors. That money could deliver thousands of new jobs, a cleaner and more resilient grid, and homegrown leadership in critical industries while giving a clear message to the world: The energy revolution will be made here in America, and it won’t leave anyone behind.

Changing clean energy tax credits to a direct-pay model would ensure that clean energy developers, especially in under-resourced and historically disadvantaged communities, have access to capital.

A study from Bloomberg NEF last year found that nearly 59 percent of solar projects and 67 percent of wind projects scheduled to start construction in 2020 and into this year were still in need of tax equity financing. With an industry this critical to national and economic security, and with increasingly disproportionate climate impacts on the poorest and most vulnerable, that’s a level of uncertainty that the United States and the world can no longer afford.

As previous programs have demonstrated, direct payment can catalyze additional private and local investment and multiply the impact of every federal dollar spent.

A comprehensive direct-pay policy for commercial and residential clean energy could also help the United States lead the equitable transition to the clean energy economy at little cost to taxpayers. Inclusive financing approaches that allow for genuine community ownership and benefit from climate solutions are currently hindered by a highly inefficient tax equity system. By allowing a small subset of banks and wealthy investors to control which projects are worthy of tax equity, the current policy prevents most community-level solar projects, such as those on churches, schools, community centers, small businesses, and nonprofits, from getting done.

Direct pay would also open up access to clean energy financing for historically disadvantaged populations and small businesses. Paired with crowd-investing, that means more ways for everyone to invest directly in climate solutions, create and retain local wealth, and benefit from the transition to clean energy.

Unlocking a new level of inclusive investment is not only critical for the United States to meet its goal of cutting emissions 50 to 52 percent below 2005 levels by 2030 as well as equity goals, but it could also drive growth in domestic manufacturing for key materials. Ambitious bipartisan legislation to secure domestic innovation in semiconductors, quantum computing, and more has already passed a divided Senate. Spurring investment in equally crucial energy technologies should not be overlooked.

Thanks to the tireless work of many of the House leaders on clean energy, the reconciliation package included a direct pay or refundable component. Direct pay and incentives for energy efficiency are key elements for inclusion in a package that will truly deliver local climate solutions faster than the pace of the problem.

Senate moderates have called on congressional leaders to prioritize a competitive tax code. Direct pay is a bold step in that direction — it’s simple, cost-effective, and sets up the nation to compete in critical technologies on the global stage. Crucially, it also would create a more equitable tax code to drive additional capital and community ownership into under-resourced urban and rural areas that risk being left behind in the transition to a clean energy economy.

This moment offers a historic opportunity for US leadership to lay the foundation for a healthy, just, and sustainable future for now and for future generations. Passing direct pay as part of the Build Back Better package is one big way that Congress can help.

Franz Hochstrasser is CEO and cofounder of Raise Green. He served in the Obama administration at the White House, USDA, and State Department, where he helped negotiate the Paris Agreement.

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