Tax Credits for “Clean Electricity”—Projected Effects on CO2 Emissions and the Generation Mix

Tax Credits for “Clean Electricity”—Projected Effects on CO2 Emissions and the Generation Mix

INSIGHTi

Tax Credits for “Clean Electricity”—Projected
Effects on CO2 Emissions and the Generation
Mix
January 23, 2023
Reducing greenhouse gas emissions was a key policy objective of recently enacted budget reconciliation
legislation, commonly referred to as the Inflation Reduction Act of 2022 (IRA; P.L. 117-169). Experts
view decarbonization of the electric power sector as necessary to achieve broader climate goals.
Numerous analyses provide a range of projections on how the IRA is expected to affect greenhouse gas
emissions over time. This Insight uses uniquely detailed information from National Renewable Energy
Laboratory (NREL) model estimates to focus on the potential effects of tax policy on electric power
sector emissions.
In December 2022, NREL released a set of 70 simulated electric power sector scenarios, based on a range
of possible future conditions. These scenarios are projections developed using a set of sophisticated
models. While models are often useful tools for informing energy policymaking, it is important to note
that (1) models are sensitive to selected model inputs; and (2) models are often limited in their capacity to
capture all potentially relevant real-world factors. Detailed information on the modeling methodology and
assumptions can be found in NREL’s 2022 Standard Scenarios Report.
The figures below rely on two of NREL’s 70 scenarios to highlight modeled effects of the IRA’s tax
provisions in the electric power sector.
 The Base Case, or mid-case, scenario is a current policy projection (i.e., includes the
IRA) that uses “central assumptions for demand growth, resource availability, fuel price,
and technology inputs.” As the NREL report notes, this scenario is intended to serve as a
reference point against which alternatives can be compared. The models do not attempt to
include all elements of the IRA. NREL selected IRA’s tax policies as potential major
drivers of changes in the electric power sector.
 The No IRA scenario provides projections assuming that the IRA’s tax credits for “clean
electricity”—production tax credit (PTC), investment tax credit (ITC), tax credits for
carbon capture and sequestration (CCS), and tax credits for nuclear power production—
had not been enacted.
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Comparing the “Base Case” and “No IRA” scenarios illustrates how NREL’s projections suggest that the
IRA’s tax provisions are expected to be associated with relatively rapid CO2 emissions reduction in the
electric power sector into the 2030s. Absent the IRA’s tax provisions (the “No IRA” case), NREL expects
power sector emissions would have continued recent downward trends, although at a slower pace than is
expected with the IRA.
In the base case scenario, projected power sector emissions begin to increase in the late 2030s. Under the
IRA, the PTC and ITC for zero-emissions electricity phase out when greenhouse gas emissions from the
electric power sector fall to 25% or less of 2022 levels, which is projected to occur in the mid-2030s in
NREL’s base case scenario. The CCS tax credits will not be available for projects beginning construction
after December 31, 2032. The zero-emission nuclear power production credit is also set to terminate on
December 31, 2032. As these tax credits expire, projections show the trend in power sector emissions
reversing, with emissions rising from the late 2030s through 2050.

Source: CRS calculations and graphic based on NREL’s 2022 Standard Energy Scenarios.
Notes: MMT=mil ion metric tons. Projections span 2022 through 2050. See the 2022 Standard Scenarios Report for more
information on modeling assumptions and limitations.
Examining the trends in generation across technology types can be helpful in understanding emissions
trends. In NREL’s modeling, the IRA’s tax incentives are associated with increased overall electricity
generation. Electricity generated using renewable resources is expected to increase at a faster rate with tax
credits than the models indicate would have been the case had the tax credits not been enacted.
Generation from coal and natural gas (without CCS) declines through the 2030s, although generation
from these resources is projected to increase as tax credits for zero-emissions electricity phase out or
expire.
NREL’s models suggest that the IRA’s tax credits for coal and natural gas with CCS lead to generation
using this technology, when the tax credits are available. Generation with CCS is expected to decline as
the tax credits expire. NREL attributes this to natural gas plants with CCS operating below their capacity

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factor once credits expire. Deployment of batteries is also supported by tax credits in the IRA, and the
share of electricity generation attributable to batteries increases in the base case (under the IRA).
NREL’s models suggest that electricity generation from nuclear is similar in the case with the IRA, which
includes tax credits for nuclear power generation, or without. Nuclear power generation facilities are
generally found not to be subject to retirement in either scenario, although new nuclear capacity is not
added.

Source: CRS calculations and graphic based on data and results from NREL’s 2022 Standard Energy Scenarios.
Notes: Projections span 2022 through 2050. CCS is coal or natural gas with carbon capture and sequestration (CCS). The
Other category is energy imported from Canada. See the 2022 Standard Scenarios Report for more information on
modeling assumptions and limitations.
If emissions reduction in the electric power sector is not sustained when tax credits expire, this could be
viewed as indicative of the need for additional policies if emissions reductions targets are to be met.
These trajectories are highly uncertain. For example, the IRA’s tax incentives for advanced energy
manufacturing are not explicitly included in these models. Thus, it is possible that more domestic
advanced energy manufacturing could reduce the cost of low-emissions electricity equipment, leading to
more deployment of renewables than modeled. Unaccounted for changes in transmission infrastructure
and networks that support more renewables could also change the model’s results. Unexpected changes in
natural gas prices could also affect the pace of renewables deployment. While there is a high degree of
uncertainty in these models, they might provide a benchmark for policymakers when evaluating the
effectiveness of climate-related policies, including the tax credits for zero-emissions electricity in the
IRA.
This product was supported by contributions from Ashley Lawson, Analyst in Energy Policy, and
Jonathan Ramseur, Specialist in Environmental Policy.

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Author Information

Molly F. Sherlock

Specialist in Public Finance

Disclaimer
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