How Green Subsidies Work—Some Are More Valuable Than Others

AInflation Reduction Act (the landmark climate legislation passed this week in the Senate and poised for passage by the House Friday) has a major purpose: to motivate more people to electrify. By subsidizing “green” purchases—from solar panels to heat pumps to electric vehicles—the legislation aims to reach households that would otherwise struggle to afford such a transition.

As this Rewiring America breakdown demonstrates, subsidies can come in all sizes and shapes. The buyers see certain subsidies as more attractive and beneficial than others, depending on when or how they are implemented. Experts say that while cost is important to all buyers, subsidy details are often more crucial for low-income consumers than their wealthy counterparts.

Stevens Institute of Technology’s July survey found that 52% of U.S. adults believe green energy has more benefits than its cost. Only 36% of those polled are willing to pay more. What’s more, the survey found that cost is a consideration for all people, regardless of how likely they are to seek out green energy technologies for personal use.

“If you want to really push people to look at clean energy technologies, you need to be looking at it from an economic perspective,” says Philip Odonkor, assistant professor at the School of Systems and Enterprises at Stevens, who commissioned the survey. “It’s cost that drives action.”

Continue reading: The Inflation Reduction Act’s Name Says A Lot About The Climate Fight

John Paul Helveston, an assistant professor at George Washington University’s Department of Engineering Management and Systems Engineering, has researched the impact of different subsidies. By surveying adults’ preferences of different incentives—effectively simulating the buying process in a variety of scenarios—he found that a $7,500 cash rebate lost value when it was offered in the form of a tax credit. Rebates immediately reduce the purchase price. To get tax credits, however, consumers must pay all costs until tax time. Otherwise, they could lose any or all of their taxes if they owe less that $7,500.

Helveston concluded that those who live in homes above the U.S. median income were devaluing the $7,500 tax credit by $1,000. Those living below it devalued the subsidy by $2,440 or about a third.

The $7,500 subsidy in Helveston’s study isn’t entirely hypothetical. Before the Inflation Reduction Act was passed, buyers of electric cars could get up to $7500 as a tax credit for purchasing a vehicle. That program sidelined consumers who couldn’t afford the upfront cost.

The new bill doesn’t entirely fix that refundability problem for electric vehicles: the subsidy will continue to exist only as a tax credit, not as a rebate. As it stands now, tax credits will not be granted to automakers unless they meet certain material or assembly requirements. This could potentially take many years. Helveston believes that other provisions of the bill will make it more affordable to buy electric vehicles for middle-income buyers. The new $4,000 tax credit for electric vehicles will be available to buyers who are less expensive than buying new ones. Also, the credits would not apply to ​​sedans over $55,000 or SUVs and trucks over $80,000, nor would they be available if the buyer’s income exceeds $150,000 (for single filers) or $300,000 (for joint filers).

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Additionally, car buyers who owe very little in taxes can “assign” the credit to their dealerships, which could then pass the subsidy back to the consumers in the form of a discount. “Presumably that would translate to [the customer], lowering the price at the point of sale,”says Helveston, who’s cautious about how it will work in practice. “But you now have this middleman who’s the dealer who may not lower that price as much as they’re getting on their tax credit. However, the assignment aspect of assignability I feel is important. It was a good move.”

Other green home purchases will get a tax credit for certain upgrades, including better insulation and heat pumps. For lower-income buyers however, these purchases will be covered by a rebate. It will be up to the state energy offices to determine when and how they will roll out rebates.

“From the buyer’s side, I think [the subsidies] are all moving in the right direction,” says Helveston. “And it’s all supported by a lot of research that’s backing it.”

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