It remains to be seen if the Democrats can still pass parts of the Build Back Better (BBB) proposal, but there is widespread support, in particular, for its program to extend and expand energy tax credits. Utility companies and environmental groups broadly agree that using tax policy to incentivize clean energy development will drive significant greenhouse gas emissions reductions in the electricity sector—by as much as 73 percent in 2031 as compared to 2005 levels, according to researchers. At a cost of more than $300 billion over ten years, if it were to become law roughly as proposed in BBB, the energy tax credits may end up being the largest climate change investment of the Biden presidency—if not ever.

Yet, the very scale of the program raises troubling questions for another key priority of the Biden Administration: ensuring a just climate transition for BIPOC communities—the communities most harmed by the fossil fuel economy. This is the overarching frame of Biden’s Justice40 initiative, which sets as a goal that 40 percent of climate-related investments be targeted for the benefit of disadvantaged communities—those at highest risk from the impacts of climate change. Such energy tax credits should also have implications for tax policy implementation under Biden’s Executive Order “Advancing Racial Equity and Support for Underserved Communities Through the Federal Government,” which requires agencies to develop strategies for rooting out racial inequities in federal programs.

Energy tax credits follow a broader trend of using federal tax incentives for social objectives such as homeownership, retirement savings, and health-care coverage. But rejecting direct investment and public decision-making in favor of private incentives like tax credits has also proven to be highly inequitable. In 2019, the distributional inequities of an estimated $1 trillion in income tax expenditures were stark: 50 percent of the benefits went to the top quintile of households and only 9 percent to the bottom quintile.

Although research in this area is limited, energy credits—for rooftop solar, energy efficiency and electrification upgrades, and electric vehicles—appear to be even more inequitable. At least one major study found that, between 2006 and 2012, approximately 60 percent of total individual energy credits worth about $18 billion went to the top quintile of households, while only about 10 percent went to the bottom three quintiles. These energy credit inequities have contributed to sharp demographic disparities in solar deployment, and it appears that race, more than income, is the strongest predictive factor. A 2019 national study found that, even controlling for income and homeownership, Black-majority neighborhoods installed between 60-70 percent less rooftop solar compared to neighborhoods with no racial or ethnic majority. Nearly half of all majority Black neighborhoods did not have any rooftop solar installed.

The BBB energy tax credit program includes several targeted reforms addressing equity, but major gaps remain. In some cases, even where equity is addressed, the legislative language is silent or ambiguous when it comes to project criteria and definitions of benefit, raising concerns that equity goals and policy implementation will not be adequately aligned.

One important part of the proposal is an Investment Tax Credit (ITC) “adder” for solar projects in low-income communities. If prevailing wage, apprenticeship, and domestic content requirements are all met, developers receive a 10 percent bonus on top of a maximum 30 percent credit for solar projects located in low-income communities or on tribal land. In the case of small solar or wind facilities installed on affordable housing or as part of a “qualified low-income economic benefit project,” the bonus is 20 percent.

Economic benefit projects, as defined in BBB, must provide at least 50 percent of the financial benefits of the electricity generated to low-income households, including electricity acquired from the project at below-market rates. This is, however, the only specification to qualify a project as an economic benefit project. The proposed legislation is silent, for example, on criteria for local employment or community ownership, which are critical aspects of an equitable clean energy transition. Further, there are no criteria for addressing environmental justice—for example, tying bonus credits to local pollution reductions. Also missing is any requirement for consultation with community organizations and residents of the host communities.

The legislation also uses a narrow, income-based definition of “disadvantaged communities,” unlike the White House’s mapping tool for the Justice40 initiative, which incorporates environmental burdens, energy burdens, climate risks, affordable housing and transit access, health vulnerabilities, linguistic isolation, in addition to other factors. Under BBB’s narrower definition, the most vulnerable communities, especially from an environmental justice perspective, may not benefit the most from low-income solar credits.

BBB’s proposed extension of residential/individual energy credits (which the Joint Committee on Taxation projects would cost approximately $42 billion over 10 years) does include one major reform aimed at equity: making the credits refundable. Previously, households with little or no federal income tax liability–predominantly low-income and BIPOC households–were simply excluded from the program; 7 out of 10 households do not have enough tax liability to fully benefit from solar credits and 4 out of 10 cannot benefit at all. Under the BBB proposal, at least in principle, households will be able to obtain credits regardless of taxable income. However, the individual tax credits for solar and energy efficiency top out at 30 percent of costs paid, available equally for most households; it seems likely that affordability for low-income households with little discretionary income will continue to be a significant barrier even if the credits are refundable. A more equitable approach would make credit values variable by income, so that poorer households would receive more.

Other major gaps in equitable access to clean energy and energy savings simply aren’t fixable through the tax code. Most importantly, renters—there is a Black-white homeownership gap of roughly 30 points—are categorically excluded from residential credits because it is not their role to make capital improvements, and many landlords have no incentive to make energy-saving improvements since renters would primarily benefit from reduced utility bills. The “split incentives” for energy improvements in rental housing could be solved in part by regulation: Energy efficiency standards could be integrated into building codes, rent regulation, or municipal emissions reduction mandates for residential buildings, and these requirements could be publicly subsidized. Continuing to rely on tax credits, as BBB does, will do little to reduce endemic barriers to energy savings in rental housing.

Addressing inequities in a tax program of this scale should start with oversight and programmatic evaluation, which largely falls to the Department of Treasury. Corporations, developers, and other project sponsors claiming investment and production tax credits should have reporting requirements to provide information for assessing the equity impacts of the resulting clean energy buildout. The Department should also develop robust and measurable criteria for the low-income community solar program, such as local job creation and pollution reductions, community ownership, and stakeholder engagement. Additionally, oversight of individual energy credits should focus on distributional impacts, accounting for both income and race; and this should inform programmatic changes or revisions of the law that will reduce persisting disparities in the program.

A climate transition that is overly reliant on private incentives is very likely to perpetuate or even worsen systemic disparities and inequities inherited from the fossil fuel economy. This is a serious risk of any national climate strategy that largely rests on energy tax credits while falling short on direct, targeted investments like those envisioned in Justice40. Today’s stark distributional inequities in clean energy access are a case in point. It is essential that supporters of clean energy tax credits embrace robust oversight and necessary reforms of the program, as well as other policies that would align federal climate goals with the needs of disadvantaged communities.