Colorado Boosts Emission Reduction Goals and Climate Tax Incentives | Article

Through a series of laws passed by its legislature in May, Colorado ramped up its emission reduction goals while sweetening incentives for the adoption of end-use electric technologies, including electric vehicles, electric bikes, and heat pumps.

Governor Jared Polis signed the clean energy and climate measures on May 11, 2023, starting with S.B. 23-016, which raised the statewide goal from a 90 percent reduction in greenhouse gas emissions to a 100 percent reduction by the year 2050. The new law also establishes interim reduction goals for the years 2035, 2040, and 2045, making Colorado the first state to provide targets at consistent five-year intervals between now and the year of its final target.

As a strategy to help achieve its ambitious emission reduction goals, Colorado is banking on a series of tax credits and other incentives to encourage the adoption of end-use electric technologies. In addition to incentives built directly into S.B. 23-016, the legislature passed another bill, H.B. 23-1272, focused specifically on decarbonization tax credits.

By making electric vehicles more appealing, the law will help to address emissions from Colorado’s largest source of greenhouse gases, the transportation sector. Colorado taxpayers can claim a $5,000 tax credit when they purchase a new electric vehicle that costs less than $80,000, with an extra $2,500 available for vehicles that cost less than $35,000. Beginning in 2025, the tax credit value starts to drop incrementally each year. The state credits complement existing federal incentives that were expanded by the Inflation Reduction Act of 2022 (P.L. 117-169), including up to $7,500 in federal tax credits for qualifying vehicles. A Colorado taxpayer purchasing an electric vehicle that retails for $30,000 and meets Inflation Reduction Act standards—a 2023 Chevy Bolt, for example—could cash-in a combined tax credit of $15,000, effectively cutting the price in half.

“As we see the electricity grid continuing to get cleaner and cleaner, that will then contribute to [electric vehicles] on the road being cleaner and cleaner and not contributing to carbon emissions,” said Emily Richardson of the Colorado Clean Energy Fund. Colorado has already more than quadrupled its renewable electricity generation since 2010, taking steps towards Governor Polis’s goal of 100 percent renewable energy consumption by 2040. The recent legislation includes additional initiatives to shift Colorado’s electricity supply to clean sources, including geothermal and green hydrogen. If Governor Polis’s goal is met, electric vehicles and other end-use electric technologies in the state would run entirely on clean energy.

Electric bicycles are another option for clean transportation and have become increasingly popular in Colorado in recent years. The city of Denver rolled out an electric bicycle rebate program in 2022 which has been used by over 5,500 city residents since its introduction, while the Colorado Energy Office plans to launch a statewide income-based e-bike rebate program this summer. Building off of this momentum, H.B. 23-1272 offers an additional $450 tax credit for any Colorado resident who purchases an e-bike beginning in April of 2024. In contrast with other incentives around the country, this tax credit is open to all Colorado taxpayers and is not limited by income.

Another major contributor to the state’s greenhouse gas emissions is the building sector. Considering that 70 percent of homes in Colorado are heated primarily using natural gas, the electrification of heating systems presents a significant opportunity to cut emissions. H.B. 23-1272 includes a new system of tax credits for heat pumps, an electric alternative to gas furnaces, and extends existing heat pump tax credits through the end of 2023. Heat pumps often exceed 300 percent efficiency and can both heat and cool buildings. For air-source heat pumps, the credit starts at $1,500 for units purchased between 2024 and the start of 2026, then drops to $1,000 in 2026, and finally to $500 from 2029 through the end of 2032. Using the same time frames, the ground-source heat pump credit starts at $3,000, then drops to $2,000, and finally ends at $1,000.

Like the electric vehicle credit, Colorado’s tax incentives for heat pumps can be combined with federal incentives from the Inflation Reduction Act, including a tax credit worth up to either $2,000 or 30 percent of the price of the heat pump (whichever is smaller). Federal income-based rebates of up to $8,000 for heat pumps are also expected to be launched sometime in the next year. To further encourage widespread adoption, S.B. 23-016 prevents homeowner associations from banning heat pumps.

Colorado consumers will also be able to take advantage of a 30 percent point of sale tax credit for electric lawn equipment beginning in 2024.

The Colorado tax credits for electric vehicles, e-bikes, heat pumps, and lawn equipment are all structured so that retailers offer their customers a discount at the point of sale. Retailers can then redeem their tax credits at the end of the tax year. With this structure, consumers receive an immediate discount upon buying the technology, shifting the lag time in repayment onto the retailers and making the incentives more accessible for people who would otherwise be unable to cover the total cost up front.

Colorado’s pioneering climate legislation also comes at a crucial moment when massive amounts of federal funding are being distributed to advance climate action across the country. The Inflation Reduction Act includes nearly $9 billion for home efficiency and electrification programs alone. The availability of both federal and state tax credits makes end-use electric technologies more affordable in Colorado than ever before, opening the door to lower-income consumers who have historically been excluded from such benefits.

“If the measures are only available to people who are able to foot the upfront cost of a $30,000 home efficiency or electrification project, only the people who are affluent enough to initiate that project are going to be able to realize the energy savings that result from them,” Emily Richardson of the Colorado Clean Energy Fund said. “It would be more important to prioritize low- and moderate-income households that need those savings more.”

One study estimates that Coloradans who switch to heat pumps could save $530 in fuel costs annually, while those who switch to an electric vehicle could save $610 in fuel costs.

Colorado is not alone in having set ambitious climate goals: 13 other states have the dual goals of at least 75 percent reduction in greenhouse gas emissions and at least 75 percent electricity production from clean energy by 2050. By modeling how tax incentives can spur electrification and decarbonization in a more equitable way, Colorado is setting an example for other states considering strategies to cut their emissions and invest in an electrified future.

Author: Mariko Yatsuhashi