The $3.5 trillion budget bill could transform the US power sector—and slash climate pollution

In the coming weeks, Congress may pass one of the most important climate policies in US history.

The $3.5 trillion budget plan includes a provision known as the Clean Electricity Payment Program, which would use payments and penalties to encourage utilities to increase the share of carbon-free electricity in the total they sell each year. If it works as hoped, the legislation would ensure that the power sector generates 80% of its electricity from sources like wind, solar, and nuclear plants by 2030, cutting more than a billion tons of annual greenhouse-gas emissions.

The measure would mark a foundational step in President Joe Biden’s ambitious climate plan, which aims to put the nation on track to eliminate climate pollution from electricity generation by 2035—and achieve net-zero emissions across the economy by midcentury.

There are real questions, though, about whether the program will achieve its aggressive targets. How the nation’s complex electricity sector actually responds will depend heavily on how the agency that implements the program designs it, and particularly where it sets the payments and penalties, some economists say.

It’s also still unclear if the measure will pass in anything like its current form—or at all.

How would it work?

The Clean Electricity Payment Program is a twist on a clean electricity standard, a regulation numerous states have implemented that requires utilities to reach certain levels of clean electricity by specific years. The proposal mainly opts for payments and penalties over binding mandates because that could enable it to pass under a legislative process known as budget reconciliation, which requires only a simple majority of votes in the Senate.

Once companies boost their share of clean electricity above an annual target, they would earn payments for every additional megawatt-hour of electricity they sell that comes from carbon-free sources, according to an analysis by the Clean Air Task Force. Those that fail to reach that threshold would have to pay a fee.

The program wouldn’t require all electricity suppliers to reach the same levels at the same times; it would adjust the yearly goals according to the point from which each is starting. But the overall target would be for the US power sector to produce 80% of its electricity from clean sources, on average, in the next nine years.

US Senator Tina Smith of Minnesota has championed the measure, which the Department of Energy would likely oversee.

The budget bill also includes federal tax incentives for building more clean electricity generation. With those credits, the program would be funded at around $150 billion to $200 billion, according to Third Way, a center-left think tank in Washington, DC.

Added together, the measures in the package would amount to “the biggest, most ambitious climate and clean energy policies that the US has ever enacted, by far,” says Josh Freed, head of the organization’s climate and energy program.

What would the program do?

If the measures achieve the goal of 80% clean electricity by 2030, it would more than double the share of carbon-free electricity in the US and significantly accelerate the pace of the transition to clean energy.

Currently, about 38% of the electricity generated in the US comes from carbon-free sources: 18% from renewables and 20% from nuclear power.

Pushing the power sector to 80% would cut carbon dioxide emissions by 86% from 2005 levels, according to an analysis by the Natural Resources Defense Council, included in an Evergreen Collective report published this month.

That would eliminate well over a billion tons of annual climate pollution in the next nine years. By comparison, the power sector reduced annual emissions by a little more than 800 million tons in the 14 years leading up to 2019, driven almost entirely by the shift from coal to natural gas and the increase in renewables.

How else does it help?

That takes a giant whack at one of the largest sources of US climate pollution. The electricity sector produces a quarter of the nation’s total greenhouse gases, second only to the transportation sector at 29%.  

Cleaning up the power sector also makes it easier to address other major emissions sources. It ensures, for instance, that far more of the electricity used to charge electric cars, trucks, and buses is carbon free. The same goes for things like heating and cooking if regulations require more homes and businesses to shift to electric stoves, heat pumps, and other cleaner technologies.

“If we want to achieve real, deep cuts in emissions, we’ve got to do it through clean electricity,” says Leah Stokes, an assistant professor of political science at the University of California, Santa Barbara, who has consulted on the policy.  

Meanwhile, other studies have found the shift to around 80% carbon-free electricity would spur $1.5 trillion of investments into clean energy, create hundreds of thousands of jobs, and save hundreds of thousands of lives over the coming decades through reduced air pollution.

But will it really get us to 80% clean electricity by 2030?

“Who knows?” says James Bushnell, an environmental and energy economist at the University of California, Davis.

The downside to going with incentives over strict mandates is that you can’t guarantee the end result. The government will need to make some imperfect predictions, or continually assess and refine how big the sticks and plentiful the carrots will need to be to bring about the desired changes, Bushnell says.

It will also have to carefully design the program to prevent the industry from gaming it. He sees scenarios where utilities could pack together big additions of clean electricity in certain years and narrow misses in others, in ways that could minimize penalties, maximize payments, and slow the progress of the program.

Another problem is that much of the data today on US electricity generation and sales is self-reported, while the “cleanness” of electricity purchased in real-time markets isn’t always clear. So the government will likely need to set up stringent processes for monitoring and verification, and develop reliable ways to certify or track where carbon-free electricity originates and where it ends up.

What would it mean for electricity prices?

Most assessments of the Clean Electricity Payment Program conclude it will drive down consumer prices. That’s because it’s funded by the federal government, and utilities would be required to use the payments to benefit customers.

“In a traditional [clean electricity standard], the cost is carried in electricity rates, and therefore by utility customers,” noted the Evergreen report, which Stokes co-wrote. In contrast, the payment program would shield Americans from rising electricity bills, the report said.

But Bushnell says that even if those performance payments are used to reduce prices, it’s still possible they could tick up in some instances. That’s because utilities will all be competing for limited sources of both old and new clean electricity, which would drive up prices. Prices for dirty electricity could fall for the same reasons of market demand and supply. The actual results from market to market remain to be seen, he says.

So why not just enact mandates?

While simply mandating utilities to sell set levels of clean electricity by certain times offers a clearer path to the desired result, the proposed payment plan has one powerful advantage: it’s politically feasible.

Specifically, it could enable legislators to include the proposal in the budget reconciliation process. That allows Congress to approve legislation on certain issues, related to taxes and spending, with 51 votes in the Senate—precisely the number Democrats have if Vice President Kamala Harris steps in to cast a tie-breaking vote.

A regulatory rule wouldn’t qualify for reconciliation, requiring it to secure 60 votes to overcome the threat of a filibuster.

So does that mean it will definitely pass?

Not at all.

There are tight restrictions on what sorts of measures can be included in the reconciliation process, under what’s known as the Byrd rule. The Senate can’t consider “extraneous” provisions requiring any proposals to alter federal spending or taxes in ways that are more than incidental to other policy aims, among other tests.

So there’s always a chance that the Senate parliamentarian could rule that certain measures don’t qualify, stripping them from the final bill altogether.