Is Energy Tax Policy the Way to Drive the U.S. Climate Change Fight? No national energy policy? No price on carbon? Nevermind. There are tax credits.

Is Energy Tax Policy the Way to Drive the U.S. Climate Change Fight?

No national energy policy? No price on carbon? Nevermind. There are tax credits.

Can a breakthrough in the U.S. climate change fight come from the energy tax policy reform proposed by outgoing Senate Finance Committee Chair Max Baucus (D-MT).

“It is time to bring our energy tax policy into the 21st century,” explained Senator Baucus at the December announcement of his energy tax policy makeover. “Our current set of energy tax incentives is overly complex and picks winners and losers with no clear policy rationale.”

Before stepping down to become U.S. Ambassador to China, Baucus suggested “dramatically simpler” incentives that would:

-replace 42 inefficient and unnecessary incentives with two simple and transparent ones,

-drive domestic and clean energy production,

-be technology-neutral and reward all clean sources, and

-give investors certainty about the benefits and their phase out.

Renewables get 45 percent of the existing $16.4 billion in tax breaks, according to the Congressional Budget Office, while 29 percent go to energy efficiency, 20 percent go to fossil fuels and 7 percent to nuclear energy.

But more than half are “too short-term to effectively stimulate investments,” Baucus’s proposal observed. “If we continue to extend current incentives, they will cost nearly $150 billion over ten years.”

Baucus proposed replacing them all with a tax credit for clean electricity and a tax credit for clean transportation fuel.

The clean electricity credit would provide a ten-year production tax credit (PTC) of up to $0.023 per kilowatt-hour or an investment tax credit (ITC) of up to 20 percent. These would be available to any domestic energy facility, including wind, solar, nuclear, natural gas and clean coal projects. The cleaner the output, as determined by the Environmental Protection Agency (EPA), the more of the incentive it would earn.

The ITC could go to retrofitting existing facilities with carbon capture technologies that cut emissions 50 percent. If any facility’s emissions rise, the ITC would be recovered.

A clean transportation PTC of up to $1.00 per gallon or ITC of up to 20 percent would similarly go to any fuel source, based on their EPA-determined emissions reduction.

The proposal also requested guidance on a carbon tax.

Reaction

Advanced Ethanol Council Executive Director Brooke Coleman commended the proposal’s elimination “of inequities favoring fossil fuels.”

The Baucus proposal “will take cash away from capital-intensive businesses like ours and significantly reduce future domestic investment,” read a letter to Baucus from oil and gas association executives. Tax policy should “support and encourage domestic investment and the jobs such investment creates.” Their letter did not address Baucus’s focus on emissions reductions.

“It is not surprising fossil fuel investors don’t like government tipping the scales toward their competitors,” noted Chadbourne & Parke Partner Keith Martin. “But the Baucus proposal puts a mechanism in place to address emissions. If climate change worsens, as it looks like it will, all you have to do is tinker with the numbers.”

The two Baucus incentives offer long-term certainty crucial for renewables developers. But they would begin phasing out when U.S. emissions fall 25 percent below 2013 levels.

That is “a grossly unambitious target,” according to ThinkProgress’s Jeff Spross, and “reform could drive even more cuts in emissions if the monetary size of the credits were bigger.”

The credits would go into effect in 2017. That allows transition time for beneficiaries of 11 current incentives the Baucus proposal omitted. Incentives for energy efficiency, clean vehicles, transmission, and fossil industry programs were dropped because they don’t provide “the largest bang-for-the-buck in reducing air pollution and enhancing energy security."

The 2017 implementation coincides with the drop in solar’s 30 percent ITC to 10 percent.

Solar and wind are expected to also soon lose the accelerated depreciation tax benefit key to equity investors in wind and solar projects and funds. “Its days are numbered,” Martin explained. “Both the President and Republicans oppose it.” Baucus would replace it with pooled depreciation that provides less than half the benefit, he said.

The Solar Energy Industries Association acknowledged Baucus’s intent “to make the convoluted U.S. tax code simpler and fairer” but noted that “reducing the solar ITC and dramatically altering the way companies depreciate their assets could jeopardize future clean energy development.”

While the proposal ups the post-2016 ITC from 10 percent to 20 percent, said a spokesperson for a major national solar rooftop installer who asked not to be named, “that Section 48 10 percent ITC is the only permanent renewable energy tax credit in the code. Trading away that permanence is significant.”

Wind would get its full PTC extended to 2016 and then beyond to the 25 percent emissions reduction, the spokesperson added. But solar would take an immediate 10 percent “ITC hit” in 2017.

The plan is “a windfall” for the nuclear, natural gas, and coal industries, one renewables advocate wrote, “and would effectively neuter truly renewable industries like solar and wind.”

But Interim President/CEO Michael Brower of the American Council on Renewable Energy, which advocates for all renewables, called it a “long-term policy commitment to clean energy investment.”

And the American Wind Energy Association, currently fighting to regain its expired PTC, called it “a sound policy option to provide domestic energy producers with stability for the years to come” and acknowledged Baucus’s effort “to find common ground.”

“There is little likelihood of sweeping tax reform before next fall’s midterm elections but this suggests give and take is possible,” wind developer Jacob Susman, CEO of OwnEnergy, agreed. “A modified accelerated depreciation will hurt but could be worth getting a long-term and certain PTC. A ton of money is dying to come into wind but investors won’t make long term plans if they don’t have some certainty.”

Baucus’s incentive phase out creates some uncertainty but there is already uncertainty in on-again-off-again incentives, Martin observed. The phase out’s transparency would allow developers to plan for it.

Environmentalists are concerned that natural gas facilities would be rewarded for electricity generation emissions cuts but the highly potent greenhouse gas methane released in producing and shipping natural gas would not be penalized.

Baucus would use the approximately $75 million saved by the reforms to cut the corporate tax rate, according to Politico’s Darren Goode and Brian Faler. Some Democrats would rather see the savings go to other tax cuts or to support energy efficiency and low carbon transportation.

“Lowering the corporate tax rate undermines the incentives because they attract corporate tax equity investors,” Martin said, “but Baucus has to negotiate tax reform with corporations so it is either that or decrease the national debt.”

The Baucus proposal “is unlikely to go anywhere anytime soon,” Goode and Faler wrote, because it eliminates “scores of incentives with broad bipartisan support.”

But it could “shape the debate over how Congress funds clean energy in the years ahead,” according to the Washington Post’s Brad Plumer.

“Until now the conversation has been about whether to extend existing incentives or replace them,” noted Martin. “If and when Congress gets around to taking up the matter, these ideas will now be in the mix.”