Sen. Baucus releases proposal to overhaul energy tax incentives

By Erin Voegele | December 19, 2013

Senate Finance Committee Chairman Max Baucus, D-Mont., has released a discussion draft of legislation that aims to overhaul U.S. energy tax incentives. According to information released by his office, the streamlined incentives are designed to be more predictable and technology neutral.

“It is time to bring our energy tax policy into the 21st century,” Baucus said. “Our current set of energy tax incentives is overly complex and picks winners and losers with no clear policy rationale. We need a system of energy incentives that is more predictable, rational, and technology-neutral to increase our energy security and ensure a clean and healthy environment for future generations.”

Information released by Baucus notes that current law contains 42 different energy tax incentives, including more than a dozen for fossil fuels. An additional 10 tax incentives exist for renewable fuels and alternative vehicles, along with six credits for clean electricity. A statement issued by Baucus notes that of the 42 energy incentives, 25 are temporary and expire every year or two. If these incentives are extended as is, they are estimated cost nearly $150 billion over the next decade.

The new proposal includes a dramatically simpler set of incentives that are technology neutral and designed to promote cleaner energy. It includes a technology-neutral tax credit for the production of clean electricity. According to the draft, the credit would be open to renewable resources, fossil resources, and anything in between. The cleaner the facility, the larger the available credit. The cleanliness of the credit would be determined by a simple ratio of the greenhouse gas (GHG) emissions of a facility divided by its electricity production.

The incentive would be available as either a production tax credit of up to 2.3 cents per kilowatt hour or an investment tax credit of up to 20 percent. The production tax credit would be indexed for inflation and could be claimed on a single facility for a maximum of 10 years. It would not be available to facilities that begin to operate before Jan. 1, 2017. However, facilities that begin production before that date could be eligible for an extended, current law production tax credit.

The maximum investment tax credit would be for 20 percent of the cost of the investment. Generally, it would be available only for facilities that begin operation on or after Jan. 1, 2017. However, after 2016, the credit could be claimed for existing facilities that undertake a carbon capture and sequestration retrofit that captures at least 50 percent of carbon dioxide emissions.

To transition to the new incentives for clean electricity, the proposal would allow three expiring incentives to continue through 2016. Under the proposal the Section 45 credit for renewable electricity production, the Section 48 investment tax credit for electricity and Section 25D credit for residential renewable electricity investments would continue through 2016.

The proposal also includes a technology-neutral tax credit for the domestic production of clean transportation fuels. The credit would be open to renewable resources, fossil resources, or anything in between. The cleaner the facility, the larger the credit. It would be available as either a production tax credit of up to $1 per gallon, or an as investment tax credit of up to 20 percent.

According to the proposal, the clean transportation inventive would generally be available to fuels that are approximately 25 percent cleaner than conventional gasoline, and the cleaner the fuel, the bigger the credit, up to a maximum of $1 per gallon. The cleanliness of the fuel would be determined based on how clean a given production process is on a lifecycle emissions basis, as determined by the U.S. EPA. Energy efficiency would also be a consideration. Under the proposal, energy efficiency would be defined as the energy density of a fuel compared to conventional gasoline. The per gallon credit amount would be determined by multiplying a fuel’s cleanliness value by its energy efficiency.

The production tax credit could be claimed for a maximum of 10 years after a facility begins to operate, but could not be claimed for fuel produced before Dec. 31, 2016. The investment tax credit would be available for facilities that begin to operate after Dec. 31, 2016.

To transition to the new clean transportation incentives, the proposal would extend the Section 40, 40A and 6426 credits for transportation-grade, renewable and alternative fuels.

The two tax credits would be available long-term, but would not be permanent. The credits would be phased out once the GHG intensity of each market declined by 25 percent.  According to the proposal, the clean electricity credit phases out over a period of four years after the GHG intensity of U.S. electricity generation declines to the point that it is 25 percent cleaner than 2013 emissions.

The clean transportation incentive could only be claimed for fuel produced and used in the U.S. The credit would be phased out over a four year period once the GHG intensity of the transportation fuel pool declines to a level that is 25 percent cleaner than conventional gasoline.

The proposal would allow a variety of other energy tax provisions to end via either expiration or repeal.

The Advanced Ethanol Council has weighed in on the proposal. “We commend Chairman Baucus and his team for taking on the challenge of reforming the federal tax code as it applies to energy. It is very clear that Chairman Baucus sees the big picture when it comes to tax reform; namely, that energy must be at the center of the conversation, and the code must be reformed to: remove inequities favoring fossil fuels, clean up redundancies, reward innovation and spur economic growth,” said Brooke Coleman, AEC Executive Director. “Senator Baucus has rightly put all existing policies on the table while proposing a new path that will achieve these goals and ensure that the United States leads instead of follows when it comes to developing new technologies and producing less carbon intensive energy.”

Coleman also noted that some additional details need to be worked out. “We look forward to working with Chairman Baucus and the Senate Finance Committee to ensure that any new piece of legislation covers the critical bases when it comes to maximizing investment,” he said. “Inequities cannot be allowed to survive this process or we will continue to ship opportunity in the disadvantaged sectors overseas. The eligibility criteria must be carefully crafted and Congress must be very careful not to create investment uncertainty when it tries to address when and if these incentives phase-out. The backdrop of this process is not a free market. The code has been de-risking fossil fuel investment for roughly a century, and that legacy will stand if not corrected carefully.”

The Biomass Power Association has also commented on the proposal, calling it an interesting, and potentially helpful, approach to leveling the playing field among all renewables. "With respect to biomass, it’s important that Chairman Baucus has recognized its enormous greenhouse gas benefits when compared to fossil fuel sources like natural gas and coal,” said Bob Cleaves, president and CEO of the BPA. “At the same time, we are concerned that the proposal creates regulatory uncertainty. The use of waste wood and forest residues for energy is undeniably beneficial from a carbon perspective, and we don’t need another, separate proceeding at EPA to reach that conclusion.”

Baucus has invited members of Congress, key stakeholders and the general public to provide feedback on the draft. Comments are requested by Jan. 31. A short summary of the proposal, a discussion draft, and a draft in legislative language are available on the Finance Committee website.


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