Sen. Baucus draft for energy tax reform focuses on clean production of electricity and fuels; repeals plug-in vehicle credits
19 December 2013
Senate Finance Committee Chairman Max Baucus (D-Mont.) introduced the latest in a series of discussion drafts to overhaul the US tax code. This new staff discussion draft focuses energy tax policy on stimulating domestic, clean production of electricity and transportation fuels, which account for 68% of energy consumed in the US. It also would repeal a number of current tax incentives, including those for plug-in electric vehicles and fuel cell vehicles.
Under current law, there are 42 different energy tax incentives, including more than 12 preferences for fossil fuels; 10 different incentives for renewable fuels and alternative vehicles; and 6 different credits for clean electricity. Of the 42 different energy incentives, 25 are temporary and expire every year or two, and the credits for clean electricity alone have been adjusted 14 times since 1978. If Congress continues to extend current incentives, they will cost nearly $150 billion over 10 years.
Furthermore, the draft notes, existing energy incentives provide different levels of subsidies for different technologies, picking winners and losers with no discernable policy rationale. Some clean energy production, such as generating electricity by capturing excess heat at manufacturing facilities, is ineligible for the production tax credit because it is not expressly listed in the code, while other types of energy production generating significant air pollution receive sizable tax subsidies.
To address these issues, the staff discussion draft proposes a smaller number of targeted and simple energy incentives that are flexible enough to accommodate advances among fuels and technologies of any type. These proposals are intended to promote domestic energy production and reduce pollution. Specifically, the discussion draft offers proposals to:
Establish a new, technology-neutral tax credit for the domestic production of clean electricity;
Establish a new, technology-neutral tax credit for the domestic production of clean transportation fuel;
Consolidate almost all of the existing energy tax incentives into these two new credits, with appropriate transition relief; and
Provide businesses and investors with more certainty by making the new incentives long enough to be effective, but phasing them out once clearly defined goals have been met.
Specific proposals include:
Clean electricity tax credit. The staff discussion draft replaces the existing patchwork of incentives for clean electricity with a new tax credit that is technology-neutral and performance-based. The cleanliness of the generating technology determines the size of the credit. For any type of electricity generation, a business can choose whether it wants to receive the credit as a production tax credit (which is claimed each year), or an investment tax credit, which is claimed when the facility begins to operate. The tax credit expires when the cleanliness of the US electricity market increases significantly.
Any facility producing electricity that is about 25% cleaner than the average for all electricity production facilities will receive a tax credit. The cleaner the facility, the larger the credit. Cleanliness is defined by a simple ratio of the greenhouse gas emissions of a facility, as determined by the Environmental Protection Agency (EPA), divided by its electricity production.
The maximum production tax credit for a zero emissions facility is $0.023 per kilowatt of generation, indexed for inflation. The production tax credit can be claimed on a single facility for a maximum of 10 years and cannot be claimed for facilities that begin to operate before 1 January 2017 (though such facilities may be eligible for the extended, current law production tax credit, described below).
The maximum investment tax credit is 20% of the cost of the investment. Generally the investment tax credit cannot be claimed for facilities that begin to operate before January 1, 2017. However, after 2016, a 20% investment tax credit can be claimed for existing facilities that undertake a carbon capture and sequestration retrofit that captures at least 50% of carbon dioxide emissions.
The credit phases out over four years once the greenhouse gas intensity of the US electricity generation declines to the point that it is 25% cleaner than 2013. In order to qualify for the credit, the electricity must be produced in the United States.
Clean fuels tax credit. The staff discussion draft also replaces the current patchwork of incentives for clean fuels with a new tax credit for clean transportation fuel that is technology-neutral and performance-based. The cleanliness of the fuel determines the size of the credit. Businesses can claim the credit as either a production tax credit or investment tax credit. The tax credit phases out when the cleanliness of the US transportation fuel market increases significantly.
Any fuel that is about 25% cleaner than conventional gasoline will generally receive a credit. The cleaner and more energy efficient the fuel, the larger the credit. Cleanliness is defined as how clean a given fuel production process is on a lifecycle emissions basis, as determined by the EPA. Energy efficiency is defined as the energy density of a fuel compared to conventional gasoline. The credit per gallon of fuel is calculated by multiplying its cleanliness by its energy efficiency.
In order to simplify the credit calculation and allow businesses to plan effectively, EPA has authority to group similar production processes together and is required to provide provisional credit amounts for new technologies within 12 months of application.
The credit phases out over four years once the greenhouse gas intensity of all transportation fuels has declined to a level that is 25 percent cleaner than conventional gasoline.
In order to qualify for the credit, the fuel must be produced and sold within the United States.
Repeal of other incentives. The staff discussion draft on cost recovery and tax accounting proposes repealing 11 current energy-related tax incentives: Section 25C credit for residential energy efficiency; Section 30B credits for fuel cell motor vehicles; Section 30D credits for electric plug-in vehicles; Section 43 credit for enhanced oil recovery costs; Section 45I marginal well production credit; Section 45N mine rescue training credit; Section 45Q carbon dioxide sequestration credit; Section 45L credit for construction of energy-efficient new homes; Section 45M credit for energy-efficient appliances; Section 48C credit for investment in advanced energy property; and Treatment of gain resulting from Federal Energy Regulatory Commission restructuring.
Request for comments on additional areas. In addition to specific comments on the proposals for the two main areas above, committee staff is also interested in broader comments.
This staff discussion draft focuses on developing two simple, technology-neutral tax incentives for domestic production of clean electricity and clean fuels. The draft does not include tax incentives for other parts of the US energy economy, such as energy efficiency, clean vehicles, transmission, combined heat and power, and storage. Staff made this choice in order to target tax incentives on areas that appear to have the largest bang-for-the-buck in reducing air pollution and enhancing energy security, given concerns about overlapping regulations and spending programs, compliance costs, and the potential for fraud or abuse.
For example, the tax code currently includes investment tax credits for infrastructure to deliver clean fuels from the refinery to vehicles. While this infrastructure is a critical part of the fuel supply chain, staff believe that it is most important to build the supply of clean fuels first. Without this supply, the infrastructure to deliver clean fuels will not exist.… Comments are also requested on whether and how tax incentives for these sectors could be implemented on a technology-neutral basis.
The draft also notes that an alternative to encouraging clean production would be to discourage energy production that is not clean. Committee staff is seeking comments on the overall merits of approaching energy policy through a subsidy for clean technologies versus a tax or fee on heavy polluting technologies or air pollution. Additional comments are requested on how to design such a tax or fee so that it would not harm trade-exposed and energy-intensive industries, and would not disproportionately harm low-income households.
Senator Baucus also called for additional feedback from members of Congress, key stakeholders and the general public on the discussion draft. Feedback on the discussion draft is requested by 31 January 2014.
Last month, Senator Baucus released staff discussion drafts regarding international tax reform, tax administration, and cost recovery and accounting.
Resources
A Video Game for Politicians?
Shouldn't they use X-boxes?
Posted by: HarveyD | 19 December 2013 at 08:00 AM
The last bit, taxing harmful production as well as rewarding cleaner stuff, seems vital to me.
So diesel cars are charged for their lethal externalities, whilst much cleaner battery and fuel cell cars benefit even more.
I believe this is normally referred to even in English speaking countries as a bonus-malus system, and has the advantage that it can be set up so that it clearly rachets up from year to year, whilst the 'malus' bit of it pays for the 'bonus'.
Posted by: Davemart | 19 December 2013 at 08:07 AM
I like that its technology neutral - that means some upstart company doesn't have to pay lobbyists to get Congress to include their specific technology in tax credits.
I think its still a bit early to dump the PHEV credit, though I'd be in favor of reducing it some (down to 5000) and turning it into a point of sale rebate instead of tax credit. It should be effective around the time the second generation EVs show up in 2016-17.
Posted by: Anthony F | 19 December 2013 at 08:13 AM
It sounds like the "staff discussion draft" was sourced from the big oil lobby. The proposal would discourage plug-in electric cars and would give subsidies to transportation fuels companies to perpetuate the current gasoline production/distribution model, albeit with the cleaner fuels that big oil is now developing. We wouldn't want to see people filling up their cars at home (from the electric grid, or solar panels), would we?
Posted by: ChrisL | 19 December 2013 at 08:41 AM
It's not likely to fly if they want to extinguish the EV credits. It could simply be bait for pork projects in his state. In other words, he proposes a plan that cannot be accepted, but there is enough of a hurdle there that he may get some quid pro quo. Is Montana planning a bridge to nowhere?
Posted by: Brotherkenny4 | 19 December 2013 at 09:23 AM
This initiative from Sen Baucus makes good common sense. For example, give tax credit for H2 if made from RE, but not if made from NG, or higher tax if made from coal. Same with electricity, if made from RE, tax subsidy, if made from coal, higher tax on electricity. FCV and PEV can be clean or not clean, depending on how the H2 and the electricity is made, so these should NOT receive any subsidy. PEV is only as clean as the electricity mix used to charge the vehicle. The subsidies on PEV have cost the gov a lot of revenue yet have not accomplished much, ie. not enough bang for the buck.
To support PEV and FCV technology developments, separate grants can be given by the DOE to promising applicants or developers. This will advance the technology faster than wholesale subsidization of EV's to the tune of thousands of dollars per vehicle, when the grid mix is still dirty and most of batteries are imported, battery production is resource-intensive and polluting, and when EV's owners are likely to be wealthy and can afford the whole price. I got tax subsidy when I bought my first Prius, but I really did not need it, and I would have bought the Prius anyway, even without the tax subsidy.
Posted by: Roger Pham | 19 December 2013 at 10:28 AM
Baucus probably won't be there to see it through. He's leaving office to become the next ambassador to China.
Posted by: Bob Wallace | 19 December 2013 at 11:05 AM
I think that it would be easier just to impose a carbon tax and if it needs to be revenue neutral because we can not have any new taxes, lower the overall tax rates. I suppose they could also call it a user fee instead of a tax.
It would also be nice if they could reduce the overall tax code so that it was easy to understand and preferably be not longer than about 3 or 4 pages. I know, dream on.
Posted by: sd | 19 December 2013 at 12:20 PM
"...picking winners and losers with no discernable policy rationale..."
This is the sum of what reactive dinosaurs like Max Baucus and the Senate have been doing with their entire careers. I urge you to look beyond the soundbites and look at the familiar body language and linguistic intonations of these television pooh-bahs. When a pol scrivens up his face and says "This is something we should consider",this is his reaction to intellectual discourse and actual public outrage the way a pathogen reacts to fresh air. When a certain pol says "This is the best deal we could get," he is really saying: "I'm the best thing that's going to enter your life and don't you forget it." When you see that steely look in their eyes when they say "We are going to pass a _____ bill by the end of the year," it means they are struggling to find an analogy between the strain of lifting a weight and the strain on their part of defending the indefensible, explaining the unreasonable, and feigning knowledge informed of their own stupidity.
So what good is it, bloggers, to offer response and elaboration to these Senators-for-Life? I'll say it -- I am sick of old people. Heaven help me that I should grow so old and dodder like these antediluvian figures in Washington. As it is, none of you will have anything to look forward to in the twilight struggle of old age between the governed and the governing.
US Tax and Energy Policy, Requiescat en Pacem.
Posted by: kalendjay | 19 December 2013 at 02:14 PM
Don't we have the politicians we rightfully deserve?
Had we been smarter, we would have voted for somebody else including TP members?
Posted by: HarveyD | 19 December 2013 at 03:44 PM
I'm very suspicious of the credit for energy production that is "25% cleaner than the average..." because I expect almost any new plant gets that, so it still turns into a give-away to status quo fossil fuel energy producers...that are very well capitalized and entrenched. I'm concerned that won't favor renewables enough, given the maturity of the fossil fuel industry.
Posted by: HealthyBreeze | 19 December 2013 at 03:53 PM
I assume there is a typo in the following sentence:
"The maximum production tax credit for a zero emissions facility is $0.023 per kilowatt of generation, indexed for inflation."
I got a federal investment tax credit of thousands of dollars for a 5 kW photo voltaic system I installed at home. If the above quote is correct, that would drop to ten cents for a similarly sized upgrade.
It should probably say "2.3 cents per kilowatt-hour of generation". That would still amount to about an 85% reduction in the federal credit versus today. Still, my state tax credit opportunity for PV goes to zero after next year. At least the federal credit would still amount to something.
Posted by: Jim McLaughlin | 19 December 2013 at 04:38 PM
Nuclear is almost 100% carbon-free, and a 2.3¢/kWh production tax credit would make it a no-brainer. But Baucus, being from a coal-producing state, no doubt has some clause which makes it ineligible.
Posted by: Engineer-Poet | 19 December 2013 at 04:44 PM
Let's keep an open mind and appreciate a good idea. No politician is perfect, and no government is free of corruption. All legislation are the result of intensive bargaining, wheeling, and dealing among all interest groups in Congress. We must work with what we've got. The good idea is to have transparency and fairness in rewarding result, not method. Fairness and transparency are keys.
The alternative of a democratic system is a dictatorship with top-down order without any deliberation nor feedback from the public. The results have been often disastrous from lessons of history.
Posted by: Roger Pham | 19 December 2013 at 05:09 PM
Nuclear does have a low lifetime carbon footprint. About the same as wind and solar.
Nuclear gets a 2.3c/kWh PTC whenever it comes on line.
It also gets benefits that other technologies don't get such as loan guarantees, free liability insurance and taxpayer paid for long term storage of used fuel.
In some states utilities get to overcharge their customers for electricity and save up that money for use to build reactors.
An interesting new report came out today that deals with what taxpayers are spending to support the nuclear industry in the US.
" The U.S. Nuclear Regulatory Commission (NRC) must start taking into account the full cost of nuclear waste disposal and storage, which would add up to a third of a trillion dollars to the price tag of nuclear power, according to a declaration filed today with the NRC by economist Mark Cooper of the Vermont Law School.
Cooper details how acknowledging the full cost of nuclear power would both dramatically undercut the rationale for relicensing of existing reactors and the licensing of proposed reactors and also make nuclear power far less attractive in comparison to wind, solar, and expanded reliance on energy efficiency."
http://www.sacbee.com/2013/12/19/6013975/cooper-nrc-can-no-longer-ignore.html#storylink=cpy
That would add a penny or two to the 16c/kWh that the UK is planning on paying for new nuclear. Moving well into 3x as much as wind and 2x as much as solar.
Posted by: Bob Wallace | 19 December 2013 at 05:20 PM
What I'm not seeing here is anything that would let the average joe in on the game. Wind & solar are dispersed energy sources, you need distributed arrays to collect it. Best way to do this is to give the landholders/property owners of Montana a stake in the energy production: Feed-in tariffs for the ranchers & net metering for homeowners.
Posted by: ai_vin | 19 December 2013 at 09:17 PM
I want to see exactly what he means by "Clean". You get credits for being "cleaner" than the other guy, but by what benchmark? Measuring CO2? Measuring toxic byproducts? Measuring environmental damages? Soot? NOx?
This really needs clarity.
Posted by: Eletruk | 19 December 2013 at 09:22 PM
Very bad proposal. It doesn't take into account that critical sources of clean tech are still in a earlier stage of development than others and need more more incentives!
Posted by: Seer | 19 December 2013 at 10:10 PM
Seer +1
What is seemingly lost on most people here and in the general public is that some clean technologies (like hydro or wind) are mature and thus much cheaper than others (eg solar, ocean). But we also know we will need a diversified grid to increase robustness and decrease variability.
Introducing a pure performance based incentive sounds very attractive and rational (you know that not-picking-winners-and-losers shite), but reinforces the status quo. We need development of promising new technologies, not entrenchment in known technologies.
I am generally opposed to investment tax credits. Subsidise the result, not the effort. So only offer production tax credits. Exception might be high-risk projects involving promising cutting edge technology.
The current EV tax credit already contain an auto-expiry clause: 200,000 vehicles per manufacturer. So why not leave them alone and let them expire like they were meant? Why not - please - have some stability and predictability?
Posted by: Arne | 20 December 2013 at 01:23 AM
No it doesn't. A very few plants may, with strictly limited total wattage and (IIRC) an annual cap.
I'm astonished you are so willing to lie about all of those things in one sentence.
- Moniz & Co. are still sitting on loan guarantees, and demanding an extremely high up-front price for them. None granted so far, and they are mostly insurance against newly-invented regulatory prohibitions; when the government has skin in the game, it is less ready to destroy private companies than if it's simply a case of crushing people for political gain.
- The nuclear industry is mandated to carry $375 million in private insurance per reactor by law, and ALL reactors are on the hook for damages from an accident at any of them. Total damages from TMI came to $71 million, all paid by private insurance.
- Spent fuel disposal is NOT free and never has been. The nuclear industry pays 0.1¢/kWh into a waste disposal fund, which now sits at over $35 billion despite the sums spent on Yucca Mountain. The US government has welshed on its end of the deal.
You should be ashamed of yourself."Vermont Law School" is all you need to know. Those people are not scientists, they are not public health experts, they are barely lawyers; they are hard-left political activists, and should be laughed out of every courtroom and venue.
Posted by: Engineer-Poet | 20 December 2013 at 09:27 AM
Mark Cooper at the Vermont Law School is an economist and an expert on nuclear energy economics. Obviously you do not like what he reports. (His work is well documented.)
The Energy Act of 2005 established a production tax credit of 1.8 or 2.1 ¢/kWh from the first 6,000 MWe of new nuclear capacity in their first eight years of operation (the same rate as available to wind power on an unlimited basis). The amounts have been increased since then.
The loan guarantee program does require that the borrowing company put some of their capital at risk. You believe that new reactors should be built at the taxpayer's risk only?
The nuclear industry is responsible for only the first $12 billion of any nuclear disaster. Even TEPCO and the Japanese government now admit that the cost of Fukushima will exceed $100 billion.
$35 billion does not cover the cost of nuclear waste. Taxpayers are stuck with that cost.
We've been through all this before E-P. You make claims which are easily disproven. In fact, the information about the PTC for nuclear comes from the World Nuclear Association web site.
http://www.world-nuclear.org/info/Country-Profiles/Countries-T-Z/USA--Nuclear-Power-Policy/
You call me a liar. Then you post things which are easily shown to be untrue.
Posted by: Bob Wallace | 20 December 2013 at 10:11 AM
E-P,
Oh please, still playing 'blame the others for your own incompetence'? The weakness of that argument shows painfully clear what is wrong with current nuclear technology. You might give an example to prove your point.
Everything in reality points to a nuclear industry that is totally incapable of delivering any project on schedule and within budget.
To suggest that the limited liability is not a form of subsidy is laughably naive. You are an engineer and a poet, so I won't blame you for not understanding how the insurance industry works, and why a nuclear disaster is uninsurable. It means it is infinitely expensive.
Yea, that was the thinking in Japan before 11 March 2011. Just because you can't imagine a nuclear disaster happening doesn't mean it can't and it won't.
Posted by: Arne | 20 December 2013 at 10:51 AM
The direct and indirect total cost of nuclear energy has increased so much (probably close to 25 cents/kWh) that it is fast becoming a failed technology.
Meanwhile, Wind and Solar energy total cost has decreased from 40 cents/kWh to under 10 cents/kWh and to under 15 cents/kwh including storage.
No wonder that many industrial countries are seriously thinking about reducing and/or eliminating nuclear from their energy mix.
Posted by: HarveyD | 20 December 2013 at 12:50 PM
Nuclear development was stunted. Light water reactors are not all that much more advanced than decades ago. They go with what works and don't change much, they just regulate it into cost overruns.
If computers had that kind of stunted development, we would still be using punch card readers. The original creator of light water reactors in the U.S. told everyone it was inherently unstable and dangerous. He promoted breeders and thorium. he was forced to retire.
Posted by: SJC | 21 December 2013 at 08:20 AM
One must ask why nuclear development has been stunted.
It was not because money was not spent on research. It has been.
It was not because no reactors were built giving no opportunity to test new ideas. Reactors have been built.
The only reason I can think that nuclear energy technology stalled out is that there were no ideas which seemed promising enough to implement.
Yes, there are a lot of ideas floating around. You can see videos on YouTube about how wonderful those ideas are. There are people who wax lyrically about those ideas.
But the people who have to sign the paper to start construction on a new reactor have not been adequately convinced that the ideas have sufficient payoff to justify the risk.
That's my guess....
Posted by: Bob Wallace | 21 December 2013 at 09:00 AM