Wednesday afternoon, Senate Finance Committee Chairman Max Baucus (D-MT) dropped his proposal for reforming the tangled web of tax breaks and credits that currently go to boost renewable energy. To shamelessly paraphrase the classic Clint Eastwood western, some of its good, some of its bad, and at least one part of it is downright ugly.
All told, the reform either scraps or consolidates 22 different tax subsidies, and replaces them with two tax credits that each come in two flavors:
Tax credit for clean electricity. This would cover all forms of electricity generation; so coal, natural gas, solar, wind, and so forth. Any facility that generates electricity with a greenhouse gas emissions rate that’s 25 percent cleaner than average could receive the credit. The cleaner they are from there, the bigger the credit would be. (The emissions rate is determined by dividing a facility’s emissions by the amount of electricity it produces.) The credit could be claimed either as a production tax credit or as an investment tax credit. The former maxes out at $0.023 per kilowatt, and lasts ten years. The latter maxes out at 20 percent of the investment.
Tax credit for clean fuel. This would cover liquid fuels used in transportation. The greenhouse gas emissions of a given fuel would be determined by the Environmental Protection Agency (EPA), accounting for the fuel’s entire life cycle, and including end use by the consumer. The credit would then be calculated by multiplying the fuel’s carbon cleanliness by its energy density. Again, qualification would begin with any fuel that’s at least 25 percent cleaner than average, and the credit would increase as cleanliness goes up. And again, the credit could be claimed either as a production tax credit or an investment credit. The former maxes out at $1 per gallon and lasts ten years, and the latter maxes out at 20 percent of the investment cost.
Generally speaking, the credits can’t be claimed except by projects that get started in 2017 or later. To cover the gap, the reform extends a number of current tax credits for alternative fuels and renewable energy — including the beleaguered production tax credit for wind — before allowing them to expire at the end of 2016.
News also dropped on Wednesday that President Obama intends to nominate Baucus as the next U.S. Ambassador to China. With that opportunity looming, Baucus arguably has an incentive to not push anything too controversial or ambitious.
What that said, how does his reform proposal wash out?
Market incentives and tax simplicity. At its basic structural level, this is a genuinely slick proposal. It’s not a carbon tax or a cap-and-trade system. But it does create something akin to a market incentive for reducing greenhouse gas emissions, using a small number of broad and well-designed tax credits. Individual businesses are left free to determined how to cut their emissions, and as the more they cut the bigger their rewards get. All told, the reform consolidates 11 current tax subsidies and scraps 11 others. That’s not all the tax incentives in the code related to energy — according to Politico, aides for the Finance Committee said there are now 42 separate incentives in all — but Baucus’ reform would arguably be a real move in favor of tax code simplicity. At the very least, it could serve as a template for the future.
Separating cellulosic biofuel form corn-based ethanol. There’s a case that the agricultural production corn-based ethanol encourages negates some or even all of its purported advantages in cutting carbon emissions. Advanced and cellulosic biofuels can avoid the problem because they’re made from agricultural leftovers and other forms of biomass waste. Thanks to its reliance on the EPA to map the fuels’ life cycle emissions, Baucus’ credit would reward a biofuel more for causing less land-use change. The current renewable fuel credits Baucus’ reform would replace don’t differentiate like that, nor does the current Renewable Fuel Standard (RFS). Baucus’ credit would also avoid any clashes with the possible blend wall, since it doesn’t mandate raw gallon amounts the way the RFS does. Of course, this is a tax reform, so it wouldn’t replace the RFS, which is a regulatory policy. But it could arguably lay the political groundwork for such a replacement.
Cutting tax breaks for Big Oil. Many of the tax subsidies major fossil fuel companies receive are actually breaks that go to businesses across the economy. As a result, this proposal, which goes after energy-specific tax subsidies, doesn’t address them. Though Baucus is also working on a larger reform of the overall U.S. tax code that may address them. That said, about 20 percent of the tax credits this reform eliminates currently go to fossil fuels, so that’s something.
Methane emissions. While Baucus’ credits for fuels would account for total life cycle emissions, the credits for electricity production would not. That’s an enormous problem where natural gas is concerned, because it has to be drilled, produced and shipped before it reaches a power plant. That entire infrastructure carries the inevitable risk of methane leaks. Methane is an incredibly potent greenhouse gas, and recent studies suggest the leaks are so bad that they may overwhelm any advantage natural gas has over coal in combating global warming. Failing to account for this is a massive hole in Baucus’ reform.
The credits phase out too soon. Once emissions intensity drops below 25 percent of 2013 levels for the electricity and transportation fuel sectors, the credits would wind down over a four-year timetable. There’s nothing wrong with that in principle, but “intensity” is a different and more lenient standard than absolute rates — if economic growth were high enough, intensity could drop very low without the actual amount of carbon emissions dropping at all. And a 25 percent drop from 2013 levels is a grossly unambitious target. It’s also possible that Baucus’ reform could drive even more cuts in emissions if the monetary size of the credits were bigger.
Lost incentives for energy efficiency. Some of the credits Baucus’ reform phases out currently reward individuals and businesses for either buying efficient and low-emission vehicles, or for retrofitting their homes and offices for greater energy efficiency. None of the new credits replace their effect. So incentives for cleaner production of fuel and electricity would continue, but incentives for cleaner and more efficient consumption of them would not. According to the draft, Baucus’ staff did this to concentrate on “areas that appear to have the largest bang-for-the-buck in reducing air pollution and enhancing energy security” and to address concerns about “fraud or abuse.” It’s also just draft legislation, so they’re still seeking input.
A corporate income tax cut. Finance Committee aides estimate that extending all the current tax subsidies Baucus’ reform either replaces or scraps would lose the federal government $150 billion over the next ten years. They also estimate that by clearing out those tax breaks and replacing them with more targeted credits, the reform could bring half or more of that revenue back in. But because he’s pledged to revenue neutrality, Baucus wants to use the savings to cut the corporate income tax. A more blatant sop to wealthy elites and corporate power is difficult to imagine. If he wanted to help everyday Americans, Baucus could use the new revenue to reduce the payroll tax, or to bulk up the earned income tax credit or the child tax credit, or to finance some of the credits for home energy efficiency or low-carbon cars that the reform currently axes.