September 3, 2012

How can the Senate tax bill be improved?

Before adjourning for August recess, the Senate Energy and Natural Resources committee reported a tax extenders bill addressing the fate of over $200 billion in tax extensions.  Among the 55 tax provisions were 13 energy-related tax extensions, that combined will help shape the growth of our clean energy economy. 

While the bill still has a long, uncertain journey  before becoming law, it’s worth examining several of the more important energy provisions related to renewable energy, energy efficiency, and transportation fuels.  Before final passage, Congress should take pains to chart a consitent course away from the dirty fuels of the past toward the clean technologies of the 21st century.

Essential Clean Energy Provisions: 

Extension and modification of wind Production Tax Credit (PTC): the most important legislative item for the renewable energy industry this term is extending the production tax credit for wind energy. The PTC is critical to maintaining the impressive growth seen in the wind sector and avoiding job losses by pulling the rug out from under this expanding industry. The production tax credit provides a tax credit for all wind power generated over ten years. This bill would actually extend the PTC for more than one year by adding a qualification that firms need only begin construction of the wind project by the end of 2013 (as opposed to being commissioned as is currently the case) which makes the PTC accessible for more wind developers.  This multi-year extension is warranted, and we applaud this approach. 

Investment Tax Credit in Lieu of Production Tax Credit: certain types of wind projects – such as small, community-owned wind, or offshore wind developments – face more of a challenge using the PTC (tax investors that turn the PTC into project capital prefer larger, less risky projects).  This provision would open up the investment tax credit (a tax credit of 30% off the cost of a project) for projects that qualify for the PTC, which is a beneficial new option for the types of non-traditional wind projects described above.

Credit for construction of new energy efficient homes: this provision extends Section 45L, which provides a $2000 tax credit to builders who construct homes that use 50 percent energy for heating and cooling than a home that meets the 2004 code. This credit has been tremendously successful at transforming the market for homes that meet these efficiency criteria, from essentially zero when the credit was enacted to 32,000 homes in 2011 or 11 percent of new homes sold. The extension of the credit will build upon this success and continue to encourage the development of new homes. In the future, a higher tier should be added to encourage homes that meet even greater levels of energy efficiency.

Credit for energy efficient appliances: this provision extends 45M, which provides a tax credit to the manufacturers of highly efficient refrigerators, clothes washers and dishwashers. Not only does the credit help consumers save money on their energy bills by encouraging highly efficient products, it also helps support the manufacturing of these products, while reducing pollution.

Cellulosic Biofuels Producer Tax Credit and Cellulosic Biofuels Bonus Depreciation: NRDC supports extension of the cellulosic ethanol tax credit because the nation needs sustainable alternatives to oil.  However, the potential benefits of advanced biofuels are not guaranteed, and this provision could be improved.  Poorly sourced and created biofuels are capable of causing more harm than good.  While this extension is welcome, Congress must go a step further and include performance based environmental standards in the tax code to minimize the risk of severe unintended consequences (more at my colleague Brian Siu's blog here).

Provisions that Require Improvement:

Credit for certain nonbusiness energy property (25C):  Inclusion of an incentive for energy efficiency in existing homes is a welcome step in the right direction, but we urge the Senate to amend 25C to eliminate the cost-based portion of the credit and avoid the flawed treatment of certain products (in particular, windows). An even better solution would be to adopt the performance based credit in Senator Snowe’s S.1914.
Counterproductive Provisions: 

Incentives for alternative fuel and alternative fuel mixtures (other than liquefied hydrogen): Unfortunately the Senate Finance proposal extends a harmful subsidy for liquid coal.  This tax credit awards producers $.50 for every gallon of liquid coal they produce. There are numerous reasons why Congress should not extend this provision for liquid coal. First, liquid coal is among the dirtiest and most destructive energy technologies.  It emits twice the carbon pollution as petroleum based fuels, accelerating the increasingly obvious impacts of global warming. Moreover, it requires nearly half a ton of coal to produce on barrel of liquid coal fuel. The associated coal mining would further decimate our natural heritage through increased mountaintop removal, water contamination, air pollution, and biodiversity loss.

We look forward to continuing to engage Congress on these important tax issues.  Properly crafted tax policy is a critical tool in continuing the transformation to the clean energy economy that is vital to our economic future and environmental health.  Passing the most effective policies that promote clean energy technologies like wind and solar powers and advanced biofuels without damaging the environment is a critical step along the way.

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