tax incentives

To make the most of this recession, we will need an economic expansion that restores our climate

Cross-posted at the NDN Blog.

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As the economic recovery and investment package backed by the administration works its way through Congress, and more evidence about the nature of this recession surfaces, an interesting exercise is to think about how we want to emerge once it is over. In the midst of current economic turmoil, it may seem difficult to imagine the post-recovery world, let alone accurately predict it. Nonetheless, starting with an outcome and working backwards to a policy prescription is far preferable to policy based purely on the passions of the moment. Following are my thoughts on the world I would like to see in 2012 and the resulting implications for current policy.

A closer look at current U.S. CO2 pricing

Kevin Drum over at Mother Jones blogged on my recent Grist post, joining my mom in the list of people who publicly praise my math skills. Thanks!

Much more interestingly, he raises this question:

Are we wiling to charge [a price for CO2 emissions] openly, with the carbon charges going to the public, [or] inside a complex giveaway to a favored corporation?

(The question is in response to my estimate here that the recently passed Illinois Clean Coal Portfolio Standards Act represents an implicit $300-$500-per-ton payment in the name of CO2 reduction.)

It's a great question because the truth is that under current federal and state policy, we do pay people for their actions to reduce CO2. But we do so in a horribly inconsistent way, providing not only inconsistency between technologies and "favored corporations," but also wild disparities in price.

For instance, suppose you're getting $0.03 per kWh from your state renewable portfolio standard. Those kWh displace -- on average -- 1,300 lb per MWh of U.S. power, and you are therefore being paid $46 per ton of CO2 you reduce. CO2 reduction is not the only justification for RPS policies, but would we ever have an RPS if we didn't care about CO2? I doubt it.

The good news there is that people are, today, being paid in the U.S. for reducing CO2. But is there any rhyme or reason to their price? And is it at all consistent with what others are getting for the same environmental service?

More math below the fold.

House Ways and Means embraces refundable renewable tax credits

As Kate reported, the House Ways and Means Committee on Friday passed the energy tax portions of the stimulus package, including:

Investment Tax Credit Refundability. For alternative energy property put into service in 2009 and 2010, companies may apply for a cash grant equal to the value of the investment tax credit from the Department of Energy. DOE must make these grant payments within 60 days of receipt of the application and may not in its discretion deny any such applications that qualify for the credit. Companies may apply for the payments through September 30, 2011. The amount of the ITCs equal 30 percent of the base investment amount for solar, winds, and fuel cell property and equal 10 percent for geothermal and micro-turbine property.

Election of ITC over PTC. For property placed in service in 2009 and 2010, alternative energy companies entitled to the Production Tax Credit can elect to receive the Investment Tax Credit instead. This election would allow them to qualify for the refundability provisions of the DOE grant program.

Awesome! (See "Note to Obama, Congress on green stimulus: No to phony clean coal credits, yes to refundable renewable tax credits, Part 1.")

Why exactly does it matter so much that tax credits for renewable projects can be refundable? That was well explained by a recent Washington Post article:

Parsing Section 451 of the House stimulus package

Here are some thoughts on the American Recovery and Reinvestment Act recently unveiled by House leaders -- specifically, the appropriation of Section 451 (aka "Subtitle E") from the 2007 Energy Bill.

For obvious reasons, we've been following this bill very closely, which not only provides $10 per MWh to waste heat recovery and high-efficiency cogeneration projects, but it also provides a nice suite of carrots to induce the states to reform their paleolithic electricity regulatory laws. Often these laws have long been perhaps the biggest barrier to reducing the carbon footprint of U.S. electricity generation and distribution.

For less obvious reasons, it's hard to get programs like this through the Congress. This is the result of some peculiarities of the way the federal government makes decisions to spend money:

1. Tax bills require one vote to enact (OK, technically three, since they have to be approved by both houses and then signed by the President, but it is a single vote on a single decision throughout). All other fiscal bills require two votes: the first authorizes the funding, and the second appropriates the money through the budget process. Since no vote is certain, this makes it much easier for regulators to get things done by tinkering with tax policy than through any other measure. In no small part, this is why the tax code is so full of complexity, loopholes, and social-engineering run amok. But I digress.


2. Any appropriation process must be "scored." This is the process by which the Congressional Budget Office estimates the cost of the legislation to the Treasury for the purpose of figuring out whether we can afford it. That's quite reasonable, but the nature of the process is such that it tends to ignore most of the upside because it does not readily differentiate between good and bad investments. (It is as if you made a decision to buy a stock based on the price per share without any consideration of whether it was likely to rise or sink in the future.) This becomes especially problematic when the economy sours, as the stimulative effects of investments are not readily quantified or evaluated precisely at the time when they are most needed.

Frustrating as this may be, the good news is that the limitations are well-understood by those inside the Beltway. Setting aside what the scoring rules say, here is what Section 451 will actually do for the U.S. economy ... with lessons broadly applicable to investments in all flavors of enhanced resource efficiency.

No to phony clean coal credits, yes to refundable, renewable tax credits

The green stimulus is beginning to take shape with mostly good stuff in the stocking, except one big lump of coal.

The package is getting bigger -- no surprise. The Washington Post writes:

Congressional leaders and Obama advisers are looking at including as much as $25 billion of energy tax credits in the economic stimulus package in an effort to bolster renewable energy projects, fuel-efficient cars and biodiesel production, said sources familiar with the negotiations ...

The main elements under consideration include a two-year, $8.6 billion extension of the production tax credit [PTC] for renewable energy, an item that favors wind power projects. Obama advisers are considering a proposal from the wind and solar industry that would make those credits refundable or count them against past taxes because many financial firms that provided capital for those projects no longer have taxable income and can't use the credits.

I understand why only a two-year PTC extension is being floated from a narrow stimulus perspective, but seriously, people, it's time for a much longer extension to give the industry firmer ground. The solar investment tax credit got an eight-year extension last year! Is there any possibility that an Obama administration with a Democratic Congress won't eventually extend the PTC that long? So don't play games with the industry. The idea of making the credits refundable is an important one I will elaborate on in part 2.

The bill could also include tax credits for service stations that install high-ethanol-content fuel pumps, a $7,500 tax credit for plug-in vehicles, an extension of the biodiesel credit, and one for coal-fired power plants that capture more than half of their carbon emissions or that could be retrofitted to do so later. There could also be clean-energy credits for rural cooperatives.

Apparently someone missed the memo that plug-ins already have a $7,500 tax credit -- which in any case won't be doing much stimulating since there aren't any plug-ins to stimulate!

Memo to Dems: Please, please, please, do not give a tax credit to any coal-fired plants "that could be retrofitted" for capturing carbon. So-called "capture ready" coal plants are nothing but snake oil, just like clean coal itself.

Congress does not want to be in the business of trying to pass regulations to determine how many angels are dancing on the head of a pin whether it might be easier or harder for some new climate-destroying coal plant to some day integrate carbon capture. Either a new coal plant captures and permanently sequesters the vast majority (not just half) of its carbon emissions now, or it should not be permitted in the first place. Stop trying to fool the public into thinking we can risk building any more new coal plants with unrestricted greenhouse gas emissions. We cannot.

One of the most exciting stimulus proposals is aimed at boosting clean-energy financing during this credit crunch:

Renewable energy industries lobby for more flexible tax credits

Renewable energy advocates are enthused by Barack Obama's call to double the production of clean, domestic energy and create three million jobs in the sector, but they don't think he'll be able to pull it off unless he backs two changes to the tax code -- changes they say will help spur millions more jobs in the wind and solar industries.

Right now, the tax credits for solar and wind energy (yes, the much-beleaguered credits that were finally slipped into the October bailout of the financial markets) are not refundable -- that is to say, a producer only gets the money back if it makes a profit. Problem is, given the economic downturn, not many renewable energy companies are making money. That means the tax credits aren't helping them. The solar and wind industries would like the renewable tax credits to become refundable, which would offer rebates even to companies that aren't making money.

Obama has said his stimulus plan would create nearly half a million jobs through clean energy investments, but neither the investors nor the lenders who would normally provide the upfront funding for start-up renewable projects are feeling confident enough to do so right now. It also doesn't help that some major financial backers of renewable projects -- like Lehman Brothers -- have gone under in recent months.

"Lehman goes away, and many other banks have suffered major losses because of the sub-prime crisis, and because they're suffering these huge losses they don't have much tax liability," Chris O'Brien, head of market development and government relations for North America at the Swiss company Oerlikon Solar, told Grist. "They don't need more losses, so their appetite for investing in solar projects has gone way down at a point in time where the interest in and the need for tax equity has gone way up."

Another idea floating around the Hill is for the stimulus plan to put $10 billion into a "National Clean Energy Lending Authority" that could lend to renewable projects and help support homeowners who want to retrofit. Reps. Chris Van Hollen (D-Md.) and Zach Wamp (R-Tenn.) wrote a letter to Obama this week asking him to support something like this. "The current financial crisis has not only thrown us into recession, it has significantly derailed or killed off virtually every alternative energy project in the pipeline, making renewable energy yet another victim of the economic fallout," they wrote.

Green jobs: Boon for Native America

A network of over 250 Native American organizations recently issued an important challenge to the Obama administration for any green recovery plan: Look to the First Nations.

The reality is that the most efficient, green economy will need the vast wind and solar resources that lie on Native American lands. This provides the foundation of not only a green low carbon economy but also catalyzes development of tremendous human and economic potential in the poorest community in the United States -- Native America.

As the recent scandalous decision to expand coal strip mining on Black Mesa in northern Arizona revealed, Native Americans have been saddled with a toxic legacy of fossil fuel and uranium development.

According to the statement released by the Native organizations, including Honor the Earth, Intertribal Council On Utility Policy, International Indian Treaty Council, and Indigenous Environmental Network:

American Enterprise Institute endorses tax credits for super-efficient, furnace-free homes

If the American Enterprise Institute starts acknowledging that residential energy efficiency has a "positive rate of return" -- and advocating federal support to capture the full energy savings possible -- perhaps the world is changing.

Then again, it may just be temporary institutional schizophrenia, since others in AEI continue to assert (without any supporting evidence), "No matter what you've been told, the technology to significantly reduce emissions is decades away and extremely costly."

Kevin Hassett, AEI's director of economic-policy studies, has a Bloomberg News column that I excerpt below, because of its surprising degree of common sense -- and because he cites actual research:

American taxpayers help pay for coal sent to China

Lee Buchsbaum writes that U.S. coal producers increasingly find it more profitable to export their product: With the falling dollar, selling to Asia, Europe or South America is giving coal producers a higher return than selling into the United States. "If I were running a coal company and I looked at what’s happening on Capitol […]