Tax proposals to restrict carbon emissions

U.S. Senate Finance Committee Chairman Ron Wyden (D-OR), along with two dozen Democratic co-sponsors, introduced the Clean Energy Act for America (the Act) on April 21, 2021. The law is likely to be a starting point for Biden’s proposals on administrative tax to limit carbon emissions. The law would change the current system of incentives for the renewable energy industry to a technology-neutral approach to generation that is carbon-free or has negative carbon emissions. The law would also provide tax incentives for qualifying improvements in transmission capacity and self-contained energy storage to improve the reliability of the transmission network. Rather than requiring taxpayers who qualify for clean energy incentives to have short-term or past tax liabilities, the law would create a new direct payment option that enables tax credits to be refunded.

The bill would replace the current renewable energy incentives with a new clean power and investment credit that would allow taxpayers to choose between a 30% investment tax credit (ITC) or a production tax credit (PTC) of 2 To choose 5 cents per kilowatt hour. The loan would apply to new construction and certain improvements to existing plants that had no or only negative CO2 emissions put into operation after December 31, 2022. The law would phase out the current credit system for certain technologies. In order to create time for transitional relief and for coordination between the US Treasury Department and the Environmental Protection Agency (EPA), the law extends the currently expiring clean energy regulations until December 31, 2022.

The Treasury Secretary, in consultation with the EPA Administrator, will determine greenhouse gas emission rates for the types or categories of facilities that are eligible for the credits. To encourage additional emissions reductions from existing fossil fuel power plants and industrial sources, the Section 45Q tax credit would be extended until the power and industrial sectors meet the emissions targets. The law would change the thresholds for qualified detection to require that a minimum percentage of emissions be recorded. Once certain emissions targets are met, namely a reduction in emissions for the electricity sector to 75% below the 2021 level, the incentives will expire over a period of five years.

Qualified improvements of the transmission network are also permissible for the 30% ITC including independent energy storage. Storage technologies do not need to be co-located with power plants and include technologies that can receive, store and provide electricity or energy to be converted into electricity. The transmission property includes transmission lines of 275 kilovolts (kv) or more and any additional equipment required. Regulated utility companies have the option to decline the tax normalization requests for grid improvement credit purposes. However, the law does not include a similar option to disable tax normalization provisions for other types of qualified entities such as solar or wind projects.

Under the law, investments that qualify for the clean emissions investment loan, grid loan, or energy storage property in qualified low-income areas qualify for higher lending rates. The law also includes new provisions requiring taxpayers to pay wages at least at local rates and using registered apprenticeship programs to qualify for the credits.

In addition, the law would create incentives for energy-efficient residential and commercial buildings as well as for clean transport technologies. In addition, the law proposes removing certain fossil fuel incentives, including immediate expenditures for intangible drilling costs, percentage depletion, deductions for tertiary grout, and credits for improved oil production, coal gasification, and advanced coal projects.