The CEAA presents a competing vision of the future of energy tax incentives from that presented in the House of Representatives. In February 2021, Representative Mike Thompson, (D-CA), a member of the Committee on Ways and Means of the U.S. House of Representatives, reintroduced the Growing Renewable Energy and Efficiency Now Act (GREEN Act). The GREEN Act would further extend and enhance the current incentives for wind and solar and other technologies under the existing tax framework and would introduce certain new provisions aimed at supporting the development of clean energy. While it remains to be seen which of these competing visions will eventually be adopted as the legislative vehicle for Biden’s infrastructure proposal, or whether Biden’s proposal blends certain aspects of each approach, it is helpful to understand what these two proposals share in common and how they differ.
The CEAA creates an emissions-based incentive that would be neutral technologies. Taxpayers are able to choose between a production tax credit (PTC) or an investment tax credit (ITC), which is provided based on the carbon emissions of the electricity generated—measured as grams of carbon dioxide equivalents (CO2e) emitted per KWh generated. Any power facility of any technology can qualify for the credits, so long as the facility’s carbon emissions are at or below zero.
Taxpayers are provided the option of receiving the credits as direct refunds, however, those wishing to avail themselves of this election must inform the Treasury Department before the facility to which the election relates starts construction. In addition, taxpayers must meet prevailing wage requirements and utilize registered apprenticeship programs in order to be eligible for tax credits on facilities that are one MW or greater. The prevailing wage requirement would also apply on alterations and repairs during the applicable 10-year PTC period, five-year ITC recapture period or 12-year Section 45Q period.
The credits are set to phase out when emission targets are achieved, i.e., when EPA and the Department of Energy (DOE) certify that the electric power sector emits 75 percent less carbon than 2021 levels. The incentives will be phased out over five years. Facilities will be able to claim a credit at 100 percent value in the first year, then 75 percent, then 50 percent, and then 0 percent. The credit amounts would fall to 75 percent of the full rate for projects on which construction starts two years after the year in which annual greenhouse gas emissions for the US power sector have declined by at least 75 percent from 2021 levels, to 50 percent for projects starting construction the next year and to zero percent in years after.
The enhanced tax credits would be available commencing in 2023. To provide transition relief and time for administrative coordination between the Treasury Department, EPA and DOE, the bill extends, through December 31, 2022, current expiring clean energy provisions.
The Internal Revenue Code Section 45Q tax credit would also be extended until the power and industrial sectors meet emissions goals under similar terms as the PTC and ITC, including the prevailing wage requirements and direct payment options, along with certain other changes further detailed in our CEAA Summary.
Comparing the CEAA to the GREEN Act
The CEAA presents a more radical departure from the current energy tax credit regime, as compared to the more conventional tax credit extensions proposed as part of the GREEN Act. While a full summary of the GREEN Act is beyond the scope of this discussion, the GREEN Act proposal includes, but is not limited to:
GREEN Act Incentives for Clean Electricity:
- Extension of the Section 45 production tax credit for facilities for which construction begins by the end of 2026.
- Extension and modification of the Section 48 investment tax credit at a 30 percent rate for projects that commence construction by the end of 2025 before beginning a new phase out period.
- Extension of the Section 45Q tax credit for carbon oxide sequestration. The provision would extend the Section 45Q tax credit for carbon oxide sequestration facilities that begin construction before the end of 2026.
- Elective direct payment, allowing taxpayers to elect to be treated as having made a payment of tax equal to 85 percent of the value of the credit they would have otherwise been eligible (under the ITC, PTC or the Section 45Q credit).
- Labor standards for certain energy jobs. The provision creates a certification by the Secretary of Labor for certain labor requirements for green energy and energy-related construction projects.
The two proposals take a different view regarding tax incentives. As discussed above, the CEAA adopts an emissions-based, technology-neutral approach to qualification through newly created tax incentives, allows optionality between certain incentives (i.e., ITC vs. PTC), and provides for open ended availability until emission target are achieved. By comparison, the GREEN Act provides for an extension and expansion of currently available benefits under the existing framework of rules for a set number of years.
An illustration of the differences in approach is illustrated in the charts below applicable to solar and wind tax credits:
While the two approaches differ, the CEAA and the GREEN Act also adopt some similar concepts. For example, although both proposals include direct payment options, the CEAA benefits are more generous. It would not require a haircut to claim direct payment, while the GREEN Act would only allow direct payment at 85 percent of the full value. Both proposals also adopt labor standards for certain energy projects. Because of strong Democratic support, it seems likely that some type of labor requirement will be included in any final infrastructure proposal.
Ultimately, the proposals included in the GREEN Act and the CEAA advance many of the same goals. The overarching differences between the two proposals are that the CEAA provides a bolder expansion and reimagination of tax incentives that potentially better algin to the required results. The technology-neutral approach provides for broader qualification among energy assets and greater flexibility for emerging technologies to potentially take advantage of the existing tax credit framework without future congressional action. Additionally, the ability to toggle between an ITC and PTC could provide flexibility to developers as different technologies advance, and cost are reduced, without the further legislative changes or extensions. The CEAA, however, is likely to create a more complex transition period, which will likely require further government guidance and potential clarifications of new rules and regulations as issues arise. These issues can have the effect of slowing down financing transaction during an interim period until issues are clarified. These sort of financing snags occurred initially with the 1603 Grant Program, the beginning of construction rules, and the Section 45Q credit expansion, but the potential for mischief is far greater because the changes proposed by the CEAA are far more significant is scope and scale. The GREEN Act by comparison provides a less ambitious and less disruptive approach of primarily extending and enhancing the current incentives under the existing tax framework.
The CEAA would provide a holistic update to the existing energy tax credit framework that was designed decades ago. A revamp and redesign of these incentives to fit the needs of the forthcoming energy transition is well overdue. The ultimate policy issue, however, is whether adopting the changes proposed by the CEAA in a single action makes sense. If past is prologue, it seems difficult to imagine that the required government guidance and inter-agency coordination for such a large number of changes will occur in a sufficiently timely manner to prevent market disruption. Policymakers will need to decide whether the long-term benefits of the CEAA changes outweigh the risk of any short-term issues, or whether it is more prudent to stay the current course and make later changes and updates on an incremental basis.
While the choice between the CEAA and the GREEN Act proposals is certainly not binary, and ultimately neither proposal may be specifically adopted as part of Biden’s proposal, they present an interesting theoretical choice that will need to be weighted in any final proposal. Does it make sense to stay to course with existing incentives and minimize disruptions to a booming market for renewable projects or is it time for bolder more far-reaching changes that would revamp energy tax credits for upcoming energy investments, even if such change cause short-term disruptions during the interim period? It is understandable that Democrats may view the forthcoming infrastructure bill as a unique opportunity to introduce more far reaching change, but the question is whether such changes can be promptly and smoothly implemented when fighting climate change is of the essence.