Senate Finance Committee Advances Emissions-Based Overhaul of U.S. Energy Tax Code

On May 26, 2021, the Senate Finance Committee advanced the Clean Energy for America Act (S.1265, 117th Congress) to the full Senate on a party-line vote. The legislation, which is a component of President Biden's Build Back Better plan, would overhaul the federal energy tax code by consolidating more than 40 different energy tax incentives into a set of emissions-based provisions that encourage clean electricity, clean transportation, and energy efficiency.

The incentives would be available to all energy technologies as long as they meet emissions reduction goals. The bill was introduced by Senate Finance Committee Chair Ron Wyden (D-Ore.) and 24 of his Democratic colleagues.

According to the Committee on Finance, the bill would do the following:

Incentives for Clean Electricity

• Provides an emissions-based, technology-neutral tax credit for the production of clean electricity that is open to all resources—renewable, fossil fuel, or anything in between—but only for facilities with zero or net negative carbon emissions.
• Any new zero emission facility may elect either a production tax credit (PTC) of up to 2.5 cents per kilowatt hour of electricity produced and sold or an investment tax credit (ITC) of up to 30 percent of the amount invested in the facility.
• Investments in critical grid improvements, like stand-alone energy storage and high-capacity transmission lines, qualify for the full-value ITC.
• To make the incentives more accessible, power projects and grid improvement projects have the option to receive the tax credits as "direct payments."

Incentives for Clean Transportation

• Encourages transportation electrification through long-term incentives for battery and fuel cell electric vehicles and electric vehicle charging. To make the incentives more accessible, the electric vehicle tax credit is made refundable for consumers.
• The bill expands the electric vehicle credit to provide a 30 percent credit for the purchase price of medium and heavy duty electric vehicles.
• Provides a technology-neutral PTC for domestic production of clean transportation fuel of up to $1 per gallon, dependent on the lifecycle carbon emissions of a given fuel. Open to all resources (including hydrogen), but only for fuels that are at least 25 percent cleaner than average, with clean fuels required to reach net zero by 2030 in order to qualify.

Incentives for Energy Conservation

• Provides tax credits for energy efficient new homes and for energy efficient improvements to existing homes, as well as tax deductions for energy efficient building components added to commercial buildings. The value of the tax incentives would increase as more energy is conserved.
• Promotes conservation in both new and existing buildings.

Ensures That Green Jobs are Good Jobs

• Projects receiving tax incentives must comply with federal labor requirements, including payment of prevailing wages.

Ends Tax Incentives for Fossil Fuels

• Repeals tax incentives for fossil fuels, ensuring the tax code rewards only clean energy.

Before advancing the bill, the Senate Finance Committee made a variety of modifications, including amongst others:

• Increasing the clean electricity ITC and PTC by 10 percent for (a) nascent clean energy technologies, (b) facilities located in an "energy community," which refers to communities historically employed by the oil and gas sector, and (c) facilities that use United States-produced steel and iron.
• Clarifying that publicly owned utilities, rural electric cooperatives, tribal utilities, and real estate investment trusts (REITs) can elect to receive direct payments of the ITC and PTC.
• Creating new clean hydrogen PTC and new clean hydrogen, biogas, and manure resource recovery ITCs.
• Creating a new (but short-lived) general business tax credit for sustainable aviation fuel, which sunsets after December 31, 2022.
• Creating additional tax credits for electric vehicles assembled in the United States or by workers represented by a labor organization.
• Placing a price limitation of $80,000 on electric vehicles that qualify for tax credits.
• Adding a new category of exempt facility bonds for carbon capture and storage and direct air capture projects.

The Clean Energy for America Act is designed to streamline the energy provisions of the tax code and make clean energy tax credits more effective and accessible. The expansion and extension of these tax credits and the ability for project sponsors to receive direct cash payments in lieu of credits are all significant changes that could vastly simplify the financing of clean energy and storage projects.

The Senate Finance Committee will report the updated bill to the full Senate this week. Democrats plan to take the bill up as part of the much larger infrastructure reconciliation package next month, but that legislation is extremely contentious, which could cause Senate action to spill over into September.