Biden tax plan chops fossil fuel subsidies to ramp up renewables

Replacing $35 billion in fossil fuel subsidies with new incentives for clean energy producers is a necessary step to help the US reach a carbon-free grid by 2035, the Department of the Treasury said in its "Made in America Tax Plan" released 8 April.

The 19-page plan outlines the fiscal steps the Biden administration hopes to take to pay in full, over 15 years, for the $2-trillion American Jobs Plan the president rolled out March 31 (the spending in the plan would be take place over 10 years). The infrastructure-investment plan includes implementing a clean energy standard that will gradually push utilities to switch to emission-free sources.

The Treasury said the tax plan would end "long-entrenched subsidies to fossil fuels, promote nascent green technologies through targeted tax incentives, encourage the adoption of electric vehicles, and support further deployment of alternative energy sources such as solar and wind power."

Prospects for the massive infrastructure package brightened this week when the Senate parliamentarian, who advises on legislative rules, said 5 April that Democrats can use the budget reconciliation mechanism to bypass the regular two-thirds vote and pass the package with a simple 50-50 vote.

However, West Virginia Democrat Senator Joe Manchin has already indicated he won't support that approach, which would erase his party's razor-thin Senate majority vote.

Biden, meanwhile, said that he is willing to work with Democrats and Republicans to hammer out a bipartisan solution on the funding side.

Fossil fuel subsidies hard to erase

Manchin and other moderate Democrats are concerned that Biden's plan to bump up the corporate tax rate from 21% to 28% and to close tax loopholes will cost jobs in a struggling economy. For the same reason, they also are likely to be lukewarm to the idea of eliminating subsidies for large coal, oil, and natural gas producers.

Indeed, fossil fuel subsidies have historically proven difficult to tackle. Legislation introduced by Democrats since the US signed a G20 pledge in 2009 to phase them out have repeatedly failed.

The American Petroleum Institute (API), the oil and gas industry's main lobby group, immediately came out against the Treasury's plan. "Targeting specific industries with new taxes would only undermine the nation's economic recovery and jeopardize good-paying jobs, including union jobs," Frank Macchiarola, API's senior vice president for policy, economic and regulatory affairs, said in a statement.

"It's important to note that our industry receives no special tax treatment, and we will continue to advocate for a tax code that supports a level playing field for all economic sectors, along with policies that sustain and grow the billions of dollars in government revenue that we help generate," he added.

But the Biden administration argues that tax preferences for the industry are not only substantial -- estimated to reach $35 billion over the next decade -- but that they also impede other energy sectors by making them less cost-competitive.

"Tax preferences for oil, gas, and coal producers today decrease their tax liabilities relative to other firms," the Treasury plan said. "Not only does this lead to lower overall tax receipts, but these provisions of the tax code shift our energy production away from cleaner alternatives, undermining long-term energy independence and the fight against climate change."

Tax credits to fuel transition

Biden's tax plan would advance clean electricity production by providing a 10-year extension of the federal production tax credit for emissions-free energy generation from wind and solar as well as for storage, and making such credits "direct pay" to help jumpstart projects. Direct pay enables the holder of a credit to use it to reduce its tax bill, even if its tax bill is negative, thus guaranteeing that the subsidy can be taken.

According to the plan, current incentives for clean energy production and investments are insufficient to match the massive scope of the nation's environmental and climate problems. It said the stop-and-go production tax credit for renewable electricity producers led to significant policy uncertainty for developers.

An IHS Markit report released the same day Biden's tax plan was unveiled said that onshore wind is the biggest potential beneficiary of the administration's strategy, especially as it would extend the production tax credit to 10 years. The US has roughly 37 GW of onshore wind capacity additions planned through the end of the decade, frontloaded with almost 9.5 GW planned for 2021.

The report estimates that more than 19 GW of energy storage plans are in the pipeline through 2030, with current Americas market leaders LG Energy Solution, Powin Energy, and Tesla Energy likely to benefit as project financing becomes easier under the American Jobs Plan provisions.

Biden's tax plan also includes incentives to help build at least 20 GW of high-voltage capacity power lines to interconnect renewables, a major undertaking needed to help decarbonize the grid over the next 15 years.

"Such a policy would significantly accelerate the pace of renewable energy deployment across the country, and, on the surface, sets a target more aggressive than any state policy today," IHS Markit's power and renewable analysts wrote in a joint report.

Aviation emissions next

The plan also would also extend the 48C advanced energy manufacturing tax credit that supports manufacturers that supply clean energy projects, and introduce a blender's tax credit to boost production of sustainable aviation fuel.

Cargo carriers, general aviation, and other industry players last week sent a letter to administration officials urging them to include the blender's tax credit in the package, calling it "the most efficient way to decarbonize the aviation industry while creating green jobs and opportunity for other sectors."

The Biden administration, clearly, is prepared to tackle everything from aviation pollution to fossil fuel subsidies to put the nation on a net-zero emissions trajectory.

"Together with non-tax initiatives, like the Energy Efficiency and Clean Electricity Standard," its tax plan said, "the plan sets the country on a path to 100% carbon pollution-free electricity by 2035."

Posted 09 April 2021 by Amena Saiyid, Senior Climate and Energy Research Analyst