Two New Senate Tax Bills Focus on System Decarbonization
Two bills introduced over the past week are looking to use tax incentives to drive technology innovation and system decarbonization: the Clean Energy for America Act (CEAA), introduced by Senate Finance Chair Ron Wyden (D-OR) and the bi-partisan Energy Sector Innovation Credit (ESIC) bill, introduced by Senate Finance ranking member Mike Crapo (R-ID) and Senator Sheldon Whitehouse (D-RI). Tax credits can play an important role in incentivizing technologies for decarbonizing the US energy system. The wind production tax credit, solar investment tax credit, and electric vehicle purchase tax credits have helped launch new components of a zero-carbon energy system in our country. And, although it requires enhancements to fully deliver on ambition, the 45Q tax credit could be poised to do the same for carbon capture, removal, and storage. Ensuring our tax credit system drives clean energy technology innovation and deployment at a meaningful scale is an important part of driving system decarbonization.
Renewables and Zero Carbon Firm Technologies
The CEAA would create a system of tax credits that potentially apply to all low or zero-carbon technologies. Very importantly, this bill would allow those technologies to apply these credits against the direct payments made by taxpayers to the IRS, also known as direct pay. This would allow project developers to bypass the very limited tax equity finance markets and fully recognize the value of the credit immediately. But, the CEAA is likely to primarily deploy variable wind and solar power, given the proposed value of the credit and how much further these technologies are on the learning and cost curves relative to firm dispatchable zero-carbon power technologies.
ESIC would provide tax incentives designed to drive innovation with low and zero-carbon technologies that are at earlier stages in the learning and development curve. Generally, these technologies fall into the category of firm and dispatchable power production, like carbon capture, advanced nuclear fission and fusion, advanced forms of renewables, and long-duration storage. Deploying these technologies at scale will be an important part of a decarbonized power system, complementing variable renewables.
Another important provision on the ESIC bill is the inclusion of a hydrogen production tax credit. Hydrogen can play an important role in decarbonizing the power, industry, and transportation sectors, and is its virtually certain that hydrogen will be necessary to fully decarbonize certain “hard to abate” areas, like shipping and long-haul trucking. Adoption of a hydrogen PTC was also called out as part of President Biden’s American Jobs Plan.
The carbon capture tax credit, 45Q, continues under both the ESIC and CEAA bills. CEAA would extend the commence construction deadline of 45Q and increase credit values for direct air capture (DAC). However, a more comprehensive reform of 45Q is needed to deploy carbon capture, removal and storage to deliver on net-zero goals in the industrial, power and carbon removal sectors. Moreover, an expansion and extension of 45Q was also called out in the Biden Administration’s American Jobs Plan for industrial, power and DAC sources. As noted recently in a blog by my colleague Lee Beck, such an expansion and extension, should also be included in national tax credit strategy promoting clean energy.
The introduction of both CEAA and ESIC provides important and complementary frameworks for creating a tax code that drives needed changes to our energy system. And, the understanding that the tax code can play such a role is recognized on a bi-partisan basis. Congress should move forward on adopting an ambitious and comprehensive set of tax code changes that help create our national net-zero carbon energy system.