President Biden’s early days in office have clearly stated his administration’s decarbonization goals, including net zero greenhouse gas (GHG) emissions by 2050 and carbon-free electricity generation by 2035. The role that tax policy plays in achieving these goals will create many opportunities and challenges for companies, their advisers, and stakeholders.
While the scale is likely to tip further toward tax policies that are viewed as consistent with these environmental objectives, it is important to understand the evolution and current status of many of the U.S. federal tax provisions that support different sectors of the energy industry. The tax code has been used increasingly since the 1970s to promote long-term energy policy goals, including a secure supply of energy at a low cost that ensures energy production and consumption is consistent with environmental objectives.
Beginning in the mid-2000’s, an increasing share of energy-related tax preferences has focused on renewable energy sources, such as wind, and solar. The Joint Committee on Taxation (JCT) regularly publishes tax expenditure estimates, which are the U.S. Treasury revenue losses attributable to special income tax provisions. Prior to the Energy Policy Act of 2005, energy-related tax preferences were around $5 billion annually (in 2015 dollars). After the 2005 Act, these tax expenditures rose sharply, especially from 2009 to 2013, peaking at $25.4 billion in 2012, before falling to $15.8 billion in 2015. In 2018, the fossil fuel incentives accounted for only $3.2 billion (17.5 percent) of the total of $18.3 billion of energy-related tax incentives, whereas renewables and renewable fuels accounted for $9.8 billion (53.6 percent) and $3.4 billion (18.6 percent), respectively. Additionally, the credit for alternative technology vehicles was estimated at $1.2 billion (6.6 percent) of the energy-related tax preferences. Based on the JCT Estimates of Federal Tax Expenditures for Fiscal Years 2020–2024 dated November 5, 2020, over this five-year period, the estimated expenditures for the production tax credit (PTC) under Internal Revenue Code (IRC) section 45 is $17 billion, of which $15.5 billion is from wind power. The estimated expenditures for this period for the investment tax credit under IRC section 48 are $35.5 billion, of which $34.9 billion is from solar. In contrast, the expenditures over this period for the excess of percentage depletion over cost depletion are $3.6 billion, of which $2.9 billion is from oil and gas, and the expensing of exploration and development costs is $2.6 billion, of which $2.3 billion is from oil and gas. While these are only select provisions, they clearly reflect that under current law, the tax code currently places a significant emphasis on renewables over fossil fuels. This same trend is reflected at the state level, where a myriad of state incentives has been targeted toward renewable energy sources, including sales tax exemptions, property tax abatements, investment tax credits (ITCs) and other income tax benefits that may not apply to other energy sources, and other grants and incentives. Some of these programs have been made similarly applicable to manufacturers of “green” equipment for various industries (not just for energy production—vehicle parts, charging stations, etc.).
As the short-term focus of the Biden administration is the COVID-19 relief bill, near-term efforts will likely focus more on economic recovery and could include enhanced (and new) green energy incentives and areas such as infrastructure and manufacturing. The efforts around green energy could include a host of new “carrots” for green energy development, including:
- Extended PTCs and ITCs, which may also include battery storage ITCs
- Expanded carbon capture credits
- Electric vehicle credits
- Expanding publicly traded partnerships qualification to green energy
- IRC section 48C-type manufacturing credits
- The possibility that any or all of the above tax benefits may be made permanent and/or include a “refundability” feature.
As for the sticks, the elimination or reduction of certain fossil fuel-related tax benefits would potentially be targets to help pay for these green energy incentives, including the repeal of (1) expensing of intangible drilling costs, (2) enhanced oil recovery credits, and (3) percentage depletion.
Not only are these areas a focus of the federal government, but also consumers and investors are more tuned in to energy policy than ever before. The focus on corporate America’s goals around Environmental, Social, and Governance (ESG) transparency and decarbonization efforts has increased exponentially in recent years. Corporate tax for energy companies, as well as all industries in some form, will play a critical role in ESG.
In addition to the U.S. federal tax code and state tax legislation, green energy subsidy programs—such as Section 1603 of the American Recovery and Reinvestment Tax Act—provided for cash grants in lieu of tax credits and other spending programs administered by Department of Energy (DOE) have provided funding for new energy technologies.
Energy policy can be aligned with climate-related policies, but there must be a realistic assessment of the costs that consumers and governments can share. There has been an increased drumbeat in recent years coming from a diverse group around mechanisms to price carbon and greenhouse gas emissions (GHG) that is nondiscriminatory (i.e., does not pick winners and losers) and is transparent in order to incentivize changes to consumer behavior.
There is no doubt that the continued focus on decarbonization and the energy transition will be with us for many years, not necessarily based on what is happening in Washington and state governments, but because of what consumers and investors have to say about it. They want energy that is low cost and reliable with the environment in mind, a balancing act that is complex but not unattainable with the ingenuity of the energy industry.
- For additional background and historical perspective on energy production, consumption, and tax incentives, see CRS Report R44854, “21st Century U.S. Energy Sources: A Primer,” coordinated by Michael Ratner; CRS Report R44852 – Version 4 Updated, “The Value of Energy Tax Incentives for Different Types of Energy Resources,” by Molly F. Sherlock; and CRS Report IF11528 – Version 1, “Oil and Gas Tax Preferences,” by Molly F. Sherlock and Joseph S. Hughes, https://crsreports.congress.gov.
- CBO Report 50980, “Federal Support for the Development, Production, and Use of Fuels and Energy Technologies,” by Philip Webre, Terry Dinan, et al.
- CRS Report R44852, pg. 6–7.
- Estimates of Federal Tax Expenditures for Fiscal Years 2020 – 2024, Joint Committee on Taxation, JCX 23-20 (Nov. 5, 2020).
- See KPMG Report: Corporate tax: a critical part of ESG https://home.kpmg/xx/en/home/insights/2019/03/corporate-tax-a-critical-part-of-esg.html