Overview

Today, the Senate Finance Committee plans to mark up the Clean Energy for America Act, which proposes to consolidate the current plethora of renewable energy tax credits into three new buckets – for “clean” fuel, “clean” electricity, and energy efficiency. While the Committee’s focus is on clean energy and climate mitigation, some parts of the bill could resurrect wasteful subsidies that do little to reduce carbon emissions – or worse yet, increase climate risks.

The Joint Committee on Taxation (JCT) estimates Chairman Wyden’s (D-OR) clean energy tax extenders legislation would cost taxpayers $215.5 billion over the next decade (Fiscal Year (FY) 2022-2031). A rough breakdown of the bill’s 10-year cost estimates includes the following:

• Eliminating fossil fuel incentives is expected to save $24.5 billion, but the bill proposes huge spending increases on electric vehicles, alternative fuels, renewable electricity, manufacturing, and energy efficiency.
• Renewable electricity tax credits are expected to cost taxpayers $155 billion over the next ten years, an increase over current law (as a comparison, current credits for renewables – primarily wind and solar – are expected to cost $10.6 billion in FY22). The additional credits would be made up of new Clean Electricity Production and Investment Credits for both businesses and residences. The majority of the projected costs are expected to occur in the latter part of the decade. These provisions could subsidize forms of biomass that fail to significantly reduce greenhouse gas (GHG) emissions.
• Clean Fuel Production Credit (which is intended to consolidate the current maze of credits such as those for biomass-based diesel, alternative fuel mixtures, and cellulosic biofuel) is expected to cost taxpayers $20 billion over the next ten years, rising to $4.8 billion in FY25 alone. It could end up costing taxpayers more than projected in out-years due to credits being tied to estimates of carbon reductions in future years. Either way, the new credit is expected to cost more than the status quo, primarily because the costliest biofuels extender – the $3 billion-per-year biodiesel tax credit – is due to expire at the end of 2022. Furthermore, some of the subsidized fuels may not actually reduce climate-related emissions in practice (more info below).
• Electric vehicle credits – $21 billion
• Energy efficiency credits – $21 billion
• Clean Electricity and Fuel Bonds – $10 billion
• Other incentives such as those for clean energy manufacturing – round out the total $215.5 billion, in addition to other policy changes and the elimination of certain existing credits.

New Fuel Credits May Be Anything but Clean

Senator Wyden’s bill proposes a new “clean” fuel production credit, but it may be anything but clean in practice.

The U.S. has already heavily subsidized the corn ethanol and soy biodiesel industries for decades. Billions of taxpayer dollars have been wasted each year on biofuels tax credits that have failed to achieve their primary goal – significantly reducing GHG emissions. Currently, the U.S. provides a $1 per gallon tax credit for biomass-based diesel. In addition, a $1.01 per gallon credit has also been provided for cellulosic biofuels. Other credits such as those for biofuels and electric vehicle infrastructure, other alternative fuel mixtures, etc. have also distorted markets and propped up demand for certain industries at taxpayer expense.

Senator Wyden’s new bill to consolidate biofuels and other energy tax extenders recognizes that historic energy tax policies have picked winners and losers. As a result, the new legislation proposes a technology-neutral Clean Fuel Production Credit. The new credit, if enacted, would provide up to $1 per gallon for biofuels that reduce lifecycle carbon emissions by at least 25 percent as compared to the current nationwide fuel average. Over time, fuels would only qualify if they reduced carbon emissions by greater levels:

• In 2026 and 2027, fuels with carbon emissions of less than 50 kg CO2e per mmBtu would qualify for a credit.
• In 2028 and 2029, the threshold would be 25 kg CO2e per mmBtu.
• Beginning in 2030, only zero-emission fuels would receive a credit.

According to the bill summary,

“The credits are set to phase out when emission targets are achieved: when EPA and DOE certify that the transportation 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 bill would also create “a tax credit bond for facilities producing clean electricity or clean transportation fuels.”

The devil is always in the details, however. Carbon emission reduction calculations don’t just fall out of the sky and onto the Treasury’s desk. They must first be calculated by government staff. Several factors enter into the calculations, and decisions must be made about which emissions factors to include or not, at which levels, and more. Just one example is how to account for changes in land use (when the government subsidizes biofuels, farmers plant more biofuels crops, which impacts crop prices and future crop choices). Various universities and independent government analysts land on a wide range of carbon emission estimates for biofuels, not to mention the plethora of different production pathways for each type of biofuel (a corn ethanol facility powered by coal or natural gas, for instance). The National Academies of Sciences found that biofuels subsidies increase – instead of decrease – GHG emissions, running counter to Congress’s original intent.

The Wyden bill could bring some wasteful corn ethanol subsidies back from the dead. This even though a bipartisan Senate voted to kill the ethanol tax credit almost exactly a decade ago – in June 2011 – and the credit ultimately ended in Dec. 2011. Current biodiesel tax credits also distort markets and waste taxpayer dollars, especially given some biodiesel derived from animal fats and used cooking oil is economic on its own without government subsidies, as reported by the Congressional Budget Office (CBO). Yet, as one of the most expensive energy tax extenders, the biodiesel credit currently costs taxpayers $3 billion annually. Certain types of mature biodiesel and ethanol, biofuel facilities powered by biomass sources, and others could qualify for credits under the Wyden proposal.

Instead of resurrecting wasteful, market-distorting, special interest tax breaks that may not actually reduce climate-causing emissions, Congress should invest in real, lasting climate solutions.