Radical: Baucus wants US energy incentives that make some sense

Montana senator Max Baucus, has proposed something remarkable – unbelievable really. A senior Democrat, the next U.S. ambassador to China, wants to throw out the existing spider web of federal “clean energy” goodies. These are the 42 tax incentives that deliver flavors of pork to the anointed providers – from ethanol to solar to wind. Baucus isn’t silly enough to propose something really efficient, like a revenue-neutral carbon tax. But his proposal is extremely radical by Washington standards. Here is Ezra Klein’s take:

(…snip…) Baucus’s proposal would be to get rid of those 42 energy tax incentives and, in their place, create two broad credits:

1) First, any facility producing electricity that is at least 25 percent cleaner than the average for all electricity production facilities would receive a tax credit. The cleaner the facility, the larger the tax credit. (By “clean,” Baucus is referring to greenhouse-gas emissions per unit of electricity produced.)

This credit starts at 2.3 cents per kilowatt of generation and rises to a maximum of 20 percent of the total cost of the investment. Companies couldn’t get the credit until they started producing power, and then they’d get the break for 10 years.

All of these credits, meanwhile, would phase out in four years once the greenhouse-gas intensity of the entire U.S. electricity sector is 25 percent below current levels. So there’s an overall limit.

2) Likewise, any transportation fuel that is at least 25 percent cleaner than conventional gasoline will generally receive a credit. Again, the cleaner and more energy-efficient the fuel, the larger the credit — and the bill would take the entire life-cycle into account when judging the fuel. So if, say, corn-based ethanol wasn’t cleaner than gasoline, no tax credit.

(Note that the credit for transportation fuels would likely need to be paired with a repeal of the Renewable Fuel Standard that requires refineries to blend a certain amount of ethanol into gasoline. It wouldn’t make sense otherwise. But Baucus’s committee doesn’t have jurisdiction over that fuel standard, so this part isn’t in the proposal.)

The upside to this reform, Baucus notes, is that any technology could qualify for these credits so long as it meets the goal of curbing greenhouse-gas emissions. An ultra-efficient natural gas plant could qualify. So could a wind farm. Or a nuclear reactor. Or a coal plant that can capture its emissions and bury it underground.

“One advantage of this reform is that it wouldn’t favor the ‘golden boy’ technologies like wind and solar,” says Paul Bledsoe, a fellow with the German Marshall Fund and a former staff member on the Senate Finance Committe. “That old approach has created a lot of resentment in the business community.”

(…snip…)

Especially radical is that the Baucus reform would recognize that nuclear is a powerful clean energy option. What are the political chances of this idea? Behind every one of those 42 special tax treatments is a powerful group of people who are very happy with the status quo.

2 thoughts on “Radical: Baucus wants US energy incentives that make some sense

  1. Engineer-Poet

    Since we need to achieve no less than an 80% reduction in emissions, there’s no purpose served by phasing out the regime when reductions hit 25%.

    Instead, the bar should go up.  As the average emissions go down, so should the upper limit for claiming the tax credit.  Also, when reductions hit some level, the tax credits should be offset by taxes on higher-emitting generators.  Eventually things will hit the level of diminishing returns and new plants will stop being able to claim the tax credit because they couldn’t qualify.

    Reply
    1. Steve Darden Post author

      Thanks for your comments – very helpful.

      Since we need to achieve no less than an 80% reduction in emissions, there’s no purpose served by phasing out the regime when reductions hit 25%.

      Agreed. The phaseout doesn’t make engineering sense. But perhaps it makes political sense – e.g., because of opposition based on the “high cost” of the tax subsidies, the drafters came up with a way of capping the size of the total incentive. I think it is wrong-headed. But I’m not a politician.

      Instead, the bar should go up. As the average emissions go down, so should the upper limit for claiming the tax credit.

      Yes – I interpret your intent for “upper limit for claiming” to mean “threshold” for claiming. This is a good incentive design. Japan’s Top Runner program for setting product standards works like your suggestion though it is a performance regulation, not an incentive. In Top Runner the bar is set by the best-performing product.

      Also, when reductions hit some level, the tax credits should be offset by taxes on higher-emitting generators. Eventually things will hit the level of diminishing returns and new plants will stop being able to claim the tax credit because they couldn’t qualify.

      That’s an interesting idea. Politically maybe that would fly (where a revenue-neutral carbon tax has no chance at this time).

      Reply

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