Tax Overhaul Hammers Clean Energy and Electric Cars

A series of proposals in both the House and Senate tax overhaul bills would pummel the renewable-energy and electric-vehicle industries.

Legislators from both chambers are now hashing out their differences in the reconciliation committee in hopes of delivering a final bill to the White House before the end of the year. Clean-energy lobbyists are scrambling to push back on provisions they and others fear could stunt development or deployment of technologies needed to lower the nation’s greenhouse-gas emissions.

“It’s headed backwards at a very crucial time, because things are just taking off,” says Tom Turrentine, director of the Plug-In Hybrid and Electric Vehicle Research Center at the University of California, Davis.

Observers do say that some of the most damaging measures could be removed during reconciliation, in part because several seem to have been the unintentional consequences of rushed-through changes.

The Senate’s Tax Cuts and Jobs Act, passed in the early morning last Saturday with handwritten scribbles down the margins, contains at least two major provisions stirring anxieties at renewable-energy companies.

One measure, designed to prevent companies from moving money overseas to reduce tax obligations, could make it far more difficult to fund renewable-energy projects.

As it stands, renewable-energy developers frequently transfer their federal tax credits to the multinational investors funding the projects. Unlike small or midsize developers, these large financiers are big enough to take full advantage of those credits, using them to offset their own tax liabilities. But under the language of the proposed rule, those investors might not be able to use those credits, eliminating their value and with it much of the incentive to fund renewable-energy projects, according to the American Council on Renewable Energy, a trade group based in Washington, D.C.

Together with the American Wind Energy Association and the Solar Energy Industries Association, the council is calling on legislators to remove these credits from the calculation of the tax. Most believe this specific impact of the bill was unintentional and are hopeful the problem will be fixed.

The second big issue in the Senate bill is a side effect of lowering the corporate tax rate to 20 percent. That’s equal to the rate of the stricter Alternative Minimum Tax, which allows fewer tax breaks. Companies must calculate both and pay the higher of the two. One major consequence is that fewer businesses would be able to use the research and development tax credit, designed to encourage companies across industries to invest in innovation.

Meanwhile, the House version of the tax overhaul targets federal incentives for renewable energy and electric vehicles. The bill trims tax credits for solar and wind energy, which Congress had extended by five years in December 2015 (see “Congress Extends Tax Credits for Renewables”). Specifically, it eliminates the 10 percent investment tax credit for large-scale solar projects after 2027. In addition, it would decrease the production tax credit for wind projects from 2.4 cents per kilowatt-hour to 1.5 cents. As written, the change could even apply retroactively to some projects already under way.

The American Wind Energy Association says the change would kill more than half the wind farms planned in the United States, putting at risk some $50 billion in planned investments.

A National Renewable Energy Laboratory study published last year estimated that the tax credit extensions would stimulate the development of dozens of gigawatts’ worth of additional renewable-energy generation for years, cutting emissions from the electricity sector by as much 1,420 million metric tons by 2030. More solar and wind installations also mean more construction projects and jobs, in red states as well as blue. The Department of Energy estimates that the solar industry workforce grew by 25 percent last year, while jobs in wind energy climbed 32 percent.

These factors have generated considerable bipartisan support for the tax credits, which is likely to mean they’ll ultimately survive the merger of the bills, predicts David Victor, an energy policy researcher at the University of California, San Diego.

“Indeed, tax support for renewables is one of the only areas of deep bipartisanship in energy,” he said in an e-mail to MIT Technology Review.

Less clear is the level of federal support for the $7,500 tax credit for electric vehicles, which the House bill would repeal. That could have a huge impact on sales, stalling momentum for the nascent automobile category. Tax credits or other incentives are crucial for closing the price gap between combustion-engine vehicles and EVs, which is otherwise likely to persist until around 2025 (see “It Already Makes Sense to Buy an Electric Car”).

Studies have consistently shown that incentives drive sales, particularly for lower-end, lower-range vehicles, according to a review of the literature earlier this year by UC Davis researchers. Famously, EV sales plummeted by 80 percent in Georgia after the state cut its $5,000 tax credit, according to a report in the Atlanta Journal-Constitution.

There were a few giveaways to clean energy in the tax bills, including an extension of a tax credit for the nuclear industry and the restoration of one for “orphaned” technologies left out of the earlier renewables extension, like geothermal and fuel cells. And of course, few energy companies, clean or otherwise, are complaining loudly about a sharp cut in corporate taxes.

Both bills preserve most of the major tax breaks for the oil and gas industry, including deductions for “intangible drilling costs” that add up to billions in savings. The Senate version would also open up Alaska’s Arctic National Wildlife Refuge to oil and gas exploration, the subject of a bitter, decades-long battle between environmental and energy interests.

Overall, UC San Diego’s Victor says, the tax overhaul is less a reflection of clear federal energy priorities than policy incoherence. The only consistent themes are cutting taxes and regulations.

“Neither Congress nor the administration is putting much attention on what we know would have a big impact on long-term transformation of the energy system—massive innovation and deployment of new technology,” he says. “Meanwhile, the country and markets stumble on.”