Chairman Makes His Move on Energy Tax Overhaul

Senate Finance Committee Chairman Max Baucus(D-MT) speaks during a hearing on health insurance exchanges on November 6, 2013 in the Dirksen Senate Office on Capitol Hill in Washington, DC. (National Journal)

Senate Finance Committee Chairman Max Baucus is pitching an overhaul of energy tax policy that he's calling a money-saving, climate-friendly way to simplify today's "confusing and costly" maze of incentives.

The Montana Democrat is making a big political bet with the sweeping proposal unveiled Wednesday that would create a wholly new system of incentives for producing low-carbon electricity and fuels.

His plan would jettison incentives that have vocal political constituencies, such as oil companies and electric vehicle and efficiency advocates. But his office hopes to attract support because the proposal saves money compared to extending the current patchwork of energy incentives, and the plan is part of wider tax code overhaul efforts that would lower corporate rates.

"Our current set of energy tax incentives is overly complex and picks winners and losers with no clear policy rationale," Baucus said in a statement Wednesday. "We need a system of energy incentives that is more predictable, rational, and technology neutral to increase our energy security and ensure a clean and healthy environment for future generations."

Baucus is not running for reelection next year and has made it his top priority to try to reform the nation's complex tax code. The plan unveiled Wednesday is a piece of that effort.

But attempts to push through the first major tax-code reform since 1986 face gigantic hurdles on Capitol Hill, where even nuts-and-bolts measures draw partisan disputes.

According to a summary of the energy plan, more than three-dozen current incentives--including 25 temporary measures that expire every year or two — would largely be replaced with two primary incentive programs for electricity and motor fuels.

For new electricity projects, the plan creates a "technology neutral" sliding credit for producing power that's at least 25 percent less carbon-intensive than the national average. The 10-year credit would be available for projects that use any type of fuel — renewable, nuclear or fossil energy — as long as they're clean enough.

"The cleanliness of the generation technology determines the size of the credit," a staff summary states.

The biggest credit available is 2.3 cents per kilowatt hour of power production or, if claimed as an investment credit, up to 20 percent of a project's cost.

For transportation fuels such as next-wave biofuels, the draft plan similarly creates a "technology-neutral" credit for production and building new projects that would be available to various types of greener fuels. The less carbon-emitting the fuel, the more lucrative the incentive.

Both tax credit programs would begin in 2017.

The availability of the programs would phase out once the U.S. power and fuel mix hits certain carbon benchmarks. The power credit would phase out over four years once the carbon "intensity" of U.S. power generation — that is, the amount of emissions per amount of energy produced — is 25 percent cleaner than it is in 2013.

For motor fuels, it would start phasing out once the greenhouse gas intensity of all U.S. fuels overall has become 25 percent lower than conventional gasoline.

Until the programs launch in 2017, the plan would extend some expiring provisions for several years, including the soon-to-expire production tax credit for wind power producers that the industry calls vital.

The new draft follows a proposal Baucus released in November that would end some oil industry tax breaks. Taken together, the energy tax plans would save tens of billions of dollars, his office said.

Continuing to extend current incentives would cost almost $150 billion over 10 years, while the new proposals would at least trim that in half, according to Democratic staff on the finance committee.

In addition to the credits for new green electricity projects, the plan would create an investment tax credit for retrofitting industrial facilities with carbon capture and storage technology.

While he's pitching the broad overhaul, Baucus may also push forward with a separate and more limited package of tax "extenders" that would include provisions to prevent the wind credit from expiring at the end of 2013.