Fiscal Cliff Deal Extends Several Sustainable Energy Tax Credits

The fiscal cliff deal, which passed both chambers of Congress on Tuesday, January 1 (by bipartisan votes of 89 to 8 in the Senate, and by 257 to 167 in the House), includes the extension of several energy tax credits, including those for wind energy, biodiesel, cellulosic ethanol, as well as credits for smaller electric vehicles (including motorcycles) and energy-efficient new homes and appliances. The bill, originally put together in the Senate with Vice President Joe Biden representing the administration, is nevertheless a mixed bag, as several critical energy-related decisions were deferred and will need to be addressed by the upcoming Congress. For example, though the deal extended the 2008 Farm Bill through the fiscal year, it did not include any mandatory funding for its energy title programs, a major loss, nor did it include the broadly supported on-bill financing provisions for rural electric cooperatives, which were part of the Senate-passed farm bill.

The American Taxpayer Relief Act of 2012 comes as a particular relief to the wind energy industry, which had seen a significant slowdown (accompanied by layoffs) as uncertainty about its tax status reigned. According to Navigant Consulting, the extension of the Production Tax Credit and Investment Tax Credits will help secure 37,000 jobs that may have been lost otherwise. A record 44 percent of all electrical capacity installed in the United States in 2012 was wind-based, according to the Energy Information Administration (natural gas came in second, accounting for 30 percent of new capacity installed). Denise Bode, the outgoing CEO of the American Wind Energy Association (AWEA), declared, "On behalf of all the people working in wind energy manufacturing facilities, their families, and all the communities that benefit, we thank President Obama and all the Members of the House and Senate who had the foresight to extend this successful policy, so wind projects can continue to be developed in 2013 and 2014." AWEA has floated a 6-year phase-out of the Production Tax Credit, which could be considered if tax reform is tackled by the new Congress.

In addition to wind projects, the Production Tax Credit (PTC) also covers other renewable energy sources, including biomass and geothermal energy. An important change that applies across the board is new language that allows projects to qualify for the PTC as long as they are under construction before the end of 2013 (previously, projects had to be in service before the end of the year to benefit from the credit). This new approach will be very helpful for technologies, such as geothermal power, that have longer development lead times.

Investment Tax Credits, which are often favored by developers because they are granted upfront, have been extended for offshore and community-scale wind projects (but most onshore wind projects only qualify for the PTC). Investment Tax Credits for other renewables, such as solar, geothermal, small wind (household or farm scale) and fuel cell projects run through 2016 and were not affected by the fiscal cliff deal.

The U.S. biodiesel industry also had reason to be thankful, as the biodiesel tax incentive, which expired a year ago, has been reinstated for both 2012 (retroactively) and 2013. A study by Cardno Entrix, an international economics consulting firm, found that the biodiesel industry will be able to support 112,078 jobs with the credit, compared to 81,977 without it. In addition to its lower greenhouse gas emissions, biodiesel (which replaces diesel and can be made from many organic sources, including recycled cooking oil, soybean oil and animal fats) also helps reduce America's dependence on oil imports, making the country less vulnerable to supply shocks. The tax credit for another biofuel, cellulosic ethanol, has also been extended, and algae will now be treated as a qualified feedstock for biofuel production.

Tax credits worth up to 10 percent of the cost (up to $2,500) of two- or three-wheeled plug-in electric vehicles (PEVs) were also renewed, while existing tax credits for four-wheeled PEVs were unaffected. Supporters argue that such tax credits reward the positive externalities that result from driving an electric vehicle: when an individual purchases a PEV, society as a whole benefits from the reduced emissions. The bill also raised the transit commuter tax benefit to pre-2012 levels of $240 per month, restoring parity with federal tax benefits for parking.

Tax credits were also extended through 2013 for new and existing energy efficient homes and energy efficient appliances. Builders of newly constructed (or substantially rehabilitated) houses for sale or lease are eligible for the $2,000 energy efficient new homes credit (Section 45L of the Internal Revenue Code). A house must consume at least 50 percent less energy for heating and cooling than a comparable home and meet other efficiency requirements. In an amendment to Sec. 45L, “comparable” houses are now defined as those built to the 2006 International Energy Conservation Code (IECC) versus the 2003 IECC that was previously cited. In addition, producers of manufactured homes that are 30 percent more energy efficient than comparable HUD-Code homes or that meet ENERGY STAR requirements are eligible for a $1,000 tax credit. The legislation extends the 10 percent tax credit for energy efficiency improvements to existing homes (IRC Sec. 25C). A variety of specific measures are eligible, but the $500 lifetime cap per house remains. Finally, tax credits are extended for the production of energy efficient appliances. Efficiency standards and tax savings vary according to the type of appliance.

The fiscal cliff deal extends a pared down version of the 2008 Farm Bill, which had lapsed last September. The extension does not include mandatory funding for the Farm Bill's energy title programs, a potentially big blow to the budding bioenergy industry and to rural economies. Programs affected include the Bio-Based Markets Program, Biorefinery Assistance Program, Rural Energy for America Program, Biomass Research and Development Program, and the Biomass Crop Assistance Program. These programs received mandatory funding in the 2008 Farm Bill, and, in 2012, a strong bipartisan majority in the Senate approved continuing mandatory funding for these programs over the next five years, as part of the Senate's five-year Farm Bill reauthorization bill.