GOP dismissive as Obama revives efforts to shift incentives from fossil fuels to renewables 

Source: Nick Juliano, E&E reporter • Posted: Tuesday, February 3, 2015

President Obama’s budget request reiterates and expands on long-standing efforts to shift the tax code further in favor of alternative energy sources and efficiency at the expense of traditional fossil fuels.There are a few new tax items proposed in the fiscal 2016 budget, including incentives for carbon capture and sequestration (CCS) and a first-time call to eliminate master limited partnerships (MLPs) popular with oil and gas companies. But in general, the budget dovetails with the president’s long-standing approach to the tax code as it affects the energy sector.

Proposing a wholesale elimination of MLPs, which are not subject to corporate taxes but establish shares that can be traded in a similar way to stocks, represents a break from ideas that have gained currency in clean energy circles in recent years. Rather than eliminate MLPs for projects like oil and gas drilling, coal mining and pipeline construction — and take on some of the energy sector’s most powerful interests — some have called to allow wind, solar and efficiency firms to establish MLPs of their own, and in the absence of a legal change, some clean energy firms are establishing MLP-like arrangements known as “yieldcos” (EnergyWire, July 29, 2014). Obama’s proposal would require MLPs to pay taxes as traditional C corporations beginning in 2021.

The budget request released yesterday — which again seeks to make renewable energy credits permanent and refundable while eliminating a variety of tax breaks for the oil, gas and coal industries — faces even longer odds of becoming reality with Republicans now in unified control of Congress. But it highlights a continued commitment on the part of the administration to an aggressive shift in the tax code that will color negotiations between the Capitol and White House for the remainder of the year.

Congressional leaders were quick to dismiss Obama’s overall budget request. Senate Finance Chairman Orrin Hatch (R-Utah) called it “partisan, not practical” and declared it a non-starter in Congress; his House counterpart, Ways and Means Chairman Paul Ryan (R-Wis.), said he wants to work with the administration on tax reform but that the president “has to demonstrate that he’s interested in governing, not just posturing.”

The lead tax-writers did not directly address Obama’s energy proposals, but they have rejected previous calls from the administration to end fossil fuel subsidies and make renewable energy benefits more generous.

Sen. James Inhofe (R-Okla.), who chairs the Environment and Public Works Committee, singled out the proposed MLP elimination among other aspects of the budget request he particularly did not like. Eliminating MLPs “would dramatically increase the cost of raising capital for Oklahoma’s energy industry and, in turn, would stifle job creation,” Inhofe said in a statement.

“Between the president’s unwillingness to complete the Keystone pipeline, the federal land grab in Alaska, and now his targeting of these provisions, it is clear the president does not support energy independence as an affordable, near-term goal,” he added.

The Washington, D.C.-based research firm ClearView Energy Partners said in a note to clients yesterday afternoon that the MLP proposal — along with the rest of the budget — stands little chance of becoming law. But it noted that the proposal may indicate that the IRS is “unlikely to further expand the category of qualifying sources (e.g., refineries, fracking sand, etc.).”

In addition to ending MLPs, the budget request would eliminate a suite of fossil fuel incentives that the administration has long tried to put on the chopping block, including the intangible drilling costs deduction and percent depletion rules prized by the oil and gas industry and the ability of drilling, mining and refining companies to benefit from the so-called 199 manufacturing tax deduction.

The Treasury Department, in its explanation of the proposals, cites Obama’s commitment at the 2009 G-20 summit in Pittsburgh to eliminate “subsidies for fossil fuels” and said the incentives “distort markets by encouraging more investment in the fossil fuel sector than would occur under a neutral system.”

The new CCS incentives would replace existing credits designed to promote carbon sequestration. Current law provides a $20 credit for every ton of carbon dioxide permanently buried underground and a $10 credit for CO2 sequestered as part of an enhanced oil recovery (EOR) operation, and those credits are available until at least 75 million metric tons has been sequestered. Energy Secretary Ernest Moniz said yesterday that he expects a 10 million ton sequestration milestone to be met this year.

Under the budget proposal, the credit for permanent sequestration separate from EOR would rise to $50 per ton, while it would remain at $10 per ton for CO2 for EOR or another beneficial reuse. Additionally, the budget would provide a 30 percent investment tax credit to cover the installation of CCS systems capable of capturing more than 75 percent of CO2 emissions at a new or modified power plant larger than 250 megawatts. It would authorize $2 billion for the investment credit.

Wind and solar developers also would see their tax credits made permanent under the president’s proposal. The production tax credit, which primarily benefits wind energy, expired at the end of last year, while the solar investment tax credit falls from 30 percent to 10 percent after 2016. Under the budget request, those would be made permanent and refundable, sparing eligible firms from having to partner with tax equity investors to take advantage of the credits.

Similar requests have fallen flat in previous years, although some Republicans have indicated a willingness to phase out the credits rather than bring them to an abrupt end.

Environmentalists said the tax proposals are a key aspect of the budget’s overall efforts to support implementation of President Obama’s plans to reduce the effects of climate change.

“To combat that threat, we must continue to accelerate America’s clean energy revolution,” Anna Aurillio, head of Environment America’s Washington, D.C., office, said in a statement. “That’s why his proposals to increase spending on clean energy research, permanently extend clean energy tax incentives, and incentivize states to exceed