On May 28, 2021, the Treasury Department published the General Explanatory Notes on the Government’s Proposed Revenue for Fiscal Year 2022, better known as the Green Paper. The publication of the Green Paper provides more details on the American Jobs Plan of the White House, one of the key proposals in the formulation of an infrastructure bill. The Green Paper will be published while the Congress is working on its own proposals. While the various proposals have different approaches, they suggest strong, sustained and expanded support for initiatives to tax green electricity.
In this warning we provide a summary of the corporate energy tax proposals in the Green Paper. Bloomberg Tax provides additional background information on the latest energy tax proposals.
The Green Paper provides more details on the energy tax proposals previously announced by the administration. In general, these proposals take the approach of expanding and improving currently available tax credits similar to the House Growing Renewable Energy and Efficiency Now (GREEN) Act, rather than adopting new technology-neutral green power tax incentives as envisaged by the Senate Clean Energy for America Act (CEAA). Below is a summary of the energy tax proposals related to the Green Paper:
- Section 45 Production Tax Credit (PTC)
- Full loan amount for qualified facilities whose construction begins after December 31, 2021 and before January 1, 2027; 20% per year, reduced to zero over a period of five years from 2027
- Option to choose a cash payment instead of the PTC
- Section 48 Investment Tax Credit (ITK)
- Expansion of loans for investments in solar and geothermal electrical energy real estate, qualified fuel cell power plants, geothermal heat pumps, small wind real estate, offshore wind real estate, waste energy real estate and cogeneration real estate to a full 30% for systems for which construction begins after December 31, 2021 and before January 1, 2027; 20% per year, reduced to zero over a period of five years from 2027
- ITC 2022 expanded to include self-sufficient energy storage (capacity at least 5 kilowatt hours)
- Option to choose a cash payment instead of the ITC
Observation of Eversheds Sutherland: Laws passed in late 2019 created an anomaly for 2019 whereby wind projects that started construction in 2018 and 2020 received a higher tax allowance than projects that started construction in 2019. The proposals in the Green Paper appear to create similar situations for renewable energies by raising lending rates only for projects whose construction begins after 2021. Congress should urgently consider adopting rules that provide parity for projects currently under development.
- Transfer ITC
- 30% credit for investments in qualified power transmission properties that were commissioned after 2021 and before 2032
- Qualified power transmission properties include overhead line, submarine and underground transmission facilities with a minimum voltage of 275 kilovolts and a minimum transmission capacity of 500 megawattwatts
- Option to choose a cash payment instead of the ITC
- Section 45Q Carbon Capture, Use and Sequestration (CCUS) Credit
- Extension of the start of construction period by 5 years until January 1st, 2031
- An additional $ 35 per tonne of Qualified Carbon Oxide for Qualified Carbon Oxide captured in cement production, steelmaking, hydrogen production, and petroleum refining and disposed of in secure geological repositories
- An additional $ 70 per tonne of Qualified Carbon Oxide from direct air capture projects and disposed of in safe geological repositories
- Option of cash payment instead of credit
Observation of Eversheds Sutherland: The extension of the CCUS credit and the changes in the credit amounts are welcome news given the potential of CCUS technology to reduce greenhouse gases. Any final package must consider what is economically required to incentivize CCUS investments, especially CCUS investments for which there is no independent source of income, such as B. Sequestration Projects.
- Section 45J Nuclear PTC
- Extension of Section 45J to include power generation from existing nuclear power plants: up to $ 1 billion for existing nuclear power plants to bid for credit between January 1, 2022 and January 1, 2030
- Would require an allocation of credits to be received; Bid would be obtained every 2 years
- Option to choose a cash payment instead of credit
Observation of Eversheds Sutherland: Unlike the current § 45J, which provides for a tax credit for the first 8 years of operation, this would allow credits aimed at economically endangered plants in order to prevent the premature decommissioning of nuclear power plants.
- Sustainable aviation fuel
- Establishes a sustainable aviation fuel production tax credit of $ 1.50 per gallon for sustainable aviation fuel that reduces emissions by at least 50% compared to traditional aviation fuel, with a maximum credit of $ 1.75 per gallon for fuel with an emission reduction of 100%
- Available for fuel produced between 2022 and 2027
Observation of Eversheds Sutherland: Given the aviation emissions concerns, there have been a number of bills in support of sustainable aviation fuels and the Green Paper continues that support. Congress and government should think carefully about how to ensure these regulations create a market for clean energy fuels for aviation as they develop the legal requirements for eligibility for this credit. Notably, the Green Paper lacks credit extensions for other fuels, although Congress proposals continue to provide support for existing fuel credits
- Section 48C qualifies advanced energy project loans
- Approves an additional $ 10 billion to invest in eligible property to be used in a qualifying advanced energy production project, allocating $ 5 billion to coal communities
- Revises the definition of a qualified advanced energy project to include industrial facilities, recycling in addition to production, and advanced eligible technologies including energy storage, grid modernization, carbon capture and sequestration, and energy conservation
- 3-year deadline for loan applications, starting on December 31, 2021
- Credit for electric vehicles
- Generates electric vehicle credits for heavy and medium-duty zero-emission vehicles, including battery and fuel cell electric vehicles
- Eligible vehicles must be purchased by the taxpayer for use or lease, not resale
- Original use must start with the taxpayer
- Funds range from $ 10,000 to $ 120,000 depending on the vehicle class (Class 3 to Class 8 according to the Federal Highway Administration classification) and the year of purchase (2022 to 2027)
- Option to choose a cash payment instead of credit
- Also expands EV charging point tax credit for up to $ 200,000 per device and extending the credit through 2026
- PTC. with low carbon hydrogen
- Establishes a PTC for Qualified Low Carbon Hydrogen: (1) produced by taxpayers; (2) for an end use in the energy, industrial, chemical or transportation sectors; and (3) from a qualified low carbon hydrogen production facility
- Qualified low carbon hydrogen would include hydrogen produced using carbon-free electricity (renewable or nuclear) and water as a raw material, or hydrogen produced using natural gas as a raw material, with all of the carbon emitted in the production process being captured and sequestered
- Available for 6 years from the date the facility was originally put into service
- The loan amount would be $ 3 per kilogram from 2022 to 2024 and $ 2 per kilogram from 2025 to 2027 (inflation indexed)
- Credit valid for qualified hydrogen produced after December 31, 2021
- Option to choose a cash payment instead of credit
As a partial payment for the above changes, the Green Paper contains a repeal of the following tax breaks for fossil fuels for tax years beginning after December 31, 2021 (December 31, 2026 in relation to the repeal of the regulation for partnerships):
- Improved Oil Production Credit for Eligible Costs Associated with a Qualifying Improved Oil Production Project;
- Credit for oil and gas produced from marginal wells;
- Expenditure for intangible drilling costs;
- Deduction for costs paid or incurred for tertiary injectables that are used as part of a tertiary recovery method;
- Exception to passive loss limits for business investments in oil and natural gas properties;
- Use of percent depletion related to oil and gas wells;
- Two-year amortization of geological and geophysical expenses of independent producers (instead, amortization is possible over the seven-year period used by integrated oil and gas producers);
- Assessment of exploration and development costs;
- Percentage of hard mineral fossil fuel depletion;
- Treatment of capital gains for royalties;
- Corporation tax exemption for partnerships with creditable income and profits from fossil fuel-related activities;
- Tax exemption of the trust fund for oil spill liability for crude oil made from bitumen and kerogenous rock; and
- Accelerated amortization for air pollution control systems.
Observation of Eversheds Sutherland: The Green Paper is a further step on the way to the additional promotion of green electricity through tax incentives. While there is still much work to be done to reconcile the various proposals, the message from the government and Congress in this support is consistent.
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