The New Carbon Cycle

Four Influential Democratic Congressman Send Letter to President Indicating Consensus Is Building

Four influential Democrats sent a letter to the President Obama indicating a growing consensus among them on climate change legislation.  While the letter is very general, it may signal a willingness of the three Congressman from disparate districts, including on from Michigan, the auto state, and one from a coal state.  The goal of addressing potential impacts on industry and consumers may suggest a compromise bill is in the works.

The text of the letters is as follows:

Dear Mr. President:

We represent different regions of the country and approach energy issues from different perspectives, but we are united in the view that now is the time for Congress to pass comprehensive energy and climate legislation. And we are working together to meet that goal.

Three imperatives our energy, environment, and economic needs drive our commitment to action. The energy imperative we face is to diversify the national energy supplies and reduce our foreign dependence, especially on oil from the Middle East, which imperils our national security. The environmental imperative is to protect the planet from global warming. As scientists learn about the dangers of a tipping points in the global ecosystem and their potentially disastrous consequences, the need for decisive efforts grows increasingly urgent.

And the economic imperative is to provide an engine to drive the nation out of the recession. The economic recovery package is an important step because it invests billions of dollars in clean energy technologies. But government can force a transition to a clean economy by itself. At most, it can serve as a catalyst for investment by the private sector.

Unfortunately, the private sector is frozen because of uncertainty. Our power companies are caught in a dilemma: they are reluctant to invest in old polluting technologies because they know that tougher regulations are inevitable, but they can invest in new, cleaner technologies until they know what Congress is going to require. Automobile manufacturers and oil companies are delivering the same message: tell us what the ground rules will be so we can plan sensible investments.

While there are many details to be resolved, the contours for building a political consensus are evident. In January, a coalition of electric utilities, manufacturers, energy companies, and car makers joined with environmental groups in the U.S. Climate Action Partnership to recommend a market-based solution that builds on the approach used successfully in the Clean Air Act to reduce acid rain. Their proposal establishes a ceiling on global warming pollution that declines gradually over time, providing environmental and economic certainty while giving industry flexibility to implement the lowest-cost pollution control measures.

An essential part of the legislation will be building a bridge to our clean energy future. We will need to make investments in new clean energy technologies, find ways to spur the development of carbon capture and sequestration, prevent the dislocation of industrial sectors including those vulnerable to trade, mitigate the effects on consumers, and assure that the costs of the program are economically sustainable. These objectives can be achieved if we are smart about overall program design and the allocation of tradable emission allowances.

Energy and environment issues have a unique regional component. Solutions that make sense in Southern California can impose large costs in Southwest Virginia. We can overcome these geographic differences, but using the budget reconciliation process, which curtails Senate filibuster rights, could arouse regional distrust and make reaching agreement harder. Hearings, markups, and regular order are the best way to forge the compromises that will unite members from all parts of the country. As we work to achieve this consensus, we hope Republican members of our committee and of the full House will join the process too, so that truly bipartisan answers can be developed.

We believe comprehensive energy legislation is both economically and politically achievable. The costs of significant reductions in carbon emissions have been estimated to be in the range of $40 to $80 billion per year over the next ten years. Twenty years ago, when we were debating the Clean Air Act, compliance costs were projected by industry to be over $100 billion per year. Yet Congress succeeded in crafting strong clean air legislation that passed the House 401 to 25.

The Clean Air Act experience shows that Congress, through the committee process and regular order, can successfully resolve seemingly intractable environmental problems. When Congress debated capping the sulphur dioxide emissions from power plants that cause acid rain, we were told achieving reductions in these emissions would cost up to $1,500 per ton. In fact, the market-based mechanisms we enacted cut emissions in half at a cost of less than $250 per ton. We are determined to find similar solutions to our energy and climate challenges and enact an economically responsible emissions reduction law.

Our districts could hardly be more different: one is rural, coal producing with a predominance of basic industry; one is urban, affluent, and a growing market for solar and wind energy; one is suburban, with a mix of working families and high tech energy innovators; and one is suburban, middle-class with a large manufacturing workforce and many union members. But our districts and the entire nation urgently need comprehensive energy legislation that provides a pathway to private sector energy investments, energy independence, and a safe climate.

As we proceed, we look forward to working closely with you, senior Administration officials, and our colleagues in the House and the Senate to build broad support for this effort. We thank you for your leadership in addressing these challenges.

Sincerely,

Henry A. Waxman, Chairman, and John Dingell, Chairman Emeritus

Edward J. Markey, Chairman, Subcommittee on Energy and Environment

Rick Boucher, Chairman, Subcommittee on Communications, Technology, and the Internet

Group of Senators Propose to Lower Tariff on Imported Ethanol

A group of U.S. Senators have proposed a bill that would lower the tariff on imported ethanol.  Senator Judd Gregg, a Republican from New Hampshire, stated that the tariff on ethanol from a friendly country like Brazil should not be higher than the tariff on oil from a country that is not our friend like Venezuela.  He also said ethanol from the Midwest cannot be shipped to the Northeast.

Republican Senator Susan Collins from Maine pointed out that the State of California's concluded that the greenhouse gas emissions from sugar-cane based ethanol is 73 percent lower than petroleum fuels and lower than corn-based ethanol.  She said that the tariff was an unfair barrier to more environmentally friendly fuel.

Senator Dianne Feinstein, a Democrat from California, said that the tariff makes no sense based on the US desire to reduce its dependence on foreign oil and to reduce greenhouse gas emissions.

To what extent these Senators can succeed in reducing the imported ethanol tariff remains to be seen, considering the large number of corn-state Senators who may feel obliged to vote against it.

EPA Sends Endangerment Finding to White House That May Open Door to EPA Greenhouse Gas Regulations

The US Environmental Protection Agency has forwarded an "endangerment finding" under the Clean Air Act that would lay the foundation for EPA greenhouse gas emission regulations under the Act.  Under the Massachusetts v. EPA case in which the US Supreme Court remanded an EPA decision under the Bush Administration to not regulate greenhouse gas emissions from automobiles, EPA may use the endangerment finding, that greenhouse gas emissions as a pollutant are a risk to human health and welfare, to move forward with restrictions on greenhouse gas emissions if Congress does not pass greenhouse gas legislation this year or early next year.

This is a second major step in only a short time.  Recently, EPA issued a proposed regulation that would require many industries and businesses to monitor and report their greenhouse gas emissions (GHG Reporting Rule).  In the preamble to the GHG Reporting Rule, EPA states that one purpose for the rule is to gather information for future regulatory and policy decision making. 

Taken together these two steps reveal a move forward by EPA to develop the basis for a greenhouse gas regulatory system.  The Obama Administration has not slowed at all with climate change actions and rhetoric, despite what many thought would be a slowdown on climate change as a result of the economic situation in the country.

How Close Did EPA Come to an Endangerment Finding in Its Proposed GHG Reporting Rule?

In the recent proposed rule announced by the US Environmental Protection Agency (EPA), the agency commented on many things.  Beyond the obvious importance of requiring facilities to monitor and report greenhouse gas emissions on an economy-wide basis, perhaps one of the least discussed aspects of the rule is the comment on the potential impact of greenhouse gas emissions on the country.  The question of an endangerment finding impacts the statutory responsibility of EPA to regulate emissions of greenhouse gas emissions under the Clean Air Act.  If EPA issues such a finding, it will have the authority if not be mandated to move forward with a greenhouse gas emission regulatory system under the Clean Air Act, even if Congress does not pass climate change legislation.

After the US Supreme Court announced its opinion in Massachusetts v. EPA, in which the court remanded the decision not to regulate greenhouse gas emissions from automobiles to the agency for further consideration, the Bush Administration issued an advanced notice of rule making (ANPR) in which the potential impacts to the economy were discussed in great detail.  EPA did not issue an endangerment finding.

Currently, President Obama's EPA Administrator, Lisa Jackson's, has asked her staff to review the ANPR and to evaluate whether an endangerment finding for greenhouse gas emissions under the Clean Air Act is warranted.  Most commentators believe such a finding will be issued by the EPA.

So how does the proposed GHG Reporting Rule come into play?  The rule in itself is required by a portion of the Omnibus Spending Bill passed in December of 2007, and which former President Bush signed.  This provision appropriated money for EPA to promulgate a GHG Reporting Rule.  EPA has now proposed such a rule, after much work was done by the EPA under the Bush Administration, but no rule was ever proposed.

Now, the rule has been issued and it states that the decisions in proposing the rule were in part motivated by gathering appropriate data for future regulation and policy development regarding greenhouse gas emissions.  The preamble to the rule also discusses EPA's authority under the Clean Air Act to require GHG reporting. 

Finally, the preamble discussed the International Panel on Climate Change (IPCC) conclusions as to the human generated GHG emissions and the impact on climate change.  This may be the most significant statement in the document in terms of where the agency is headed with respect to an endangerment finding.

The preamble to the GHG Reporting Rule states:

Future projections show that, for most scenarios, atmospheric concentrations of GHGs are expected to continue climbing for most if not all of the remainder of this century; with associated increases in average temperature.  Overall risk to human health, society and the environmental increases with increases in both the rate and magnitude of climate change.

Based on these statements, it seems clear that EPA has reached conclusions that would indicate if a decision is made regarding whether an endangerment exists, the agency would conclude that GHG emissions present a significant risk.  The real question may be what then would EPA do after issuing such a finding.  Would it proceed to developing rules to limit greenhouse gas emissions?  Would it give Congress a certain amount of time to enact climate change legislation, acting only if Congress failed to pass such legislation? 

These are all questions that will remain of immense interest over the next few months as EPA evaluates how it will handle the issues of an endangerment finding and any regulatorysystem it might attempt to enact outside of the Congressional action on climate change.  In addition, the Obama Administration may see the ability to regulate GHG emissions without further legislation as leverage to push Congress to pass legislation.  Industry and lobbyists would have less ability to influence an EPA rule than how Congress deals with all of the competing concerns in attempting to craft federal climate change legislation.

EPA Issues Proposed Greenhouse Gas Reporting Rule

The U.S. Environmental Protection Agency (EPA) has issued a proposed rule to require a large part of industries and businesses to monitor and report their greenhouse gas (“GHG”) emissions.  Following a Congressional insert to the Omnibus Spending Bill in December of 2007 that required EPA to issue a proposed rule by September of last year and a final rule by June of this year, EPA under the Obama Administration has moved forward with an initial step in establishing a greenhouse gas regulatory system.  This Client Alert will address the major aspects of the proposed rule.  EPA is proposing a substantial program of greenhouse gas monitoring and reporting with a publicly available registry—the combined preamble and proposed rule are more than 1400 pages in the length.  EPA states that the program will be “economy wide” and cover 85-90 percent of greenhouse gas emissions in the United States.

           The list of sources that would be required to report under the GHG Reporting Rule, may also be those that would be regulated under a federal GHG cap and trade system being discussed by Congress and the Obama Administration.  EPA states in its proposed rule that the rule is being implemented to gather information for future regulatory and policy decisions.

I.        What Gases Are Covered?

EPA has identified the six traditional greenhouse gases for regulation:  carbon dioxide (“CO2”), methane, nitrous oxide, sulfur hexafluoride, hydrofluorocarbons, chlorofluorocarbons, perfluorocarbons, and certain other fluorinated gases.  For purposes of comparing the gases with a single unit, the gases other than CO2 are converted into the equivalent GHG impact of CO2.  The other gases have a greater impact in terms of causing the greenhouse effect and thereby global warming.  As an example, a ton of methane emissions would be reported in terms of carbon dioxide equivalent (“CO2e”); thus, one ton of methane emissions would equate to 20 tons CO2e.  This is critical in understanding the threshold levels for application of the reporting requirements that will be discussed below.  Other non-CO2 gases would need to be converted to CO2e before determining whether the GHG reporting obligations apply to a particular facility.

II.     What Facilities Are Covered?

The proposed GHG reporting rules would establish four categories of facilities that would be required to measure and report their GHG emissions.  In addition, vehicle manufacturers would be required to report the GHG emissions of their vehicles.  We will focus on the other facility-bases emitters for purposes of this Client Alert. 

A.     Source Categories

The first category of facilities that would be required to report under the rule are facilities that fall under a list of source categories identified by EPA.  These sources include, among others, the following:  electric generating plants subject to the Acid Rain program, namely certain coal-fired power plants, aluminum, ammonia, cement, electronics, lime, petrochemical, petroleum refining, certain underground coal mines, and municipal landfills.

B.     Other facilities that Emit 25,000 Tons Per Year or More of CO2e

The second category of sources that would be required to report are facilities that emit 25,000 tons per year or more of CO2e from stationary fuel combustion units, miscellaneous uses of carbonate, and all source categories that are listed and that are located at the facility in any calendar year.  These sources include, among others, the following:  electricity generation, electronics—photovoltaic manufacturing, ethanol production, food processing, glass production, iron and steel production, ferrous alloy production, oil and natural gas systems, pulp and paper, industrial landfills, and wastewater treatment.

C.     Facilities That Do Not Meet the First Two Source Categories, But That Emit 25,000 tons of CO2e per Year Only from Stationary Fuel Combustion Sources

The third source of facilities that would be required to report are those that meet three conditions:  (1) does not contain any source category designated for the first two groups of categories; (2) aggregate maximum heat input capacity of stationary fuel combustion units at the facility is 30 mmBtu/hr or greater; (3) emits 25,000 tons per year or more from all stationary fuel combustion sources.

D.     Entities That Sell, Import, or Export Fossil Fuels, Industrial Greenhouse Gases, and CO2

The final category of facilities that would be required to submit GHG emission reports under the proposed GHG Reporting Rule are supplies of certain GHG gases or products that when used or burned produce GHGs.  The types of supplies that fit within this category are as follows:  coal, coal-based liquid fuels; petroleum products, natural gas and natural gas liquids; producers of industrial greenhouse gases as listed in the rule; importers and exporters of industrial greenhouse gases exceeding 25,000 tons of CO2e; CO2; producers of CO2; and importers and exporters of CO2 exceeding 25,000 tons of CO2e.

III.   When Will Monitoring and Reporting Be Required? 

The rule if adopted would required emitters, sellers of certain fossil fuels and other greenhouse gases, and automobile manufacturers to report their greenhouse gas ("GHG") to measure their greenhouse gas emissions starting January 2010 and report these emissions by January 2011.

 

The proposal of a GHG Reporting Rule is a significant first step by the new Administration, and would extend the measurement and reporting to a large part of the economy.  As companies continue to review future strategies for evaluating the potential risks and opportunities that a GHG regulatory sytem and potential cap and trade system will present, this proposed rule is the first salvo in what will be a concerted effort by Congress and by the President to impose a GHG regulatory system on the country.

With this rule and with potential future legislation that may be passed as early as this year, many publicly traded companies should also consider their disclosures in their filings with the Securities and Exchange Commission to determine if any further description of the risks or opportunities presented by climate change legislation should be discussed in their public filings.

 

Climate Change and Environmental Law and Policy in Brazil

I want to introduce Antonio Reis and Luiz Gustavo Bezarra, two of our attorneys in our Rio de Janeiro, Brazil office, who focus on environmental law, sustainability issues, climate change, and carbon trading. They have prepared the following summary of Climate Change and Environmental Law and Policy in Brazil. I hope you enjoy this guest article.

Environmental laws and regulations that have been adopted in Brazil are very strict, however, a long-term effort will be required to improve their enforceability and effectiveness. In the past 50 years, Brazil has developed extensive environmental policies and regulation, promoting innovative solutions and technologies connected with sustainable development and actions to address global warming. Such new trends offer opportunities for socially responsible companies to make sustainable development a standard part of their business practices.

Brazil has developed one of the largest renewable energy programs in the world (PROALCOOL – for the production of ethanol and its use in replacing gasoline in light vehicles). The use of ethanol as fuel powering automobiles, introduced in the 70’s, has evolved incredibly in the last decade with the new flex-fuel light vehicle technology. In addition, the Brazilian government has adopted the Brazilian National Program of Production and Use of Biodiesel that establishes a mandatory addition of 5 percent of biodiesel into petroleum diesel by 2013.  This decision provides a strategic mechanism to stimulate employment and income, to reduce greenhouse gas emissions, and to decrease dependence on fossil fuels.

Other policies include creation of PROINFA – a program with the purpose of increasing the amount of electrical energy generation from wind, small hydro plants, and biomass. Additionally,Brazil has instituted several recycling initiatives and programs to reduce the use of fossil fuels.

In one of the country’s most important environmental initiatives, in early December 2008, Brazil enacted its National Plan for Climate Change (PNMC), introducing ambitious targets for reducing deforestation, Brazil’s main source of greenhouse gases. The goal is to reduce deforestation by 72% in the Amazon by 2017. It is too early to know if these new targets are achievable in a country that faces serious problems with enforceability and effectiveness of environmental laws and policies. The PNMC is also intended to make Brazil a more influential player in global climate change debates, helping to push developed countries to agree to more ambitious emissions cuts and encouraging wealthy countries to essentially pay Brazil to preserve the forest for the benefit of all countries.

With respect to actions linked with the Kyoto Protocol, the country is, together with China and India,, one of the key players helping developed countries to attain their carbon reduction targets through the Clean Development Mechanism (CDM) of the Kyoto protocol. Many CDM projects have already been approved in Brazil and subsequently at the UN CDM Executive Board. The most representative Brazilian CDM projects are flaring of landfill gas and the use of biomass (e.g., sugar cane bagasse) as an energy source.

Brazil has an incomparable potential for CDM projects, which represents an opportunity for developed countries with obligations to reduce their emissions. The Kyoto Protocol has become part of the Brazilian legal system. The country was one of the first to create procedures to approve CDM projects by establishing a strong national authority with the participation of the most important Ministries – Inter-ministerial Commission on Climate Change (Comissão Interministerial de Mudança Global do Clima– “CIMGC”). The CDM projects are also an efficient way to provide the transfer of clean technologies to non-industrialized countries and a great opportunity for Brazil.

Since the negotiations prior to the adoption of the Kyoto Protocol, Brazil has been supporting proposals to include all forest and forestry projects in the CDM. However, due to the controversy associated with these issues, only afforestation and reforestation practices were accepted as possible CDM projects. The main concerns expressed were that forest and forestry activities are difficult to monitor, they provide cheap carbon credits inhibiting stronger domestic mitigation action, and the fear that those projects could lead to deforestation. However, CDM forest and forestry projects can provide benefits that overcome their downsides, such as positive revenue alternatives for local communities.

Besides the regulatory market for carbon credits (under Kyoto Protocol’s CDM and other flexible trading mechanisms), there has been renewed interest for credits from reducing emissions from deforestation and degradation (REDD) that are eligible for credits traded in voluntary carbon markets, operating outside international agreements. Brazil has a key role to play in developing future REDD projects that produce voluntary carbon credits. The benefits of carbon credits must always be analyzed in light of environmental benefits and not as an end in themselves. Emission trading programs cannot replace strong domestic policies toward ambitious emission reduction targets. At Thompson & Knight, we are involved with clients in developing carbon credit projects under the CDM and voluntary standards. Our projects include avoided deforestation projects, fuel switching, landfill gas projects, and other means of reducing emissions and monetizing those emissions in the form of carbon credits. Our Firm further provides advice as to existing and possible future local, national, and international environmental laws and treaties, including those relating to climate change and greenhouse gas emissions.

Thompson & Knight assists its clients in all of these areas whether involving transactions, financing, project development, carbon trading, and litigation or arbitration. Our experience extends to renewable energy projects as well. For further information on developments on Climate Change Law and Policy in Brazil, you may contact Luiz Gustavo Bezerra and Antonio Augusto Reis.

THE BAILOUT BILL AND STIMULUS BILL: OPPORTUNITIES FOR RENEWABLE ENERGY, ENERGY EFFICIENCY, CARBON CAPTURE AND STORAGE, AND ALTERNATIVE TRANSPORTATION FUELS

The American Recovery and Reinvestment Act of 2009, otherwise known as the “Stimulus Bill”, which President Obama signed into law on February 17, 2009, made significant changes in prior tax incentives for renewable energy, energy efficiency, and carbon capture and storage.  Understanding these changes may provide opportunities for those companies that are engaged in these business areas, and provide significant assistance to municipalities that are looking for opportunities to address these issues.  The Stimulus Bill should not be discussed alone, but should also be discussed in the context of the Emergency Economic Stabilization Act of 2008 (the “Bailout Bill”), that served as the vehicle for the economic rescue legislation  signed into law on  October 3, 2008 by President Bush.  The legislation is organized into three (3) separate divisions, but the one that we will explore in this Alert along with the Stimulus Bill, is Division B, entitled the Energy Improvement and Extension Act of 2008.  The Stimulus Bill and the Bailout Bill together have created significant incentives for renewable energy, energy efficiency, carbon capture and storage, and alternative transportation fuels. The significant financial incentives may enhance the internal rate of return of projects that qualify for the incentives.

Many of these projects will reduce greenhouse gas emissions, and may qualify for carbon credits through voluntary carbon credit programs or current or future state and federal climate change legislation. Combining both the incentives and carbon credit revenue may allow projects that would not otherwise be financially feasible to become economically sound or increase the rate of return on projects to make them attractive to project developers and investors.

 

The

The Bailout Bill – tax incentives and extensions for tax credits

The Bailout Bill provided significant tax incentives and extensions for tax credits for the following projects:  (i) renewable energy, (2) energy efficient and conservation, (3) carbon capture and storage, and (4) transportation and domestic fuel.  Below are examples of tax incentives and credits related to the foregoing projects:

Renewal Energy

·                     Extends through 2009 (placed in service before January 1, 2010) the tax credit for producing electricity from wind.

·                     Extends through 2010 (placed in service before January 1, 2011) such tax credit for other facilities, including closed and open-loop biomass, solar energy, small irrigation power, landfill gas, trash combustion, and hydropower. Modifies rules for and definitions of refined coal, trash and biomass facilities, and hydropower production.

·                     Includes marine and hydrokinetic renewable energy as a renewable resource for purposes of the tax credit for producing electricity from renewable resources.

 

Energy Efficiency and Conservation

 

·               Allows a new tax credit for investment in qualified energy conservation bonds for capital expenditures to reduce energy consumption in public buildings, implement green community programs, develop alternative and renewable energy sources, and promote mass commuting facilities.

·               Extends through 2009 the tax credit for non-business energy property expenditures. Includes energy-efficient biomass fuel stoves as property eligible for such tax credit. Modifies tax credit standards for water heaters, geothermal heat pumps, and energy efficiency improvements.

·               Extends through 2013 the tax deduction for energy efficient commercial buildings.

·               Extends through 2009 the tax credit for residential energy efficiency improvements.

Carbon Capture and Storage

·                     Allows a 30% investment tax credit rate for advanced coal-based generation technology projects and increases the maximum credit amounts allocable for such projects to $2.55 billion.

·                     Increases to 30% the investment tax credit rate for coal gasification projects and the aggregate credit amount for such projects.

·                     Sets forth special rules for refund claims of the coal excise tax by certain coal producers and exporters.

Transportation and Domestic Fuel

·                     Increases and extends through 2009 income and excise tax credits for biodiesel and renewable diesel used as fuel.

·                     Extends through 2009 the excise tax credit for alternative fuel and fuel mixtures. Requires such fuels to include compressed or liquefied biomass gas and to meet certain carbon capture requirements.

·                     Allows a new tax credit for new qualified plug-in electric drive motor vehicles. Limits the amount of such credit based upon the gross vehicle weight rating of such vehicles. Terminates such credit after 2014.

·                     Extends through 2010 the tax credit for alternative fuel vehicle refueling property expenditures. Includes electricity as a clean burning fuel for purposes of such credit.

·                     Provides for the treatment of certain income and gains from alcohol, biodiesel, and alternative fuels and mixtures as qualifying income for publicly traded partnerships.

·                     Extends through 2013 the taxpayer election to expense costs of certain refinery property.

The Stimulus Bill  - tax credits, grants and other incentives

The Stimulus Bill contains more than $42 billion in energy-related investments from tax credits.  More specifically, the Stimulus Bill extended renewable production tax credits for (1) wind projects through  December 31, 2012 and (2) closed-loop biomass, open-loop biomass, geothermal, small irrigation, hydropower, landfill gas, waste-to-energy, and marine renewable facilities through December 31, 2013.

The Stimulus Bill also authorized various grants and other incentives related to renewable energy, energy conservation and energy efficient projects.  Below are examples of the grants and other incentives authorized by the Stimulus Bill.

·                     Authorizes $1.6 billion in clean renewable energy bonds to finance facilities that generate electricity from wind, closed-loop biomass, open-loop biomass, geothermal, small irrigation, hydropower, landfill gas, waste-to-energy, and marine renewable facilities, and trash combustion projects.

·                     Authorizes $2.4 billion in qualified energy conservation bonds to finance state, local, and tribal government programs designed to reduce greenhouse gas emission and other qualified conservation activities.

·                     Increases alternative refueling property credit for businesses to a 50 percent credit and increases the cap for these credits to $50,000, for hydrogen to $200,000, for 2009 and 2010.  Increases the credit for individuals to 50 percent and the cap to $2000 for 2009 and 2010.

·                     Authorizes $3.1 billion for states to promote energy conservation and to reduce the rate of energy demand

·                     Authorizes $2 billion for manufactures of advanced vehicle batteries and components

·                     Authorizes $5 billion for installation of energy efficiency improvements in the homes of low-income families in order to reduce the energy bills of these families

·                     $2.5 billion for applied research, development, demonstration, and deployment activities, such as $800 million for biomass projects, $400 million for geothermal projects, $50 million for research to increase the energy efficiency of information and communications technology.

·                     $400 million for electrification of transportation.

·                     $300 million to create an alternative fuel vehicle pilot grant program.

·                     $300 million for the energy efficient appliance rebate program and the Energy Star Program

The Bailout Bill and Stimulus Bill provide significant opportunities for parties engaged in projects in renewable energy, energy efficiency, carbon capture and storage, and alternative transportation fuels.  Coupled with the potential for carbon credit revenue, many projects in these areas may become increasingly attractive.

The American Recovery and Reinvestment Act of 2009, otherwise known as the “Stimulus Bill”, which President Obama signed into law on February 17, 2009, made significant changes in prior tax incentives for renewable energy, energy efficiency, and carbon capture and storage.  Understanding these changes may provide opportunities for those companies that are engaged in these business areas, and provide significant assistance to municipalities that are looking for opportunities to address these issues.  The Stimulus Bill should not be discussed alone, but should also be discussed in the context of the Emergency Economic Stabilization Act of 2008 (the “Bailout Bill”), that served as the vehicle for the economic rescue legislation  signed into law on  October 3, 2008 by President Bush.  The legislation is organized into three (3) separate divisions, but the one that we will explore in this Alert along with the Stimulus Bill, is Division B, entitled the Energy Improvement and Extension Act of 2008.  The Stimulus Bill and the Bailout Bill together have created significant incentives for renewable energy, energy efficiency, carbon capture and storage, and alternative transportation fuels. The significant financial incentives may enhance the internal rate of return of projects that qualify for the incentives.

Many of these projects will reduce greenhouse gas emissions, and may qualify for carbon credits through voluntary carbon credit programs or current or future state and federal climate change legislation. Combining both the incentives and carbon credit revenue may allow projects that would not otherwise be financially feasible to become economically sound or increase the rate of return on projects to make them attractive to project developers and investors.

 

The

The Bailout Bill – tax incentives and extensions for tax credits

The Bailout Bill provided significant tax incentives and extensions for tax credits for the following projects:  (i) renewable energy, (2) energy efficient and conservation, (3) carbon capture and storage, and (4) transportation and domestic fuel.  Below are examples of tax incentives and credits related to the foregoing projects:

Renewal Energy

·                     Extends through 2009 (placed in service before January 1, 2010) the tax credit for producing electricity from wind.

·                     Extends through 2010 (placed in service before January 1, 2011) such tax credit for other facilities, including closed and open-loop biomass, solar energy, small irrigation power, landfill gas, trash combustion, and hydropower. Modifies rules for and definitions of refined coal, trash and biomass facilities, and hydropower production.

·                     Includes marine and hydrokinetic renewable energy as a renewable resource for purposes of the tax credit for producing electricity from renewable resources.

 

Energy Efficiency and Conservation

 

·               Allows a new tax credit for investment in qualified energy conservation bonds for capital expenditures to reduce energy consumption in public buildings, implement green community programs, develop alternative and renewable energy sources, and promote mass commuting facilities.

·               Extends through 2009 the tax credit for non-business energy property expenditures. Includes energy-efficient biomass fuel stoves as property eligible for such tax credit. Modifies tax credit standards for water heaters, geothermal heat pumps, and energy efficiency improvements.

·               Extends through 2013 the tax deduction for energy efficient commercial buildings.

·               Extends through 2009 the tax credit for residential energy efficiency improvements.

Carbon Capture and Storage

·                     Allows a 30% investment tax credit rate for advanced coal-based generation technology projects and increases the maximum credit amounts allocable for such projects to $2.55 billion.

·                     Increases to 30% the investment tax credit rate for coal gasification projects and the aggregate credit amount for such projects.

·                     Sets forth special rules for refund claims of the coal excise tax by certain coal producers and exporters.

Transportation and Domestic Fuel

·                     Increases and extends through 2009 income and excise tax credits for biodiesel and renewable diesel used as fuel.

·                     Extends through 2009 the excise tax credit for alternative fuel and fuel mixtures. Requires such fuels to include compressed or liquefied biomass gas and to meet certain carbon capture requirements.

·                     Allows a new tax credit for new qualified plug-in electric drive motor vehicles. Limits the amount of such credit based upon the gross vehicle weight rating of such vehicles. Terminates such credit after 2014.

·                     Extends through 2010 the tax credit for alternative fuel vehicle refueling property expenditures. Includes electricity as a clean burning fuel for purposes of such credit.

·                     Provides for the treatment of certain income and gains from alcohol, biodiesel, and alternative fuels and mixtures as qualifying income for publicly traded partnerships.

·                     Extends through 2013 the taxpayer election to expense costs of certain refinery property.

The Stimulus Bill  - tax credits, grants and other incentives

The Stimulus Bill contains more than $42 billion in energy-related investments from tax credits.  More specifically, the Stimulus Bill extended renewable production tax credits for (1) wind projects through  December 31, 2012 and (2) closed-loop biomass, open-loop biomass, geothermal, small irrigation, hydropower, landfill gas, waste-to-energy, and marine renewable facilities through December 31, 2013.

The Stimulus Bill also authorized various grants and other incentives related to renewable energy, energy conservation and energy efficient projects.  Below are examples of the grants and other incentives authorized by the Stimulus Bill.

·                     Authorizes $1.6 billion in clean renewable energy bonds to finance facilities that generate electricity from wind, closed-loop biomass, open-loop biomass, geothermal, small irrigation, hydropower, landfill gas, waste-to-energy, and marine renewable facilities, and trash combustion projects.

·                     Authorizes $2.4 billion in qualified energy conservation bonds to finance state, local, and tribal government programs designed to reduce greenhouse gas emission and other qualified conservation activities.

·                     Increases alternative refueling property credit for businesses to a 50 percent credit and increases the cap for these credits to $50,000, for hydrogen to $200,000, for 2009 and 2010.  Increases the credit for individuals to 50 percent and the cap to $2000 for 2009 and 2010.

·                     Authorizes $3.1 billion for states to promote energy conservation and to reduce the rate of energy demand

·                     Authorizes $2 billion for manufactures of advanced vehicle batteries and components

·                     Authorizes $5 billion for installation of energy efficiency improvements in the homes of low-income families in order to reduce the energy bills of these families

·                     $2.5 billion for applied research, development, demonstration, and deployment activities, such as $800 million for biomass projects, $400 million for geothermal projects, $50 million for research to increase the energy efficiency of information and communications technology.

·                     $400 million for electrification of transportation.

·                     $300 million to create an alternative fuel vehicle pilot grant program.

·                     $300 million for the energy efficient appliance rebate program and the Energy Star Program

The Bailout Bill and Stimulus Bill provide significant opportunities for parties engaged in projects in renewable energy, energy efficiency, carbon capture and storage, and alternative transportation fuels.  Coupled with the potential for carbon credit revenue, many projects in these areas may become increasingly attractive.