The U.S. bailout and cap-and-trade program developments demonstrate confidence in the clean tech sector

By Cheryl Slusarchuk

Although environmental concerns are now largely overshadowed by unprecedented volatility in the global economy, U.S. legislators recently demonstrated recognition that the clean technology sector can be used to grow gross domestic product, while developing a secure and sustainable energy sector. Contained in the United State’s new $700-billion Emergency Economic Stabilization Act of 2008 are approximately $18 billion worth of clean technology-related tax incentives.

Bailout details
The sheer diversity and scale of these new tax incentives represent substantial economic opportunities for the clean tech sector. Many new tax incentives have been created and numerous expiring tax benefits have been extended. And because these tax incentives are effective from the date of enactment, businesses should move quickly to determine how to best take advantage of these considerable tax breaks. Here, I will briefly review some of the most significant provisions.

Over half of the $18 billion-dollar tax treatment relates to extensions and expansions of production and investment tax credits. Wind power gained a one-year extension of the production tax credit, while various other renewable sources received a two-year extension. The Act also expanded the production tax credit to include new biomass facilities and those that generate electricity from marine renewables (e.g. waves and tides).

But solar energy arguably received the best tax treatment. Solar projects received an eight-year extension of the investment tax credit to residential and commercial solar energy projects, as well as the elimination of the tax credit cap on residential solar projects. To put this in perspective, Navigant Consulting, Inc. recently estimated that this investment tax credit is expected to create more than 440,000 jobs and to generate at least $325 billion in private investment.

Other forms of renewable energy received similar tax incentives. Small wind power, fuel cells, microturbines, geothermal and certain combined heat and power systems received extended timelines for investment tax credits and enhanced tax credit caps. The new legislation also gives incentives for utilities to initiate smart metering and smart grid systems by providing for accelerated depreciation.

Clean tech opportunities also received a boost regarding financing - the Act authorizes $800 million in Clean Energy Renewable Bonds to help fund facilities that will generate electricity from a wide variety of renewable and alternative fuels.

Buildings and transportation
Businesses involved in the efficiency of buildings will also see a boost. Extensions were given for tax deductions for improvements to commercial and residential buildings, as well as for tax credits for new energy-efficient homes. Tax credits relating to manufacturing energy efficient appliances will be both increased and extended. Also, a fund of $800 million of Qualified Energy Conservation Bonds was created to finance state and local government initiatives to reduce greenhouse gas emissions. Further, the Act extended for another three years the authority to issue qualified green building and sustainable project bonds.

The clean tech transportation sector will also see a better tax treatment. Tax credits of up to $7,500 were enacted for forthcoming plug-in hybrid vehicles, and new tax exemptions have been created for anti-idle technologies and advanced insulation installed in heavy trucks. The Act also extended the timeline for the tax credit for alternative fuel refuelling facilities and expanded it to include charging stations for electric vehicles. Many biofuel producers will also now be able to benefit from the accelerated depreciation previously enjoyed by ethanol plants exclusively. Plus, biodiesel production tax credits were extended to the end of next year.

Included also were tax incentives for carbon mitigation and cleaner uses of coal. The Act provides $1.5 billion in tax credits for approved demonstration projects that show the greatest potential beneficial use of carbon capture and sequestration technology. It also provides a limited tax credit based on the tonnage of CO2 captured and either stored permanently or used for enhanced oil recovery.

Clearly, the breadth and scale of these legislative amendments demonstrate that the U.S. government is recognizing that the clean technology sector can both help recover flagging domestic productivity and create a secure and sustainable energy sector in the United States.

WCI takes shape
With the recent release of its draft design recommendations, the Western Climate Initiative (WCI) brought its regional cap-and-trade program one step closer to completion. This draft design resulted from 18 months of negotiation and consultations, and is anticipated to come into effect on January 1, 2012. Each WCI partner - including seven U.S. states and four Canadian provinces - now bears the responsibility of using the draft design to create a legislative and administrative framework to implement the cap-and-trade system within its own borders.
 
The draft design is important for businesses to understand as it details a multi-sector cap-and-trade program that will limit emissions from all major sources of greenhouse gas emissions. The program mandates the use of consistent reporting methodology and incorporates flexible mechanisms, such as offsets and the banking of allowances, in an effort to mitigate negative economic effects.
 
Each WCI partner will receive a set number of emissions allowances based on its own emissions goal for 2020, which will then be distributed to regulated emitters. Although most allowances can be distributed in any way the WCI partner sees fit, a small percentage must be distributed via auction.
 
Regulated entities - those that annually emit 25,000 or more tonnes of carbon dioxide equivalents - will be required to abide by strict reporting requirements. And these entities will have to budget their allowances effectively, as financial penalties will result from any allowance shortfalls. Reporting will begin in 2011, based on emissions from the previous year. The first compliance period will begin in 2012, and in 2015 the program will expand to include transportation, residential, commercial and industrial fuels.
 
Much like the proposed Canadian federal system, the WCI draft design encourages early action and will provide allowances to reward emissions reductions that are made before the start of the first compliance period in 2012. Expect WCI partners to be working feverishly to determine their own jurisdiction-specific details in the coming months. Next month, I will explore the details of the WCI draft design and its implications for businesses.
 
Cheryl Slusarchuk is a partner in the Vancouver office of McCarthy Tètrault LLP practicing in the business law and technology groups. She is president of the B.C. Premier’s Technology Council and serves as Chair of the B.C. Climate Action Team.
 

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