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Introduction The Administration's Climate Change Technology Initiative (CCTI) includes a number of proposed tax incentives for buildings, vehicles, and renewable electricity generation. The purpose of the tax incentives is to reduce the initial costs to the purchasers of more energy-efficient and renewable technologies for buildings and vehicles and provide tax incentives for the generation of electricity from renewable sources, thereby encouraging their adoption earlier than would otherwise occur. These are short-term incentives, lasting a few years and extending no later than 2007, with the exception of the change in the depreciable life for distributed power property; however, in addition to their short-term impacts, they are intended to stimulate the use of the technologies, lower costs, and establish a more mature market for them. The Administration estimates the combined revenue impact of the tax incentives at $201 million in fiscal year 2001 and $4.0 billion from fiscal years 2001 through 2005, all in nominal dollars. In general, this analysis of the tax incentives used the National Energy Modeling System (NEMS),(6) the Energy Information Administration's (EIA) model of U.S. energy markets. To evaluate the tax credits for new energy-efficient homes, U.S. Department of Energy (DOE) building code and building simulation models were also used. The results of the analysis highlight the energy savings and reductions in carbon emissions for each of the tax incentives, relative to a reference case based on the Annual Energy Outlook 2000 (AEO2000),(7) published in December 1999. Where possible, an estimate of the tax revenue implications is also provided and compared to the Administration estimates. Some past tax incentives have been able to accelerate substantially the introduction of new technologies into the market. For example, natural gas production from coal seams has grown dramatically since the late 1980s, largely because of tax credits that provide an incentive for the production of high-cost gas supplies. Other tax credits have had little impact, including the current biomass tax credit and the solar tax credit, which was enacted in 1978 and expired in 1985. Important factors in the success of tax incentives include the timing and magnitude of the incentives. Compared to some earlier tax credits, including the 40-percent solar tax credit, the incentives currently proposed generally are of small to modest magnitude and of relatively short duration. Other factors include the definition of qualifying entities and the different incentives provided by investment and production tax credits. Investment tax credits provide a return to the investor at the time a capital investment is made, while production tax credits provide a return during the life of the credit. It is likely that some of the technologies targeted in the CCTI would penetrate to some degree even in the absence of the proposed tax incentives; however, those units would receive the tax incentive as well as the marginal units that would come on line purely as a result of the incentive. Estimates of the magnitude of such unintended benefits are also provided. Another unintended result of the tax incentives may be a tendency on the part of purchasers to either delay or accelerate investments in order to receive the incentives, an effect that cannot be quantified. An additional unintended effect of an investment tax credit is that part of the value of the credit accrues to equipment manufacturers and suppliers. The credit increases the demand for capital equipment, leading to higher equilibrium prices for the equipment. As a result, as much as 70 percent of the tax credit could be passed to equipment suppliers in the form of higher equipment prices.(8) If this situation were to occur, the impact of a tax credit on capital equipment additions could be quite modest. This effect has not been incorporated in the analysis. The Clinton Administration's proposed budget for fiscal year 2001 includes a package of proposals aimed at promoting energy efficiency and improving the environment. The CCTI package would provide $1.0 billion in targeted tax incentives from fiscal years 2001 through 2005 for consumers who purchase energy-efficient products and energy from renewable sources for use in buildings. These provide incentives for the purchase of more efficient equipment and structures generally by offering income tax credits for the year in which the equipment or structure was purchased. Specific estimates include $201 million in tax incentives for energy-efficient equipment, $633 million for the purchase of new energy-efficient homes, and $132 million for rooftop solar systems from fiscal years 2001 through 2005. In addition, a $10 million incentive is proposed for distributed power property by changing the depreciable life. By offering consumers tax incentives on energy-efficient and renewable energy products, the CCTI initiatives are intended to increase demand for the products and, thereby, increase economies of scale in the production process, reduce production and retail costs, and develop a more robust market for the products. The CCTI package also includes $275 million in investments for research, development, and deployment of clean technologies for residential and commercial buildings in fiscal year 2001 (see Chapter 3). The EIA has conducted an analysis of the CCTI tax incentive proposals that have the potential to affect levels of energy use and carbon emissions in the buildings sectors. Estimates of the projected impacts were developed by comparing the results from a reference case with results from an analysis case incorporating the proposed tax initiatives. Energy consumption and energy-related carbon emissions were the only effects considered. The reference case included efficiency and price improvements expected under current policy and market conditions. The residential and commercial demand modules of NEMS were used to model the CCTI proposals that could be explicitly represented (tax credits for energy-efficient equipment in existing homes and buildings, tax credits for rooftop solar systems, and a change in the depreciable life for distributed power property). An off-line analysis using DOE building simulation models and payback analyses was employed to evaluate the potential impacts of the proposed tax credits for energy-efficient new homes. Estimates were developed considering only the buildings sectors, with no analysis of possible feedback effects from other sectors of the economy. Tax Credits for Energy-Efficient Building Equipment Background A tax incentive program has been proposed to accelerate the development and distribution of several energy-efficient technologies, providing a 20-percent credit to the purchasers of energy-efficient equipment from 2001 through 2004. The specific technologies, requirements for eligibility, and applicable credits of the tax incentive program are shown in Table 1. Table 1. Tax Credit Proposal for Energy-Efficient Building Equipment The tax credit is a percentage of the purchase price not exceeding a specified price limit. The purchase prices of the technologies included in the CCTI proposal are such that, in some instances, the tax credit does not exceed the cap. Table 2 illustrates this point by providing the costs and possible tax credits for equipment of the efficiency levels specified in the proposal. Also provided in Table 2, for comparison purposes, is the cost of the equipment that just meets the current energy efficiency standards and thus would receive no tax credit. In the NEMS residential and commercial modules, the income tax credit is represented as a direct offset to the cost of the equipment. The costs for each of the affected technologies are reduced only for the years specified in the budget language. Once the tax credit expires, it is no longer subtracted from the cost of the technology. Both the reference case and the CCTI analysis case incorporate cost declines for advanced technologies over time as producers gain experience. The size and duration of the credit in the CCTI case are not considered sufficient to alter the rate of the cost declines. The credit is also believed to be too small to affect general consumer behavior toward energy efficiency or to change the barriers to entry that exist in the marketplace. An example of this market phenomenon is the development of heat pump water heaters in the early 1980s. With the help of government and utility supports, sales of heat pump water heaters peaked at about 8,000 units in 1985. Even with continued utility support, however, the decline in real energy prices and uncertainties regarding the technology caused sales to slip to 2,000 units per year, where they have stabilized.(9) While innovative and aggressive marketing strategies by private firms and government information programs could enhance the effectiveness of the tax credits by increasing the exposure and consumer awareness of a given technology, the short lead time and limited duration of the proposed incentives make changes in consumer behavior unlikely. Table 2. Cost and Performance Data for CCTI TechnologiesIt is clear from Table 2 that the tax credits offered would not significantly change the economics of the investment decision from the consumer's point of view. Historically, consumers have been unwilling to invest in energy-efficient equipment with long payback periods. Short tenancy rates, lack of information, the fact that builders (as opposed to consumers) generally purchase the energy-using equipment, and limited availability of investment funds are just some of the factors that tend to affect purchase decisions. The technologies included in the CCTI proposal currently retain very small market shares in the residential arena. Natural gas heat pump prices have been high and volatile due to low sales, which currently total under 6,000 units per year. A consortium of 120 gas utilities currently subsidizes the development of the York Triathlon natural gas heat pump in an effort to increase sales to a level at which economies of scale can reduce the installed cost.(10) The tax credits offered for the purchase of this technology could increase sales somewhat; however, the cost--including the tax credit--is still almost double the cost of a traditional natural gas furnace/central air conditioner system. With energy prices expected to remain stable in real terms over time, it is unlikely that significant increases in the market penetration of natural gas heat pumps would occur without substantial subsidies or technological breakthroughs leading to large price reductions. The only generating technology included in the CCTI tax incentive proposal for energy-efficient building equipment is the fuel cell. Currently, units sized for residential applications are in the prototype stage, with a projected commercialization date of 2001-2002. There is only one manufacturer of fuel cells for commercial-sized units. The current cost for a commercial-sized fuel cell is about $3,625 per kilowatt of capacity; the CCTI tax credit would reduce the cost to $3,125 per kilowatt.(11) As an example, assume that a commercial business purchases a fuel cell system, the tax credit is taken, and the cost of the fuel cell is financed at 9-percent interest for 7 years. Including the fuel savings that would result from using the heat produced by the fuel cell to satisfy the company's hot water needs in place of a natural gas-fired water heater, the fuel cell could provide electricity for around 5 to 7 cents per kilowatthour, depending on regional natural gas prices. That cost is slightly less than the average U.S. commercial electricity price. However, the payback period in this example is 9 to 10 years in most areas of the country, longer than many commercial consumers are willing to accept.(12) Results The analysis results indicate that the CCTI tax incentive proposal for energy-efficient building equipment would encourage the penetration of the equipment covered by the proposal (Table 3). The tax credits could reduce projected carbon emissions by 0.14 million metric tons (0.02 percent) and buildings energy use by 6.6 trillion British thermal units (Btu)--0.02 percent of primary energy--in 2005 (Table 4). Given the small increase in the projected market share for the technologies targeted by this tax credit proposal, it follows that a significant portion of the decreased tax revenues could result from tax credits received by consumers who would have purchased the equipment with no additional incentive. In the years covered by the tax credit (2001-2004), the analysis indicates that a total of 81,724 natural gas heat pumps would be purchased in the reference case,(13) and that an additional 81,014 units would be purchased because of the tax credit in the CCTI case. In the CCTI case, the Treasury would incur a total reduction of $162.7 million in projected tax revenues related to purchases of natural gas heat pumps. Of the $162.7 million, 50 percent of the tax credits paid would go to unintended beneficiaries. Table 4. Projected Energy Savings and Carbon Emissions Reductions from the CCTI Tax Incentive for Energy-Efficient Building Equipment, 1998, 2005, 2010, and 2020Tax Credits for Energy-Efficient New Homes Background The following CCTI tax credits for energy-efficient new homes are proposed:
Given the intricate interactions between building shell measures, equipment measures, building orientation and shading, and equipment sizing, it is difficult for any estimate to incorporate all the potential effects included in designing and building a home. The NEMS residential module is not a building simulation model and therefore cannot handle all the different aspects and interactions of building systems. In order to give some perspective on the magnitude and potential impacts that the CCTI tax incentive might have, an offline analysis was completed using a building simulation model (PEAR),(15) the MECcheck software,(16) and a cash flow/payback model. When the three models are used in concert, energy savings, code compliance, and investment information can be determined. Although the models estimate energy savings and code compliance, they do not address all issues associated with the energy efficiency aspects of new home construction. The software used for this analysis, although possibly not the state of the art, was readily available, and analysts were familiar with its use.(17) Even with the use of very detailed building simulation models, there are several limitations of note regarding this analysis. The MECcheck and PEAR programs do not include a number of options that may affect the costs of meeting the qualifications for the tax incentives. The software does not allow for orientation properties, which allow builders to minimize sun exposure in the summer and maximize it in the winter. There is no credit for downsizing the heating and cooling equipment, which allows builders to install smaller, less costly units when a tighter building envelope is in place. There is no accounting for more efficient ventilation systems (e.g., tighter duct work), and only conventional building materials are considered. In addition, there is no unique solution for achieving an energy savings target. To the extent that some of these options can be and are used to meet the CCTI efficiency level requirements, their omission in this analysis may cause higher estimated costs of meeting the program's requirements than if the options were included.(18) As of the end of 1999, 19 States had adopted MEC95 or better building codes,(19) and 40 States had adopted some form of the MEC or its equivalent.(20) Implementation and enforcement of the code are difficult, and construction often is not compliant. Building codes in States without mandatory codes may be set on a county-specific basis, making estimates of an "average new home" building shell difficult. A somewhat different approach to increasing the building of energy-efficient homes is to offer the tax credit to the homebuilder, as opposed to the homeowner. If the credit were offered to the builder, more energy-efficient homes would be made available to prospective buyers, because the builders would receive an incentive to construct more energy-efficient homes. Currently, builders can recoup only the incremental cost of improving energy efficiency in the sales price of the home, because they do not receive the benefits of lower energy bills. The CCTI tax credit would be available to homeowners only; however, given the restrictions on allowable tax credits, it is not clear whether all parties interested in receiving the tax credits could claim them. For this analysis, two prototype houses were used as typical for two climate regions: north and south. Tables 5 and 6 detail the characteristics and costs of efficiency measures for each prototype and the expected tax credit. It is assumed that each percentage level specified in the tax credit proposal relates to energy savings relative to the MEC95 code for heating and cooling only. It is further assumed that the most efficient equipment is installed as a means to meet the credit, because it is generally the cheapest option per Btu saved. Methodology and Results MECcheck was used to establish the characteristics of a MEC95-compliant home, which were then input into PEAR, a building simulation model developed by DOE, to establish MEC95-compliant energy consumption for heating and cooling. The characteristics were then changed to achieve the levels of energy consumption specified in the tax credit proposal. The characteristics shown in Tables 5 and 6 are the results of this process. The costs associated with the efficiency improvements were then mapped to each particular characteristic. As noted above, the solutions given in the tables above are not necessarily unique, nor are they necessarily the least-cost options for obtaining the goal of the tax credit proposal. Furthermore, there is considerable uncertainty in the estimates of the costs of meeting the CCTI efficiency requirements. It is possible that, for some specific locations, costs could be much lower than portrayed here.
Table 5. South Region Building Code Characteristics To determine the attractiveness of each investment, a spreadsheet model was developed using a cash flow and payback analysis as the means to evaluate the investment. The following assumptions were used in the analysis:
The results are as follows:
Tax Credits for Rooftop Solar Equipment Background The CCTI tax incentive for rooftop solar equipment is aimed at encouraging individuals and businesses to adopt systems that provide heat and electricity without producing greenhouse gases. The credit, equal to 15 percent of the investment cost, applies to rooftop photovoltaic (PV) systems and solar water heating systems located on or adjacent to a building and used exclusively for purposes other than heating swimming pools. Solar water heating systems placed in service during the 5-year period from 2001 through 2005 are eligible up to a maximum credit of $1,000. Rooftop PV systems placed in service during the 7-year period from 2001 through 2007 are eligible for the 15-percent tax credit up to a maximum of $2,000. Currently, a 10-percent business energy tax credit (BETC) is provided to private businesses for qualifying equipment that uses solar energy to generate electricity, to heat or cool, to provide hot water for use in a structure, or to provide solar process heat. The allowable tax credit for any one year is limited to $25,000 plus 25 percent of remaining taxes after the credit is taken. Credits not allowable in one year may be taken in other tax years. Equipment that uses both solar and non-solar energy must not use more than 25 percent of its total annual energy input from non-solar sources to qualify. Passive solar systems and those owned by public utilities are not eligible. Thus, commercial taxpayers would have to choose between the present tax credit and the proposed CCTI credit for each qualifying investment. For systems that qualify for both credits, only small systems would benefit more from the 15-percent CCTI proposal because of the $1,000 and $2,000 caps. The solar technology costs and tax credits used in the analysis of the proposed CCTI tax credit for rooftop solar systems are shown in Table 8. Table 8. Cost Data for CCTI Solar Technologies Tax credits have been used in the past to create a niche market for solar water heaters. In the early 1980s, shipments of medium-temperature solar thermal collectors (the type used for water heaters) peaked at just under 12 million square feet (enough for roughly 300,000 units) per year. After the Federal 40-percent residential and 15-percent business energy tax credits expired at the end of 1985, shipments fell to less than 1 million square feet per year, and they have never recovered.(22) The BETC was reinstated at 15 percent for 1986 and phased down to 10 percent by 1992, with the Energy Policy Act of 1992 (EPACT) providing a permanent extension of the BETC. The credit reinstatement and increasing oil prices after 1986 did not seem to create a rebound of the solar industry. Today, most solar collector shipments (85 percent) are used for heating swimming pool water, which is excluded from the tax credit. In 1997, EIA estimates that roughly 460,000 households (0.5 percent) used solar water heaters to provide some of the energy required to heat the annual load of hot water.(23) Currently, about 9 percent of solar thermal collector shipments are destined for the commercial sector. Only 0.5 percent of all solar thermal collector shipments purchased by the commercial sector are for uses other than heating swimming pools, even with the existing energy tax credit. Residential rooftop PV systems are uncommon. Some are used for remote power generation, where connection to the electrical grid would be prohibitively expensive. PV systems are also rare in the commercial sector, used primarily for power generation and communications.(24) The 10-percent BETC is generally not enough to make PV systems economically attractive to the commercial sector, where purchased electricity is readily available. There are Federal, State, and local programs and incentives to encourage use of solar technologies. Locally, under the PV Pioneer I program, the Sacramento Municipal Utility District (SMUD) has created a small market for solar photovoltaics by installing the equipment on residential rooftops for $4 per month for 10 years. The homeowner is, however, obligated to pay SMUD's current rate for electricity. Since 1993, about 450 homes have participated in the program. SMUD has recently launched PV Pioneer II, which allows homeowners to purchase their own PV systems and participate in net metering, generating their own electricity at no cost and paying for the electricity needed from the electrical grid. Any excess electricity generated from the PV system is sold back to the grid for future credit.(25) With energy prices expected to remain stable in real terms, it is likely that substantial subsidization or technological breakthroughs leading to large price reductions would be required to foster increased penetration of residential PV systems. The reference case for this analysis includes the current 10-percent BETC for both solar thermal water heaters and PV systems. Installations for DOE's Million Solar Roofs (MSR) program (see Chapter 3) are also included in the reference case. The analysis does not include consideration of any State or local incentives. Results A negligible change from reference case results was seen when the CCTI tax incentive for rooftop solar equipment was included in the NEMS residential and commercial modules. It should be noted that many of the units completed under the MSR program could be eligible for the solar tax credit. Approximately 400,000 units--of which 66,000 are included in the reference case--are planned to be constructed under the program from 2001 through 2005, the period for which revenue impacts are estimated.(26) Any such units qualified to receive the tax credits during this interval probably would be unintended beneficiaries, because the MSR program pre-dates the CCTI tax incentives. The proposed tax credit is modest in comparison with the 40-percent residential credit available in the past. Niche markets with local incentives in place and electricity rates much higher than the national average could create a situation in which the CCTI tax incentive would make solar technologies economically attractive; however, the Census division resolution of NEMS dilutes the ability to capture such instances. 15-Year Depreciable Life for Distributed Power Property Background The Administration's CCTI proposal for fiscal year 2001 includes a simplification of current law governing the depreciation recovery period for distributed power property. The objectives of the change are to promote the use of distributed power technologies to reduce both energy use and carbon emissions and to reduce taxpayer uncertainty and controversy. Property used to produce electricity and/or steam for primary use in a taxpayer's industrial manufacturing process or plant activity is generally depreciated using the 150-percent declining balance method over 15 years. Industrial property with a smaller capacity (totaling 500 kilowatts or less of electricity or 12,500 pounds per hour or less of steam) is depreciated in accordance with the class life assigned to the applicable manufacturing equipment class. By contrast, under current law, distributed power property used to produce electricity and/or heat for use in a commercial or residential building is likely to be classified as a building structural component and depreciated using the straight-line method over 39 years if placed in service after 1993. The CCTI proposal would allow distributed power systems installed to produce energy for buildings use to be depreciated with the same recovery period as that currently used for larger distributed power property in an industrial manufacturing process or plant activity. Specifically, a 15-year depreciation recovery period would be assigned to distributed power property placed in service after the date of enactment that is used in the generation of electricity for primary use in nonresidential real property or residential rental property in the taxpayer's trade or business, and to property with a rated total capacity in excess of 500 kilowatts that is used in the generation of electricity for primary use in a taxpayer's industrial manufacturing process or plant activity. Assets used to transport primary fuel to the generating facility or to distribute energy within or outside of the taxpayer's facility would not be included in the proposal. Also, no more than 50 percent of the electricity produced from distributed power assets is expected to be sold to, or used by, unrelated persons. If distributed power property is used to produce thermal energy or mechanical power for use in a building, at least 40 percent of the total useful energy produced must consist of electrical power. In an industrial setting, at least 40 percent of the total useful energy produced must consist of electrical power and thermal or mechanical energy used in the taxpayer's industrial manufacturing process or plant activity. The CCTI proposal for distributed power is expected to have its primary impact on distributed generation and cogeneration in the commercial sector, which is the focus of this analysis. Because the proposal represents no change in the tax treatment of property used in an industrial manufacturing process or plant activity, for the purpose of this analysis it is considered a buildings program although CCTI characterizes this incentive as an industry program. Distributed power in the residential sector is only represented for single-family homes, therefore any potential impacts from the tax initiative on residential rental property are not reflected in these results. The analysis did not include the potential effects of removing institutional barriers to distributed power and combined heat and power systems (CHP). Elimination or reduction of barriers due to, for example, standby rates, exit fees, establishing uniform interconnection standards, or reform of environmental permitting policies could lead to a substantially larger increase in the adoption of distributed power technologies than is likely with the proposed change in the current depreciation system alone. The Administration currently has in place the Distributed Power Initiative and the CHP Challenge Program, which may address some of these barriers.(27) The analysis also did not include any change in reference case assumptions regarding any research and development programs or voluntary programs. Methodology The effects of the proposed change in tax law for distributed power property were assessed by changing the depreciation schedule for modeling distributed electricity generating equipment in the NEMS commercial module for AEO2000 to the 150-percent declining balance method over 15 years. The results were then compared to the reference case using the depreciation method used for AEO2000--straight-line over 39 years.The NEMS commercial module develops a forecast of distributed generation and cogeneration of electricity based on the economic returns projected for distributed power technologies. Typical generation technologies represented in the NEMS commercial module are depicted in Table 9. The model uses a detailed cash-flow approach to estimate the number of years required to achieve a cumulative positive cash flow. Penetration rates for distributed generation technologies are determined by how quickly an investment in a technology is estimated to recoup its flow of costs--the more quickly costs are recovered, the higher the penetration. Table 9. Typical Distributed Power Technologies in the NEMS Commercial Module The cash-flow calculations for each potential investment include both costs and returns in an analysis covering 30 years from the date of investment. Costs include down payments, loan payments, maintenance costs, and fuel costs, while returns include tax deductions, tax credits, and energy cost savings. Tax deductions in the reference case include the depreciation of distributed power assets using straight-line depreciation over 39 years, treating the property as a structural component of the commercial building. To gauge the effect of the CCTI proposal, the methodology was changed to incorporate the 150-percent declining balance method of depreciation over 15 years as proposed for distributed power assets used to produce electricity for buildings use. All other aspects of the cash-flow analysis were performed as in the reference case. Results The analysis results for the Administration's CCTI proposal for distributed power are presented in Tables 10 and 11. About 98 megawatts of new electricity generating capacity in commercial distributed power resources are projected to be added by 2005 in the reference case for this analysis, with 86.7 megawatts of the additional capacity installed during the 2001 through 2005 time frame. An additional 6.1 megawatts of new distributed generating capacity is projected to be installed by 2005 in the CCTI analysis case.
Table 10. Projected Energy Savings and Carbon Emissions Reductions from the CCTI Tax Incentive for
Commercial Distributed Power Property, 1998, 2005, 2010, and 2020
The additional capacity prompted by the proposed tax law change results in annual savings of 209 billion Btu in commercial primary energy use by 2005. However, all of the commercial capacity projected to be added in 2005, 27 megawatts, would be eligible to use the proposed depreciation schedule, leading to projected tax revenue losses of $4.2 million. The tax revenue losses for the capacity added because of the tax proposal total $0.1 million for 2005, indicating that 98 percent of the tax benefits would be realized by unintended beneficiaries, capacity that would be added whether or not the proposed change is enacted. The proposal for distributed power is different from the other CCTI tax revenue proposals in two respects. First, the distributed power proposal affects the depreciation schedule used for equipment, rather than providing a tax credit. Second, the change in tax law under this proposal has no time limit and would apply to any distributed power property for building use placed in service after the date of enactment, whether the equipment was installed in 2002 or 2020. The second aspect allows this CCTI proposal to have a greater effect later in the forecast, as projected costs for more advanced technologies decline. The more favorable depreciation treatment of the CCTI analysis case, combined with the reference case declines in technology costs for newer technologies, results in an additional 370 megawatts (14 percent) of commercial generating capacity in 2020 compared to reference case levels. Primary energy savings are projected to reach almost 6 trillion Btu in 2020, saving commercial consumers $47 million in energy expenditures relative to the reference case. The increased penetration of distributed power in the CCTI analysis case reduces carbon emissions attributable to the commercial sector marginally compared to reference case levels. Increased use of distributed power technologies reduces purchased power requirements and leads to lower emissions from central-station electricity producers. However, because additional fuel (natural gas in most cases) is required to fuel distributed power systems, higher site emissions result, offsetting some of the reduction in central-station emissions. Annual projected emissions in the CCTI case are 5 thousand metric tons lower by 2005 and 140 thousand metric tons lower by 2020 compared to the reference case, resulting in a cumulative reduction of 1 million metric tons of carbon emissions by 2020. The cumulative estimate for tax revenue losses between 2001 and 2020 as a result of the CCTI proposal reaches $275 million with 77 percent going to unintended beneficiaries. Transportation Sales of alternative-fuel vehicles (AFVs) and advanced technology vehicles (ATVs) are expected to total approximately 3.2 percent of all U.S. light-duty vehicle (LDV) sales in 1998.(28),(29) About 74 percent of those sales are alcohol-flexible vehicles, which can run on any combination of alternative fuel and gasoline, and 23 percent are AFVs that use either compressed natural gas (CNG) or liquid petroleum gas (LPG). Less than 1 percent are hybrid electric vehicles. The electric vehicles currently available (Table 12) average 17 to 30 percent higher fuel efficiency than
comparable conventional gasoline vehicles.(30) Whereas conventional gasoline vehicles achieve only about
18 to 28 percent efficiency in combustion, electric vehicle motors have almost no loss in thermal
efficiency. On the other hand, approximately 66 percent of the primary energy used to produce
electricity is lost in production and transmission.
Hybrid electric vehicles are just beginning to enter the marketplace. For example, the Toyota Prius, scheduled for introduction in the U.S. market in the summer of 2000, uses a gasoline engine and regenerative braking to restore power to an electric battery that runs the vehicle motor. It has been advertised as having reached 66 miles per gallon (mpg) in the Japanese fuel efficiency test cycle, but in the U.S. Federal test procedure (FTP) cycle it has been rated at 50 to 55 mpg. The Honda Insight two-seater gasoline-electric hybrid entered the U.S. market in the fall of 1999. The electric motor is used only when the driver needs a power assist during acceleration. Fuel economy for the Insight is approximately 60 mpg in the city and 71 mpg in highway applications. In general, there is about a two-year lag between the availability of a production prototype, which is available in limited quantities, and a commercial prototype, which is available on a larger scale. Fuel cell vehicle technology is still in the early stages of development. A few test vehicles--buses in the Chicago Transit Authority fleet--have been sold, and some mechanical problems with those have been reported. Fuel cell vehicles have the potential to increase fuel economy relative to conventional gasoline vehicles by some 72 percent with gasoline as a fuel, 84 percent with methanol, and 100 percent with hydrogen. Tax Credits for Electric, Hybrid Electric, and Fuel Cell Vehicles The CCTI proposes the following tax initiatives for LDVs:
-$1,000 if a rechargeable energy storage system provides at least 10 percent but less than 20 percent of the maximum available power - $1,500 if rechargeable energy storage system provides at least 20 percent but less than 30 percent of the maximum available power - $2,000 if rechargeable energy storage system provides at least 30 percent or more of the maximum available power. An additional credit of up to $1,000 is available for vehicles with a regenerative braking system. -$250 if the regenerative braking system supplies to the rechargeable energy storage system at least 20 percent but less than 40 percent of the energy available from braking in a typical 60 to 0 mph braking event All qualifying vehicles must meet or exceed all emissions requirements for gasoline vehicles. Analytical Approach The NEMS transportation module represents conventional gasoline vehicles (including direct injection gasoline technology and 57 other fuel-saving technologies), diesel turbo direct injection, alcohol (both methanol and ethanol) flexible-fueled and dedicated vehicles, gaseous (both CNG and LPG) dedicated and bi-fuel vehicles, electric vehicles, hybrid electric (gasoline and diesel) vehicles, and fuel cell vehicles (methanol, hydrogen, and gasoline reformers). Each AFV/ATV technology is evaluated within each of the 12 EPA size classes for both cars and light trucks. For this analysis, the following consumer purchase criteria were evaluated:(31) (1) vehicle price, (2) cost of driving per mile (fuel price divided by fuel efficiency), (3) vehicle range, (4) top speed, (5) acceleration, (6) multiple fuel capability, (7) maintenance cost, (8) luggage space, and (9) fuel availability.It was assumed that there would be no new requirements or additional costs for catalysts, engine design changes, or advanced reformulated fuels to meet EPA vehicle emissions standards. If stricter EPA standards are passed in the future or if some ATVs cannot meet current or future emissions standards, the market penetration rates and carbon emissions reductions projected in this analysis could be lower. The following assumptions were made in modeling the CCTI analysis case:
Results Sales of fuel cell vehicles, which are assumed to be available in 2005,(32) are projected to total 37,900 in 2020 in the CCTI case (Table 13). Projected sales of hybrid vehicles--particularly, gasoline-electric hybrids--are significantly higher in both cases than are sales of either electric vehicles or fuel cell vehicles, with sales of gasoline-electric hybrids at about 1,211,300 vehicles in 2020 in the CCTI case. Two hybrids are anticipated to be available in U.S. markets by 2000, and the technology allows for vehicle characteristics that are similar to those of conventional gasoline vehicles--especially the most important consumer purchase criterion, vehicle price (see discussion below).(33) Total AFV/ATV sales in the CCTI case represent 7.4 percent of all LDV sales in 2010. Moreover, most
of the projected sales also occur in the reference case. Projected LDV fuel consumption in the CCTI case
does not differ significantly from that in the reference case. The difference in 2005 is about 8.6 trillion
Btu, consisting almost entirely of a reduction in gasoline consumption. The difference in 2010 is 27.1
trillion Btu and in 2020 it is 65.9 trillion Btu. As a result, the reduction in projected carbon emissions
from transportation energy use in the CCTI case relative to the reference case is about 0.5 million
metric tons in 2010--representing 0.08 percent of total carbon emissions for the transportation sector
(Table 14). In 2020, the carbon emissions in the CCTI case are lower by 1.2 million metric tons because
of the accumulated increased sales of both gasoline-electric and diesel-electric hybrids through 2020.
In the CCTI case, the gasoline-electric hybrid vehicles displace some fuel cell vehicles and diesel-electric
hybrids, which had slightly higher penetration in the reference case, and some LPG and ethanol vehicle
sales are reduced relative to the reference case.
Projected AFV/ATV vehicle sales and the corresponding reductions in Federal tax revenues in the CCTI analysis case are shown in Table 15. In 2003, the reduction in tax revenues totals just over $392 million, growing to $830 million in 2005 and $973 million in 2006. The total proposed allocation of Treasury funds for the CCTI tax incentives is $2.1 billion for the years 2001 to 2005, as estimated by the Administration in nominal dollars, compared to $1.9 billion in this analysis. The results suggest that the proposed CCTI tax initiatives for LDVs would not yield many additional
AFV/ATV sales above those projected in the reference case with the exception of about 216,000
additional sales of gasoline-electric hybrid vehicles in 2020. Consequently, most of the tax benefits
would go toward consumer purchases that would have been made even without the proposed tax
incentives (about 84 percent of fuel cell, electric, and hybrid electric vehicle sales over the period of the
tax credits)--because of the sales mandated by the Low Emission Vehicle Program in California, New
York, and Massachusetts and those resulting from the tax incentives for electric and fuel cell vehicles
in EPACT. The CCTI tax initiatives would, however, provide additional incentives for manufacturers
to comply with the mandates of the Low Emission Vehicle Program. Additional benefits would result
from a reduction in vehicle emissions of criteria pollutants other than carbon, because electric and fuel
cell vehicles are zero emission vehicles.
Why are the projected effects of the CCTI tax incentive program for LDVs so marginal? The answer is suggested by an analysis of the barriers to AFV/ATV penetration of the U.S. LDV market. Again, the following criteria are likely to be considered by prospective purchasers: (1) vehicle price, (2) cost of driving, (3) vehicle range, (4), top speed, (5) acceleration, (6) multiple fuel capability, (7) maintenance cost, (8) luggage space, and (9) fuel availability. The most important consideration in consumer purchase decisions is vehicle price. CCTI reference case assumptions were updated to the latest available information. Full volume vehicle production levels, which include the maximum level of economies of scale in production, lower the incremental vehicle price above a comparable gasoline vehicle to approximately $4,000 for an hybrid electric vehicle and $6,000 for a fuel cell vehicle by 2020. The full volume production vehicle price is assumed to be currently available for hybrid electric vehicles because the Toyota Prius is currently available in Japan and will be in the United States market by early summer. The Honda Insight hybrid electric is currently available in the United States. The full volume production vehicle price for fuel cells is potentially available if sales were to increase rapidly but is not reached in the reference case until 2020. Several refinement cycles of approximately three to four years each for the fuel cell will be necessary before prototypes achieve the attributes that consumers will demand. In terms of driving costs, even with the lower vehicle prices at higher sales volumes, consumers may not receive sufficient payback through fuel savings to encourage AFV/ATV purchases if gasoline prices remain low.(34) Because 75 percent of the vehicles purchased in the United States are still on the road after 10 years, vehicle purchases generally are long-run decisions. The pattern of fuel prices over the recent past can be expected to raise doubts among consumers about the prospects for long-term increases in the future. Gasoline prices rose by 31.9 cents a gallon (in 1998 dollars) from 1973 to 1974, but by 1978 they were only 14.6 cents above 1973 levels. From 1978 to 1979, prices rose by 47.6 cents a gallon, only to fall below 1978 prices by 1983. Although consumers switched their purchasing patterns toward smaller cars and away from larger cars during the oil crises, those short-term fuel price spikes caused only short-run adjustments in vehicle purchasing patterns. Moreover, although AFV/ATV fuel economies (miles per gallon) are expected to be significantly higher than those of conventional gasoline vehicles, their driving costs per mile also are likely to remain significantly higher. As long as gasoline prices remain low, electricity will be a more expensive vehicle fuel. Hydrogen currently is more than twice as expensive as gasoline and, at any rate, is not available to the average consumer. Vehicle range, top speed, and acceleration may also pose barriers to consumer acceptance. For example, electric vehicles can travel a maximum of one-fourth to one-sixth the distance that a conventional gasoline vehicle can travel before refueling. Top speeds generally are similar for the advanced technologies and gasoline vehicles, but all the new technologies have significant acceleration drawbacks that would require higher horsepower and larger engines to match the performance of conventional vehicles, which in turn would reduce their fuel economy.(35) After price, reliability or quality is often cited as the most important purchase criterion by consumers, who are wary of high maintenance costs. Unfortunately, the maintenance costs for ATV vehicles are virtually unknown. Mechanics are not currently being trained to repair and maintain the vehicles, and the availability and cost of replacement parts are uncertain. For present-day electric vehicles, which use lead-acid batteries, the batteries must be replaced approximately every three years at a cost of up to $10,000 for each replacement. Nickel-metal hydride batteries provide 50 percent greater vehicle ranges and last twice as long as lead-acid batteries, but they cost more than four times as much. Lithium-ion batteries can extend vehicle ranges to approximately three times those of lead-acid batteries and may not require replacement during the life of the vehicle, but their costs can be as much as ten times that of a lead-acid battery. Interior volume and luggage space are also of concern to potential purchasers, especially with regard to electric battery packs or fuel cell stacks, which may significantly reduce the interior volume. Electric vehicles are likely to be limited in availability to smaller vehicles, because the expense of batteries needed to power larger vehicles would be prohibitive. Two electric minivans are currently on the market (see Table 12), but their purchase price is approximately $60,000 per vehicle. Fuel cell vehicles, in contrast, may only be available in the larger size classes, because of the size and weight of the fuel cell stacks. Finally, fuel availability is one of the most important barriers to AFV/ATV market penetration. Infrastructure problems are important issues for the production and distribution of both methanol and hydrogen fuel. Methanol refueling stations are sparsely scattered in most States, although more are available in California. Electricity is available in nearly all U.S. homes, but recharging stations are just beginning to appear. Moreover, the recharging time for most electric vehicles is between 3 and 8 hours.In addition to the above concerns that are expected to dampen the enthusiasm of consumers for AFV/ATV purchases, emissions and environmental issues also pose significant hurdles for the new vehicle technologies. For example, electric vehicles are nearly emission-free while in operation, but their ability to provide net emissions reductions depends on the primary energy source used to generate the electricity that fuels them. Coal-burning electricity generation provides few benefits relative to gasoline-burning vehicles. Still another environmental issue for electric vehicles is the potential impact of rapid production, elimination, and recycling of vehicle batteries on a large scale. Emissions issues may also pose problems for diesel-electric hybrid vehicles. Advances in diesel technology have significantly reduced their noise and emissions of particulates, but high levels of nitric oxides and particulates may present significant health problems. EPA has revised its NOx and particulate emissions standards through Tier II standards as mandated by Congress under the Clean Air Act Amendments of 1990, and recent regulations passed by the California Air Resources Board are expected to eliminate diesel technologies from further consideration as solutions to higher fuel economy unless they use advanced catalysts and/or new types of low-sulfur or reformulated diesel fuel. Advanced low-sulfur, low-benzene, and reformulated fuels in combination with advanced catalysts are currently being explored, and Fischer-Tropsch fuels (derived from refinery waste products and natural gas) also are potential candidates for use with advanced diesel technologies. Studies have shown that these advanced diesel fuels and derivatives can reduce both NOx and particulate emissions by as much as 80 percent. At present, however, the fuels are not cost-competitive with either gasoline or diesel fuel. Vehicle stock turnover is also very slow in the personal vehicle market, which accounts for the lack of fuel savings and carbon emissions reductions by 2010. Even 1 million vehicle sales amount to just 0.4 percent of the vehicle stock, which is projected to total some 230 million vehicles by 2010. In order to assess the impacts of the CCTI transportation tax credits with higher petroleum prices, the tax credits were analyzed using the high world oil price case from AEO2000. In that case, world oil prices reached $28.04 per barrel (1998 dollars) in 2020 compared to $22.04 per barrel in the reference case. Using the high world oil prices, the CCTI tax credits result in about 31,000 additional gasoline-electric hybrid vehicle sales in 2020 compared to the additional sales with reference case world oil prices. However, these additional gasoline-electric hybrid vehicles displace some fuel cell, diesel-electric hybrid, and alternative-fuel vehicles, which have higher efficiency and generally lower carbon emissions. As a result, the carbon savings from the CCTI tax credits in 2020 with the high world oil prices are slightly lower than the carbon savings of 1.2 million metric tons with the reference case world oil prices. With the high world oil prices, the tax revenue losses from 2001 through 2005 increase from $1,912 million to $1,940 million. Renewable Electricity Generation The proposed CCTI tax initiatives include several provisions aimed at increasing the utilization of renewable technologies in the generation of electricity. It is hoped that the programs will spur the development of these generating technologies and lower their costs in the future. Such incentives for renewable fuels are not entirely new. EPACT (P.L. 102-486) established production incentives for new biomass and wind-powered generating facilities, but their impact has been fairly small. Wind and Biomass EPACT provides qualifying new wind and biomass facilities with a 1.5-cent subsidy (adjusted for inflation since 1992) for each kilowatthour of electricity they produce during their first 10 years of operation. In effect, the subsidy reduces the per-kilowatthour cost of new wind plants by 20 to 25 percent and the per-kilowatthour cost of new biomass plants by 20 to 30 percent. The original production tax credit (PTC) for wind and closed-loop biomass expired on June 30, 1999; however, in late 1999 the credit was extended through December 31, 2001. To qualify, a new wind plant must have come on line between January 1, 1994, and December 31, 2001 (June 30, 2003, for those brought on by publicly-owned entities). For qualifying biomass plants, the beginning date is January 1, 1993. The program differs slightly for facilities built by private and public entities. For private companies, the subsidy is paid through a PTC, and biomass plants must be closed-loop facilities to qualify.(36) For public entities, the subsidy is paid by DOE through a renewable energy production incentive (REPI), and the definition of qualifying biomass facilities is much broader. Through 1999 the REPI and PTC resulted in limited additions of biomass and wind generating capacity.
No biomass capacity has been built in response to the PTC, because technologies for closed-loop biomass
are not yet commercially available. For wind, incentive programs in addition to the PTC appear to have
contributed to the capacity builds during the EPACT PTC period (Table 16). Very little wind capacity
was added during the early years of the original PTC. Of the 935 megawatts(37) of new wind generating
capacity entering service through 1999, 117 megawatts entered service before 1998, of which 28
megawatts were clearly associated with programs independent of the PTC. Of the remaining 818
megawatts, 494 were also encouraged by other programs, principally State mandates, most of which
began in 1998. For example, in Minnesota, Northern States Power is legislatively mandated to build 425
megawatts of new wind power, 244 megawatts of which were added in 1998 and 1999. Of the capacity
added during 1998 and 1999, 324 megawatts entered service without a specific mandate. However, even
these additions appear to have been influenced by additional factors, including testing, demonstration,
and green power programs and other environmental initiatives. Further, the vast majority of the
capacity, 654 megawatts, entered service in 1999. Some of this capacity probably would have been built
in 2000 or later but was brought on earlier to take advantage of the original PTC deadline. The revenue
effects of the PTC are fairly limited so far. For wind power, PTC-related revenue losses in 1997 are
estimated at less than $4 million, rising to $33.2 million in 1999.
Landfill Gas The anaerobic decomposition of organic wastes in landfills represents the largest source of methane emissions in the United States and is second only to carbon dioxide as a major contributor to potential greenhouse warming. Gases created during the decomposition process migrate from the depths of the landfill. These gases are composed primarily of methane (50 percent) and carbon dioxide (45 percent). Unless methane is collected and used as a fuel for electricity generation or heat, it is either burned off by flaring the gases without recovering the energy potential of the gas or released into the atmosphere. Over long periods of time, methane is estimated to be 21 times more potent than carbon dioxide as a greenhouse gas. Under current regulations, many landfill owners or operators are required to collect and combust the methane that their landfills produce. U.S. landfills produced 9.7 million metric tons of methane in 1998, the lowest level of methane emissions since the late 1970s.(38) Although the volume of municipal waste grew by 16 percent between 1990 and 1997, the amount of the total U.S. waste stream reaching landfills decreased 21 percent. This decrease is the result of the increased use of curbside recycling and composting. Even though the availability of methane production is expected to decrease as a result of increased recycling efforts, the number of landfill-gas-to-energy projects increased from 150 in 1997 to more than 200 in 1998. This increase occurred as producers attempted to complete their projects prior to the expiration, on June 30, 1998, of the Internal Revenue Code Section 29 tax credit that provided a subsidy of about 1.0 cent per kilowatthour for electricity generated using landfill gas. Climate Change Technology Initiative The CCTI extends the 1.5-cent PTC for wind and closed-loop biomass for 2.5 years, through June 30, 2004; however, because the proposal allows unfinished plants that are under binding contract or construction as of June 30, 2004, an additional year, the PTC is effectively extended 3.5 years. In addition, the proposal would expand the types of plants qualifying for the biomass subsidy. The definition of eligible biomass sources is broadened from closed-loop biomass only to include any solid, nonhazardous, cellulosic waste material that is segregated from other waste materials, and that is derived from the following forest-related sources: mill residues, pre-commercial thinnings, slash, and brush other than old growth timber. Also included would be pallets, crates and dunnage, trimmings, and agricultural byproducts or residues. In essence, this would expand the credit to those facilities that can use wood residues and wood wastes to generate electricity for sale to customers (self-generation does not qualify). Moreover, biomass facilities that were placed in service before January 1, 2001, would be eligible for a credit of 1.0 cent per kilowatthour, adjusted for inflation from a 2000 base, for electricity generated for 3 years, from 2001 through 2003. EIA projects 1,780 megawatts of biomass capacity would be available on December 31, 2000, and eligible for that credit. In addition to broadening the definition of eligible biomass, the proposal also provides a 0.5-cent PTC, adjusted for inflation from the 2000 base, for biomass that is co-fired in coal plants to produce electricity during the period January 1, 2001, through December 31, 2005. Unlike the PTC for new wind and biomass plants, the co-firing PTC does not continue for the first 10 years during which a plant co-fires but remains in effect only from 2001 through 2005. This credit would apply to all facilities that are co-firing biomass with coal, including those that are already doing so. The CCTI would also institute tax initiatives for further development of landfill-gas-to-energy projects. These incentives would be applied to new landfill-gas-to-energy projects that are placed in service between January 1, 2001, and December 31, 2005. However, facilities would also be eligible for the incentive if the facility is under construction in 2005 and completed in 2006 or a contract for construction is in place in 2005 for a facility to be completed in 2006. The incentives would include a 1-cent-per-kilowatthour PTC for landfills subject to EPA's New Source Performance Standards (NSPS) and a 1.5-cent-per-kilowatthour PTC for landfills not subject to the NSPS. The PTC would be applied to generation over a period of 10 years. The PTC would not apply to existing facilities but effectively extends the incentive to December 31, 2006, if the facility is constructed, reconstructed, or acquired by the taxpayer pursuant to a contract binding on December 31, 2005. In addition, a facility will be eligible for the PTC if the lesser of $1 million or 5 percent of the facility's cost has been incurred or committed by December 31, 2005. Methodology For this analysis, the PTC for renewable generation was modeled in the NEMS electricity market and renewable fuels modules, with no feedback from other NEMS modules. The vast majority of biomass-based cogeneration is not eligible for the credit because it uses nonwoody fuels and self-generation does not qualify, so cogeneration was not considered in the analysis. In order to test the potential impacts of the CCTI, it was assumed that the PTC for wind and new biomass would be extended through 2005 and that generation from the existing 2000 biomass capacity would receive the 1.0-cent credit from 2001 through 2003, adjusted for inflation. Based on an analysis of the economics of dispatching, it was also concluded that generation from this capacity would increase in response to the PTC incentive. For both the reference and the CCTI cases, new biomass technology is not assumed to be commercially available until 2005. Therefore, new biomass generating capacity entering service prior to 2005 is considered to be either demonstration plants or plants using existing technologies. The model allows coal plants to use biomass for a portion of their fuel if it is economical. It was assumed that a coal plant could use biomass to displace up to 5 percent of the coal it would normally use. Current research has shown that a typical coal-fired boiler can fire as much as 5 percent biomass without a costly retrofit. Coal plants can consume larger shares of biomass, perhaps as much as 10 to 15 percent of their fuel, if new fuel handling systems are added and boiler firing equipment is modified. However, such modifications are expensive, $250 or more per kilowatt of capacity, and the short length of the PTC for biomass co-firing makes it unlikely that plant operators would be willing to make such investments. An offline analysis was performed to match the availability of relatively low-cost biomass with the amount of coal capacity in a State. The maximum co-firing share allowed in any region was the minimum of the available low-cost biomass and the available coal capacity (assuming the use of 5 percent biomass) matched at the State level. Because there were States where the match was not good--large amounts of biomass but few coal plants, or many coal plants but little biomass--the maximum amount of coal that could be displaced by co-firing with biomass was determined to be 4.1 percent nationally. (For example, Oregon has a substantial amount of mill residues that could be used for co-firing in coal plants, but there is very little coal-fired capacity in the State.) Among the regions in the model, the share varied from 0 to 5 percent. To capture costs that may not be fully represented in the biomass supply curves, the model also incorporates a hurdle rate, a minimum savings for displacing coal with biomass. These costs are associated with issues such as developing a reliable fuel supply for a specific plant, testing the fuel in the plant to see what modifications might be necessary, designing and implementing the modifications, applying for any licenses that are needed, and getting air permit changes approved where necessary. Analysts have informed EIA that each of these factors may require some effort to overcome and may slow the penetration of biomass use in coal plants. Therefore, in the reference case, the co-firing shares are phased in between 1999 and 2010, and the hurdle rate is initially 1 cent per kilowatthour in 2000 before declining to 0.1 cent by 2010. In the CCTI biomass co-firing case, it is assumed that the PTC causes the hurdle rate to decline further, reaching 0.05 cents by 2010, essentially assuming that the availability of the biomass co-firing PTC would lead to further reductions in the costs incurred in preparing to use the fuel. Following observed experience in 1999 of accelerating already mandated new capacity in order to obtain the PTC, extending the PTC for biomass and wind through 2005 would likely accelerate some post-2005 reference case capacity additions resulting from State mandates. As a result, 90 megawatts of mandated new biomass generating capacity and 480 megawatts of mandated new wind generating capacity projected to occur between 2006 and 2008 in the reference case would be built by 2005 in the CCTI case. Because the AEO2000 version of NEMS does not allow landfill-gas-to-electricity technologies to economically compete with other generating alternatives, a new reference case was developed along with the CCTI case. In both cases, the amount of new landfill-gas-to-electricity capacity during the projection period competes with other technologies using supply curves that are based on the amount of high, low, and very low methane producing landfills located in each electricity market module region (Figure 1). An average cost of electricity production for each type of landfill yield is calculated using gas collection system and electricity generator costs and characteristics developed by EPA's Energy Project Landfill Gas Utilization Software (E-PLUS).(39) Figure 1. Electricity Market Module Regions The amount of methane available by methane yield is calculated by first determining the amounts of total waste generation excluding composting and incineration for the years 1999 through 2020 and applying assumptions regarding the amount of waste that is landfilled against this waste stream. The total waste stream projection is based on a regression model that extrapolates waste from historical values as a function of U. S. population and gross domestic product. Landfill projections are calculated from this total waste stream by assuming that recycling will account for 35 percent of the total waste stream by 2005 and 50 percent by 2020. After projecting the amount of landfill available for 1999 through 2020, the annual landfill amounts are used as supply inputs for a slightly modified EMCON Methane Generation model.(40) The EMCON model characterizes waste by three categories--readily, moderately, and slowly decomposable material--based on the emission characteristics of the each type of waste. It then calculates methane emissions over the decomposition cycle associated with each type. The model and emission parameters used in this analysis are the same as those used in calculating historical methane emissions in EIA's Emissions of Greenhouse Gases in the United States 1998(41) but are also applied to the projected landfill amounts calculated as described above. The ratio of high, low, and very low methane production sites to total methane production is calculated by applying the ratios of high, low, and very low methane-yielding sites as calculated from data obtained for 156 operating landfills contained in the Government Advisory Associates' METH2000 database.(42) Finally, because NEMS models landfill-gas-to-electricity technologies as characterized by price and quantity curves rather than site specific data, an analysis was performed using EPA's State Land Profiles(43) for 31 states to determine a representative ratio of NSPS to non-NSPS sites. This analysis resulted in an average PTC of 1.41 cents per kilowatthour for new landfill gas capacity construction during the effective PTC period of 2001 through 2006. Similarly, the production cost of electricity for high, low, and very low methane-yielding sites was
calculated by constructing a model of a representative 100-acre by 50-foot deep landfill site and by
applying methane emission factors for high, low, and very low methane-emitting wastes (Table 17).
Because methane yields for this virtual site are different for each yield assumption, the generator size,
number of wells, cost of gas cleanup, piping, and other gas collection and generating parameters lead
to different production costs of electricity due to increases in material and losses to economies of scale.
In general, high methane yield sites produce electricity at a lower cost per kilowatthour than lower
yielding sites. The cost of electricity and the available supply of methane at each yield category for each
region is displayed in Table 18.
Table 18. Landfill Gas to Energy Supply and Cost of Electricity Production by Region Biomass As discussed in the methodology section, although new biomass gasification plants are assumed to be
commercially available during the final year of the PTC horizon, the extension and broadening of the
biomass PTC through 2005 does not lead to more capacity being added solely on an economic basis
(Table 19). However, the extension of the PTC may encourage additional demonstration efforts, and it
is expected to accelerate construction of about 90 megawatts of mandated new biomass capacity by 2005
in the CCTI case that would have been built after 2005 absent the PTC. In the reference case, 144
megawatts of new biomass capacity come on line within the 2002-2005 PTC period. In the CCTI case,
the additional 90 megawatts of accelerated builds bring the total to 234 megawatts expected to be added
by 2005. The increase in biomass generation and reduction in carbon emissions because of the 90
additional megawatts added in the CCTI case are small. In 2010, the carbon emissions are unchanged
from the reference case; however, the full 234 megawatts added are expected to take the tax credit. In
2010, if all the expected plants took advantage of the PTC, tax collections would be almost $27 million
lower than in the reference case. In 2005, approximately 35 percent of the tax savings would go to the
90 megawatts accelerated by the program, and the remaining 65 percent would go to capacity expected
to be built even without the program. Over the full life of the proposed CCTI extension for new biomass
capacity, 93 percent of the tax revenue is returned to unintended beneficiaries.
The 1.0-cent PTC (adjusted for inflation from a 2000 base) for existing biomass plants applies to all generation between 2001 and 2003 from the 1,780 megawatts biomass capacity on line in 2000. Because the monetary incentive induces some additional generation from this capacity that would not have occurred otherwise, extending the PTC has the effect of inducing 1.2 billion kilowatthours additional generation by 2003, accounting for 15 percent of all payments to this capacity in 2003. Nevertheless, over the three-year proposed CCTI extension for existing biomass capacity, 86 percent of the tax revenue is returned to unintended beneficiaries. The biomass co-firing provision of the CCTI has a more significant impact than the PTC for new and existing plants. Coal plants can burn small amounts of biomass without significant modifications. Thus, if low-cost biomass fuel can be found, collected, and delivered to the plant at reasonable costs, it may be economical. Data suggest that there is a relatively large amount of low-cost biomass available in the form of mill residues, urban wood waste, and site clearing residues. The production tax credit would be expected to encourage power plant operators or third-party developers to search out these supplies and develop collection and handling systems; however, because the co-firing credit expires in 2005, the impact declines somewhat in the later years. In 2005, electricity generation from co-fired biomass is projected to be 14.6 billion kilowatthours in the CCTI case, about three times the reference case level (Table 20). As a result, total carbon emissions are 3 million metric tons lower in that year. The cost of the subsidy is estimated to be about $280 million in tax revenue reductions during the life of the credit, with about 34 percent going to facilities that would have used biomass co-firing without the PTC. It is assumed in this analysis that the co-firing PTC would encourage power plant operators and biomass fuel suppliers to overcome the hurdles that are keeping them from taking advantage of the low-cost supplies that appear to be available. For example, some electricity producers might maintain their relationships with biomass fuel suppliers once the PTC has induced such purchases. A recent example of such a change is the use of low-sulfur subbituminous coal in boilers originally designed only for bituminous coal, encouraged by the sulfur emission reduction requirements of the Clean Air Act Amendments of 1990 (CAAA90). Before the CAAA90 requirements were implemented, it was believed that the plants could not burn subbituminous coal. After testing and minimal modification, however, use of subbituminous coal in such boilers expanded significantly. For both biomass and wind (see below), the actual tax revenue losses may be less than estimated in the CCTI case even if all the projected new capacity enters service. To the extent that new generating capacity (1) is ineligible for the PTC because of minimum tax rules or other requirements effectively disallowing the benefits, (2) enters service later in its initial year or is delayed until a later year, or (3) performs below the 33-percent capacity factor assumed for new wind capacity or the 80-percent capacity factor assumed for new biomass capacity, the tax revenue reductions could be less than estimated here. Of course, higher capacity factors would increase the tax consequences. Wind In the reference case, 991 megawatts of new wind generating capacity is expected to enter service during the 2002-2005 period in response to State mandates, renewable portfolio standards, and other programs. No additional wind capacity is expected to be added in this period based solely on economics. Wind technology costs and performance are expected to improve, but they still are not expected to be competitive with new natural gas plants in most situations. Extending the wind PTC through 2005 leads to accelerated construction of 480 megawatts of mandated
new wind generating capacity that otherwise would have been built later in response to State renewable
portfolio standards (Table 21). No additional wind capacity is expected to be built solely for economic
reasons, and analysis indicates that repowering existing older wind facilities would remain economically
noncompetitive. As a result, although wind generating capacity and output are increased in 2005
compared with the reference case, by 2010 no differences between the reference and CCTI cases remain.
The tax revenue consequences of the CCTI are similarly modest for wind power when applied only to the CCTI-induced additional capacity, totaling $18 million in 2005. The total tax revenue effects of the PTC extension are much greater, however, because the 991 megawatts of wind capacity expected to be added in the reference case can also take advantage of it. As a result, if all the eligible plants take advantage of the extended PTC, the cost could reach $55.4 million in 2005. Over the full life of the extension for wind power, 94 percent of the tax revenues are returned to unintended beneficiaries. Because little new wind capacity is expected to be encouraged by the extended PTC, carbon emissions are virtually unchanged. The PTC could indirectly lead to new capacity additions not captured in the results presented here. Just as the new wind plants added during the original PTC time frame appear to have been encouraged by the combination of the PTC, State mandates, and other incentive programs, the combined stimulus could again conceivably continue with the extension of the PTC. Without the PTC extension, the other incentive programs could be less successful. Conversely, green power programs and utility testing programs may grow if the PTC is extended. Some consumers may be willing to pay a small premium to purchase green power, including wind power. Similarly, some power companies have been experimenting with new wind facilities to become familiar with the technology and test how they might use it within their systems. Their willingness to continue those efforts may grow if the PTC is extended. It is also possible, however, that utility testing, green power, and other wind technology demands are satisfied by capacity additions through 2001 and that additional capacity for those reasons is unlikely despite the PTC. While the production tax credits for these technologies do lower the costs faced by potential developers, they are not large enough to overcome the cost disadvantages they face. New gas-fired facilities (and new coal-fired facilities after 2015) are very economical, making it difficult for new wind and biomass plants to penetrate the market. Even though renewable technologies are improving, the falling costs and improving efficiencies of new fossil generating technologies continue to restrict their penetration in the market. While these PTCs are not expected to spur a large increase in renewable power generation, there are other non-CCTI programs being considered that could have a bigger impact. For example, the Comprehensive Electricity Competition Act proposed by DOE in 1999 included a 7.5-percent renewable portfolio standard. The analysis of this proposal in AEO2000 found that it could lead to a reduction in carbon emissions of almost 20 million metric tons in 2010 at minimal cost to consumers.(44) Landfill Gas In the reference case, 374 megawatts of new landfill gas capacity are projected to come online between 2001 and 2006. However, this new capacity is the result of State initiatives or mandates, such as renewable portfolio standards or green power initiatives, and are unintended beneficiaries of the tax incentives. An additional 381 megawatts of State initiatives or mandates are planned for the period 2007 through 2010 in the reference case. Since implementation of the PTC is likely to encourage accelerated development of some plants currently planned for the post-PTC period, it is assumed that 143 megawatts of this capacity would be accelerated to begin operation by 2006 in the CCTI case. The remaining 238 megawatts are completed during 2007 through 2010, as currently planned. Consequently, a total of 517 megawatts due to State initiatives and mandates are projected to be built during the PTC period. However, all generation from the 374 megawatts scheduled to be completed before 2007 in the reference case and that portion of the generation that occurs after 2006 from the accelerated 143 megawatts are considered to be unintended beneficiaries. The PTC in the CCTI case results in an additional 570 megawatts of landfill gas capacity during the period 2001 through 2006 over and above the mandated capacity additions. Tax revenues returned in 2005 equal $77 million, of which $30 million, or 38 percent, would be returned to unintended beneficiaries (Table 22). Total revenues returned over the life of the tax incentive are $900 million, of which $491 million, or 55 percent, would be returned to unintended beneficiaries. Table 22. Projected Impacts of the CCTI Landfill Gas Tax Credit, 1998, 2005, 2010, and 2020 Due to the displacement of fossil-fired generation by new landfill gas capacity, direct carbon emissions are reduced by about 1 million metric tons in 2005. However, the additional 570 megawatts projected in the CCTI case due to the PTC result in an additional 3.4 million metric tons reduction in carbon equivalent emissions in 2005 when the methane emissions avoided are converted to carbon equivalent, assuming that the methane would otherwise have been emitted into the atmosphere. Although generation by landfill gas facilities is projected to be small relative to total U.S. generation (less than 0.6 percent in 2020 in the reference case), the PTC in the CCTI could have significant impact within the landfill-gas-to-energy industry itself. This analysis demonstrates that the proposed PTC could lead to a near tripling of landfill gas generating capacity additions during the years 2001 through 2006. This amount could be increased if plans for the remaining State-mandated 238 megawatts of new landfill gas generators for the period 2007 through 2010 are accelerated to take advantage of the credit. However, offsetting the benefits of the PTC are the tax revenues that will be returned to the 374 megawatts of currently planned facilities during this period. In order to assess the impacts of extending the PTC beyond the proposed CCTI expiration date of 2006, a case was developed which extended the PTC for landfill gas technologies through 2020. The landfill gas PTC was selected because it has the largest impacts of all the renewable generation tax incentives. Extending the PTC results in an increase of 733 megawatts of landfill gas capacity compared to the reference case through 2020, 186 megawatts more than in the CCTI case. The same schedule is used for the State-mandated capacity additions as in the reference case, so all reported State-mandated additions through 2020 become unintended beneficiaries of the extended PTC. In the case extending the PTC, unintended beneficiaries account for tax revenue reductions of $911 million through 2020, or 55 percent of the total revenue reductions of $1,644 million. In the CCTI case, unintended beneficiaries account for revenue reductions of $491 million, also 55 percent of the total revenue reductions of $900 million. Summary In general, the estimated impacts of the proposed tax incentives in CCTI are relatively small. In 2005, the tax incentives for the buildings and transportation sectors are projected to reduce total primary energy consumption by 25.2 trillion Btu, or 0.02 percent, relative to the reference case projection of 105 quadrillion Btu (Table 23). The impact in 2010 is 44.2 trillion Btu (0.04 percent). In the AEO2000 reference case, carbon emissions are projected to reach 1,683 million metric tons in 2005 and 1,787 million metric tons in 2010. (Note that the EIA model only tracks the carbon equivalent of carbon dioxide emissions from the combustion of energy.) These tax incentives lower the projected carbon emissions by 0.5 million metric tons (0.03 percent) and 0.7 million metric tons (0.04 percent) in 2005 and 2010, respectively, relative to the AEO2000 reference case (Table 24). The renewable generation tax incentives are projected to reduce fossil energy consumption for electricity generation by 150.9 trillion Btu in 2005 and by 48.7 trillion Btu in 2010, reducing carbon emissions by 3.2 million metric tons (0.19 percent) in 2005 and by 0.6 million metric tons (0.03 percent) in 2010, relative to the AEO2000 reference case. An additional 3.4 million metric tons carbon equivalent of methane emissions are avoided in 2005 due to the landfill gas tax incentive. Table 23. Projected Reductions in Energy Use for CCTI Tax Initiatives, 2002-2010In 2005, total carbon emissions are projected to be reduced by 3.7 million metric tons, or 0.22 percent
of the AEO2000 reference case projection, as a total of the individual impacts of the tax incentives. The
reduction reflects lower projected energy consumption and a shift in the mix of energy fuels. In 2010,
the tax incentives reduce projected carbon emissions by 1.3 million metric tons, or 0.07 percent of the
AEO2000 reference case projection.
For all the tax incentives, with the exception of the buildings equipment credit, the impacts increase from 2002 to 2005, because the more advanced technologies become available and gradually penetrate the market. As the buildings equipment tax credits expire in 2004, the impact of the tax credits is reduced, because some of the new, more efficient equipment begins to need replacement and is replaced by less efficient equipment. The more efficient equipment is no longer economical without the tax credit. As most other tax credits expire in 2005, their incremental impacts are subsequently reduced. Since the initiative for distributed power is a change in the depreciation schedule without a time limit, rather than a credit, this proposal has a greater impact later in the projection period. The proposed transportation tax credits also have more sustained impacts by encouraging the penetration of advanced technology vehicles. Although the CCTI tax initiatives lower carbon emissions, there is a loss to the Federal government resulting from the lower tax revenues. In Table 25, the revenue reduction per ton of carbon reduced or avoided is presented for each of the tax initiatives, using two different methods. In the first method, the tax revenue losses through 2020 are discounted, and in the second method, both the tax revenue losses and the emissions reductions are discounted. Both methods are calculated because there is some disagreement about discounting nonmonetary values. Discount rates of 7 and 15 percent are used, along with no discounting. Table 25. Projected Tax Revenue Reductions per Ton of Carbon Emissions Reduced With no discounting, the cost of carbon reductions ranges from $44 to $267 per ton across the various tax initiatives. For a 7-percent discount rate, the cost ranges from $54 to $460 per ton if carbon emissions are discounted and from $24 to $157 per ton if emissions are not discounted, and, for a 15-percent discount rate, the cost ranges from $55 to $813 per ton if carbon emissions are discounted and from $14 to $98 per ton if emissions are not discounted. The cost per ton of carbon emissions reduction increases with higher discount rates if the carbon emissions are discounted because the revenue reductions occur earlier in the period while the carbon emissions are reduced over the life of the equipment. As requested by the Subcommittee, it is noted that only the landfill gas tax initiative has a cost in the range of the $14 to $23 dollars per ton estimated as the cost of implementing the Kyoto Protocol. The investment tax credits lower the initial cost of purchasing more efficient equipment; however, the tax credits do not appear to be of sufficient magnitude to overcome consumer reluctance to purchase more expensive equipment with long payback periods. Most consumers are willing to invest in more efficient, but more expensive, equipment if the higher initial costs are offset by lower fuel expenditures within a period of several years. In the electricity generation sector, the production tax credits may affect some marginally competitive wind and biomass plants; however, new natural gas-fired, combined-cycle plants generally retain an economic advantage. Also, the more flexible operation of natural gas-fired generating facilities provides an advantage over wind generation. Higher prices for fossil fuels or higher demand growth could serve to make these technologies more economically attractive. Tax incentives of longer duration and/or higher value could also lead to more significant impacts by making the technologies more competitive. The timing and duration of the incentives are critical. For example, the fuel cell vehicle tax credit extends through 2006, and EIA assumes that fuel cell vehicles will first become commercially available in 2005. Although tax incentives have benefits in encouraging some incremental investments, there may be some
unintended consequences. Some of the technologies covered by the incentives would likely penetrate
even without the incentives, which can be seen by comparing the tax incentive cases with the reference
case. Those units would receive the tax incentives in addition to those units added incrementally as a
result of the incentives. Such unintended beneficiaries may be a significant portion of the total units,
nearly all of the rooftop solar equipment and 70 percent or more for the distributed power,
transportation, wind, and biomass tax initiatives (Table 26). Another unintended result could be a
shifting of planned investments to fall within the time period of the incentives by purchasers either
delaying until the incentives begin or accelerating their investments.
As discussed earlier in this report, there are a number of uncertainties in key assumptions that could affect the specific results of this analysis. Changes in energy prices from those in the AEO2000 reference case could alter the underlying economics of technology penetration. Also, unforeseen changes in the costs and performance characteristics of new or more advanced technologies or fundamental shifts in consumer behavior and consumer valuation of more energy-efficient or lower-emission technologies could impact the results. Given these assumptions, the impacts of these incentives on energy consumption and emissions appear small. Comparison to the Fiscal Year 2000 Climate Change Technology Initiative The Administration's fiscal year 2000 budget request included $383 million in tax incentives, compared to $201 million in the fiscal year 2001 budget request, all in nominal dollars. Over a five-year period, the tax incentives in the fiscal year 2000 request totaled $3.6 billion from fiscal years 2000 through 2004, and the incentives in the fiscal year 2001 request total $4.0 billion from fiscal years 2001 through 2005. Although many of the proposed tax incentives are similar, there are some significant deletions, additions, and modifications to the proposals. The impacts of the fiscal year 2000 CCTI were analyzed by EIA at the request of the U.S. House of Representatives Committee on Science.(45) Buildings Tax Credits for Energy-Efficient HomesThe fiscal year 2001 CCTI tax credit for energy-efficient new homes proposes a credit of $1,000 for purchasers of new homes built between 2001 and 2003 that are at least 30 percent more efficient and a credit of $2,000 for homes built between 2001 and 2005 that are at least 50 percent more efficient than the IECC standard. The fiscal year 2000 CCTI included a credit of $1,000 for new homes built between 2000 and 2001 that are at least 30 percent more efficient, a credit of $1,500 for new homes built from 2000 through 2002 that are at least 40 percent more efficient, and a credit of $2,000 for new homes built from 2000 through 2004 that are at least 50 percent more efficient than the IECC Standard. By removing the 40-percent category, the energy savings in 2010 are reduced from 11.6 to 9.5 trillion Btu and the savings in carbon emissions from 0.2 to 0.1 million metric tons (Table 27). The estimated impact on tax revenues over the five-year period decreases from $537 million to $454 million. Table 27. Summary of Projected Impacts for Climate Change Technology Tax Initiatives, 2010Tax Credits for Energy-Efficient Equipment in Homes and Buildings The fiscal year 2001 CCTI includes a 20-percent tax credit, subject to caps, for purchasers of electric heat pump water heaters, natural gas heat pumps, and fuel cells, meeting specified efficiency levels, from 2001 through 2004. In the fiscal year 2000 CCTI, tax credits of 10 percent were proposed for specified equipment and efficiency levels purchased between 2000 and 2001 and tax credits of 20 percent for specified equipment and efficiency levels purchased between 2000 and 2003, all subject to caps. However, the fiscal year 2000 CCTI also included central air conditioners, natural gas water heaters, and electric heat pumps. By reducing the number of eligible technologies, the energy savings in 2010 are reduced from 24.4 to 5.9 trillion Btu and the savings in carbon emissions from 1.2 to 0.1 million metric tons. Tax Credits for Rooftop Solar Systems The CCTI for fiscal year 2001 proposes a 15-percent tax credit, subject to a cap, for rooftop photovoltaic systems installed between 2001 and 2007 and solar water heating systems installed from 2001 and 2005 but not applicable to solar-heated swimming pools. This is identical to the credit proposed in the fiscal year 2000 CCTI although the applicable time period was shifted by one year. The impact of the proposed credit is negligible, and, for the most part, the credit would apply to equipment already completed under the Million Solar Roofs program. Tax Incentives for Distributed Power Property The fiscal year 2001 CCTI includes tax incentives for distributed power property for use in commercial or residential rental buildings by proposing a 15-year depreciation recovery period for these systems, making their tax treatment consistent with that currently used by industrial generation facilities. Distributed generation facilities in buildings currently have a 39-year depreciation recovery period if placed in service after 1993. The estimated energy savings from the distributed power property tax incentive in 2010 are 1.7 trillion Btu, with 0.03 million metric tons of carbon emissions reductions. The tax revenue losses are estimated at $8 million for the distributed power property tax incentive. Industrial Tax Credit for Combined Heat and Power Systems The fiscal year 2000 CCTI included a tax credit of 8 percent for qualified combined heat and power systems larger than 50 kilowatts, installed between 2000 and 2002. This credit is not included in the fiscal year 2001 CCTI. In 2010, the energy savings from this tax credit were essentially negligible because reductions in purchased electricity were offset by increases in natural gas consumption for cogeneration; however, carbon emissions were reduced by 0.15 million metric tons. The tax revenue losses were estimated to be between $85 million and $125 million, with the range resulting from the possibility that systems planned for 1999 or 2003 would be moved to take advantage of the credit. Transportation Tax Credits for Electric Vehicles and Fuel Cell Vehicles The fiscal year 2001 CCTI proposes extending the current 10-percent tax credit, subject to a cap, for qualified electric and fuel cell vehicles. This credit is currently scheduled to begin to phase down in 2002, phasing out in 2005, and the proposal would extend it at its full level through 2006. This is identical to the proposal for electric and fuel cell vehicles in the fiscal year 2000 CCTI. Tax Credits for Hybrid Vehicles The fiscal year 2000 CCTI proposed graduated tax credits from $1,000 to $4,000 for qualifying hybrid vehicles. The level of the credit was based upon the efficiency improvement relative to the average efficiency of comparable vehicles in the same size class. This has been changed to a proposed tax credit for qualifying hybrid electric vehicles purchased from 2003 through 2006, ranging from $500 to $3,000 depending on the design performance. The level of the tax credit is based upon the percent of the maximum available power provided by the energy storage system and the percent of the energy used in braking that is recaptured and stored into the battery. Hybrid electric vehicles can have two different designs in which the electric motor either assists the gasoline engine when more performance is needed or is used at low speeds while the gasoline engine is used at high speeds to optimize the engine efficiency. The revised incentive may be intended to achieve the latter design of optimizing the engine efficiency rather than using the electric motor as a power assist. The fiscal year 2001 tax credit proposal may lead to the earlier development of advanced regenerative braking technology and the optimization of the engineering efficiency of the combined hybrid electric motor and engine. In 2010, the tax credits proposed in the fiscal year 2001 CCTI for transportation are projected to save 27.1 trillion Btu of energy and 0.5 million metric tons of carbon emissions, compared with 0.8 trillion Btu of energy and a negligible amount of carbon emissions with the tax credits in the fiscal year 2000 CCTI. The five-year tax revenue loss is estimated at $1,912 million for the fiscal year 2001 proposal, compared to $1,960 million for the fiscal year 2000 proposal. Renewable Energy Electricity Generation Tax Credits for Wind Generation An existing tax credit for wind generation provides a credit of 1.5 cents per kilowatthour, adjusted for inflation from a 1992 base, for systems placed in service after December 31, 1993, and before January 1, 2002. In the fiscal year 2001 CCTI, this credit would be extended to systems placed in service before July 1, 2004, or, if unfinished by that date but under firm contract or under construction, eligibility is extended through June 30, 2005, one year beyond the date proposed in the fiscal year 2000 CCTI. Under both proposals, the savings in carbon emissions in 2010 are negligible. The tax credits are not large enough to stimulate significant new capacity additions. In the current analysis, additional wind capacity is expected in 2005, even without the tax credit, due to additional State mandates. Because of the higher planned wind capacity additions relative to the previous analysis and the accelerated construction of post-2005 planned wind capacity to obtain the benefits of the tax credit, the tax revenue losses in 2005 are about double those in the analysis of the fiscal year 2000 CCTI and are more than double in 2010. Tax Credits for Biomass Generation Currently, closed-loop biomass generation systems placed in service after December 31, 1992, and before January 1, 2002, receive a tax credit of 1.5 cents per kilowatthour, which is adjusted for inflation from a 1992 base. In the fiscal year 2001 CCTI, this tax credit would be extended to systems placed in service before July 1, 2004, or, if unfinished by that date but under firm contract or under construction, through June 30, 2005, one year beyond the date proposed in the fiscal year 2000 CCTI. Under both proposals, the definition of biomass systems eligible for the credit would be extended to certain open-loop systems, and the proposed credit in the fiscal year 2001 CCTI would be extended one year beyond the date proposed in the fiscal year 2000 CCTI. In addition, the fiscal year 2001 CCTI proposes a 1.0-cent-per-kilowatthour credit, adjusted for inflation from a 2000 base, for electricity produced from 2001 to 2003 from open-loop biomass facilities placed in service prior to January 1, 2001. The credit for existing open-loop biomass systems was not proposed in the fiscal year 2000 CCTI. In 2010, the revenue losses as a result of the tax credit for new biomass capacity are similar to those in the analysis of the fiscal year 2000 CCTI, but the revenue losses are lower in 2005, as accelerated construction of State-mandated capacity is offset by less new capacity in the reference case, compared to last year's analysis. The credit for existing open-loop biomass systems provides tax revenue reductions of about $235 million from 2001 through 2003. The tax credits for both existing and new biomass capacity are not expected to have a significant impact on carbon emissions. The fiscal year 2001 CCTI proposes a 0.5-cent-per-kilowatthour tax credit, adjusted for inflation from a 2000 base, for biomass-fired electricity generated by coal plants using biomass co-firing from January 1, 2001, through December 31, 2005. The proposal shifts the biomass co-firing tax credit in the fiscal year 2000 CCTI by one year and reduces the proposed credit from 1.0 cents per kilowatthour to 0.5 cents per kilowatthour. Because the lower tax credit reduces the economic incentive, co-firing is reduced from 19 to 12 billion kilowatthours in 2004, and revenue losses are about one-third of those estimated under the fiscal year 2000 proposal. In addition, the fiscal year 2001 proposal extends this credit through 2005, generating additional tax revenue reductions of about $70 million for the additional year. Tax Credits for Landfill Gas Generation The fiscal year 2001 CCTI provides a tax credit of 1.0 cent per kilowatthour for landfills subject to EPA's NSPS and a 1.5-cent-per-kilowatthour tax credit for landfills not subject to the NSPS. This applies to systems placed in service between January 1, 2001, and December 31, 2005, but is extended through December 31, 2006, if the facility is constructed, reconstructed, or acquired by the taxpayer under a contract binding on December 31, 2005. The fiscal year 2000 CCTI did not include a tax credit for landfill gas generation. As a result of this proposed credit, about 600 megawatts of new landfill gas generating capacity are constructed with reductions in carbon emissions of about one million metric tons annually with revenue losses of $900 million through 2015. Total Renewable Energy Electricity Generation In total, the renewable energy generation tax credits proposed in the fiscal year 2001 CCTI are projected to reduced carbon emissions in 2010 by 0.6 million metric tons compared to 1.5 million metric tons estimated for the fiscal year 2000 CCTI. The lower estimated savings result from the lower impact of the biomass co-firing tax proposal. The five-year tax revenue losses are increased from $816 million to $944 million under the fiscal year 2001 CCTI. Across all programs, the savings in carbon emissions as a result of the fiscal year 2001 CCTI total 1.3 million metric tons in 2010. This is lower than the 3.1 million metric tons estimated as the impact of the fiscal year 2000 CCTI, due to smaller impacts from the energy-efficient buildings equipment tax credit, the renewable generation tax credits, and the distributed power tax incentive when compared to the CHP tax credit. The lower carbon savings from these proposals, and to a lesser extent the energy-efficient new homes tax credit, are partially offset by higher carbon savings from the proposed transportation tax credits. |
