Transportation and Fuel Components of the Bailout Bill

5 October 2008

The Emergency Economic Stabilization Act of 2008 (EESA 2008), a rework of the “Wall Street bailout bill” by the US Senate, was passed by the US House on Friday and shortly thereafter signed into law by President Bush. During the past week, EESA 2008 rapidly became more than only a bill directed at stabilizing the financial sector: the final legislation consists of three main parts (divisions).

The first is the stabilization component, the actual Emergency Economic Stabilization Act of 2008, which provides the $700 billion for dealing with “troubled assets.” The second is the Energy Improvement and Extension Act of 2008 (EIEA 2008), which provides a large number of tax incentives related to energy and fuel production and energy conservation. The third is the Tax Extensions and Alternative Minimum Tax Relief, a broad amalgam of tax policies ranging from extensions of the alternative minimum tax credit; to disaster relief; to specific elements such as income averaging for amounts received in connection with the Exxon Valdez litigation and providing special relief for “certain wooden arrows designed for use by children”.

The Congressional Budget Office (CBO), in an analysis of the bill on Wednesday, concluded that Division B (the division specifically related to energy) would reduce Federal revenues by $6.8 billion, increase outlays by about $0.2 billion, and increase projected deficits by about $7 billion. It concluded that Division C would reduce revenues by about $105.2 billion, increase outlays by $7.1 billion, and increase projected deficits by about $112.3 billion.

The Energy Improvement and Extension Act

The Energy Improvement and Extension Act (Division II of the EESA 2008 bill) makes changes to the Internal Revenue Code of 1986 and is subdivided into four main sections (Titles):

• Title I: Energy Production Incentives, subdivided into renewable energy incentives and carbon mitigation and coal provisions;

• Title II: Transportation and Domestic Fuel Security Provisions;

• Title III: Energy Conservation and Efficiency Provisions; and

• Title IV: Revenue Provisions.

Title II transportation and fuel provisions in the bill include:

• Expanding the category of cellulosic biomass ethanol to the broader category of cellulosic biofuel for the calculation of bonus depreciation for ethanol plant property.

• Increasing the income tax credit and excise tax credits for biodiesel and renewable diesel.

• Broadening the definition of “renewable diesel” (currently defined as a diesel fuel produced by a thermal depolymerization process), with the exception of renewable diesel co-produced with petroleum feedstock. The expanded definition of renewable diesel now also includes aviation fuel produce from biomass that meets DoD specs for military jet fuel or ASTM specs for aviation turbine fuel.

• No credits are to applied to any alcohol fuel or biodiesel produced outside the US for use in the US.

• Extension of the alternative fuel credit, and modification to include compress or liquefied biogas. Credit is now also allowed for aviation use of qualifying alternative fuel. To be eligible for credits under this section, coal-to-liquids fuels must be produced by a gasification facility that captures and stores at least 50% of the CO₂ emissions up to 30 December 2009, and 75% for fuel produced after 30 December 2009.

• Tax credits for the purchase of plug-in hybrid electric vehicles. (Earlier post.) The credit is a base $2,500 plus $417 for each kWh of battery pack capacity in excess of 4 kWh, to a maximum of $7,500 for light-duty vehicles; $10,000 for vehicles with gross vehicle weights of more than 10,000 but less than 14,000 pounds; $12,500 for vehicles with a GVW of more than 14,000 but less than 26,000 pounds; and $15,000 for any vehicle with a GVW of more than 26,000 pounds.

  Phaseout of the credit is to begin after the total number of qualified PHEVs in the US sold after 31 December 2008 is at least 250,000. Qualifying vehicles must have a battery pack with at least 4 kWh of capacity—a provision that will preclude the inclusion of the first generation of Toyota PHEVs as well, potentially, as other lower all-electric range plug-ins.

• Exclusion of idling reduction units and advanced insulation from the heavy-duty truck tax.

• Extension of the alternative fuel vehicle refueling property credit, and the inclusion of electricity as a “clean-burning fuel” in this category.

• Extension of the time period to expense certain refineries, and the inclusion of fuel derived from shale and oil sands.

• Extension of the suspension of the taxable income limit on percentage depletion for oil and natural gas produced from marginal properties.

• Inclusion of bicycle commuting as a qualified transportation fringe benefit eligible for exclusion from gross income for the calculation of income tax.

Title I renewable energy production incentives include:

• Extended periods of tax credit for both renewable (wind, solar, biomass, hydropower,) and coal-based power generation from “refined coal.” “Refined coal” is defined by the IRS tax code as liquid, gaseous, or solid fuel produced from coal used to produce steam. The original tax code required that the refined coal project increase the market value of the refined coal by at least 50% to be eligible for a tax credit. The new law strikes that provision. The new law increases the required reduction in NO_x emissions from 20% to 40%. The bill also adds a new category of renewable power generation eligible for credits: marine and hydrokinetic power systems with a nameplate capacity of at least 150 kW.

• Extended periods of credit for fuel cell, microturbine, and combined heat and power systems.

• Providing credit to “small wind energy properties” using wind turbine with a maximum nameplate capacity of 100 kW and geothermal heat pump systems.

• Extending credit for residential energy efficiency properties, including solar, small wind, and geothermal heat pump systems.

• Support for the issuance of new renewable energy bonds.

• Applying a credit to refined coal used as feedstock for the manufacture of coke for steelmaking.

Carbon mitigation and coal provisions in Title I include:

• Expansion of the aggregate credit for advanced coal projects—e.g., integrated gasification combined cycle (IGCC) power generation—from $1.3 billion to $2.55 billion. The bill adds a requirement for sequestration of at least 65% of the total CO₂ emissions. Priority is to be given to projects with the highest percentage of carbon capture and storage. There is also a provision for the government “recapturing the benefit” of any credit allowed to a project that fails to attain or maintain its capture and storage requirements.

• Credit amounts for coal gasification projects are bumped up to 30% from 20%, with a not-to-exceed limit of $3350 million, plus another $250 million for gasification projects that capture and store at least 75% of the project CO₂ emissions.

  Eligible projects in this category now include those that produce transportation grade liquid fuels (e.g., Fischer-Tropsch CTL).

• The bill defers a decrease in the excise tax on coal for five years

• Adding a new credit to the tax code for carbon dioxide sequestration. The credit is $20/tonne of CO₂ which is captured at secured in geological storage, and $10/tonne of CO₂ which is used in an enhanced oil or natural gas recovery project.

• The bill directs the Secretary of the Treasury to commission the National Academy of Sciences to review the tax code to identify both the types of as well as specific tax provisions that have the largest effects on carbon and other greenhouse gas emissions and to estimate the magnitude of those effects. A report is due in two years.

Resources

• H.R. 1424 ENR

• CBO estimate of cost of Dodd amendment for H.R. 1424

• IRS Code of 1986 (US Code Title 26)