Two Steps Forward, One Step Back: A Tough Win on Renewable Tax Credit Extensions

By Andrea Lang, Energy Fellow

 

Credit: USDA.gov

Congress’s last day of work this year saw a major win and a major loss in terms of transitioning away from fossil fuels. The victory was in extending the Production Tax Credit (PTC) and the Investment Tax Credit (ITC) for wind and solar development, respectively. However, to pass these extensions, Democrats on Capitol Hill had to agree to lift a 40-year-old ban on exporting crude oil. Despite this loss, I think the deal represents two steps forward and one step back in terms of the transition away from fossil fuels.

Two steps forward…

First, the deal extends the PTC for a full five years. ThePTC is a production-based credit of 2.3 cents per kilowatt-hour (KWh) of energy produced from wind, geothermal, and closed-loop biomass, and has primarily been used for wind energy. It has been tremendously important for providing financing for the relatively capital-intensive development of new wind energy projects, since the credit enables developers to get financing from banks and other institutions in exchange for the tax credit. Unfortunately, the wind industry has been in a boom-and-bust kind of cycle for years as Congress has repeatedly only extended the PTC for a year or two, and sometimes only retroactively. This uncertainty in the ability to get the credit has made financing and developing wind projects, which often takes several years, difficult. The five-year extension Congress agreed to on December 18 would thus give the wind industry much some needed certainty. To ensure the wind industry can survive if Congress lets the PTC permanently expire in five years, the deal also slowly ramps down the amount of the tax credit so that the industry has time to adjust and become cost-competitive in the absence of the PTC. The wind industry itself recognizes that the PTC cannot last forever, and this deal finally puts in place a solid plan to grow the industry in the short-term and help it find its footing in the long-term.

Second, the deal extends the ITC, the tax credit that helps finance primarily solar projects by crediting 30% of eligible costs of developing projects. The ITC, which would have expired at the end of 2016, is now set to extend at its existing 30% rate until 2019, and then gradually decline down to 10% by 2022. Moreover, the bill changes the eligibility date for the ITC from the date the project is “placed in service” to the date it “commences construction.” This is hugely important for solar developers seeking tax equity investors because it provides more certainty that their projects will receive the tax credit. Because solar projects often take years to develop, and there is a certain unpredictability in how long some permit processes take, the “commence construction” provision removes some of this uncertainty and should make it easier for projects to find investors. Between the long-term extension and the modification for eligibility, the ITC extension is a huge win for the solar industry and for the transition away from fossil fuels. Indeed, Greentech Media projects that the ITC extension will add 25 more gigawatts of solar-generated electricity to the grid by 2020, over 50% more than would be added without the extension.

…One step back

The price wind and solar advocates had to pay to get the much needed tax credit extensions was the lifting of a 40-year-old ban on exporting crude oil from the United States. The ban was put in place in 1975 with the passage of the Energy Policy and Conservation Act. Its purpose was to protect the domestic oil supply in the face of the 1973 OPEC oil embargo and the corresponding spike in oil prices.

Now, with the fracking boom providing access to shale oil, domestic oil production has vastly increased from 5.6 million barrels per day in 2011 to 9.3 million barrels per day in 2015. Oil producers wanted to see a larger market for their domestically produced product, and lifting the ban has done that. Ironically, this has happened at a time when there is an oversupply of crude oil on the global market, so there is little demand right now for U.S.-produced crude oil. But whether or not the market for oil changes, the lifting of the ban is likely to lead to increased oil production domestically, as producers hope the price goes back up and they can sell their product overseas. That means more oil—and associated carbon emissions—coming out of the ground that really should be left there. Additionally, lifting the ban may also lead to a bigger push to increase infrastructure to transport the oil to ports for shipping oversees (see my post on the Tesoro Savage project from a few weeks ago).

A win?

Just looking at the impact the deal will likely have on emissions, the compromise is probably a win, albeit a tough one to swallow. The Council on Foreign Relations estimated last Friday that accounting for both emission reductions as a result of the tax credit extensions and the emission increases from lifting the crude oil export ban, the deal would result in anywhere from 20–40 million metric tons less of CO₂ emissions annually over the next five years. The argument that the renewable tax credit extensions would eliminate about 10 times more carbon emissions than lifting the crude export ban would add was exactly the argument Democratic minority leader Nancy Pelosi used to convince wary democrats to vote for the bills.

Of course, the estimate does not take into account what happens if the PTC is phased out and the ITC reduces permanently to a 10% credit in five years. Nevertheless, the tax credits, coupled with States’ need to comply with the Clean Power Plan, should lead to substantial renewable development with the potential to displace gigawatts of fossil fuel-generated electricity over the next five years. Even though the extensions came at a high cost, it is probably the best we could have hoped for from this Congress.

Will the Paris Agreement Help Usher in the End of the Coal Era?

By Amelia Schlusser, Staff Attorney

On December 12, 2015, 195 nations signed onto a new international agreement to address climate change. The agreement sets an ambitious but essential goal of significantly reducing greenhouse gas emissions to prevent global temperatures from increasing beyond 2° Celsius. While the individual emission reduction pledges included in the agreement are not legally binding—primarily because the U.S. Senate would almost certainly have rejected a legally binding commitment—the Paris Agreement signifies the start of a global transition away from fossil fuels and towards sustainable, renewable energy sources.

Many believe that the Paris Agreement will help usher in a new era of sustainable investment, in which investors will begin to shy away from risky investments in fossil fuel assets and invest capital in renewable energy.  As quoted in the Guardian, the International Investors Group on Climate Change stated: “Investors across Europe will now have the confidence to do much more to address the risks arising from high carbon assets and to seek opportunities linked to the low carbon transition already transforming the world’s energy system and infrastructure.”

There are two overarching reasons why the Paris Agreement should precipitate investment in renewable energy. First, by establishing the goal of attaining global carbon neutrality by 2050, the agreement serves to delineate the long-term risks associated with fossil fuel investments and establishes a more clearly defined timeline for the clean energy transition. Second, the agreement reduces the uncertainty associated with renewable energy investments by ensuring that demand for renewables will steadily increase over the coming decades.

In reality, the market transition from fossil fuels to renewables has been growing for some time. In the United States, coal stocks continue to decline in value as coal companies post substantial economic losses and confront increasingly stringent environmental regulations. Two major coal companies have made the headlines in recent days. Last week, the New York Stock Exchange threatened to delist Arch Coal due to its sub-par economic performance. Earlier this week, Peabody Coal submitted a filing to the Securities and Exchange Commission that fails to list climate change or greenhouse gas regulations as potential risks to the company’s investors.

Arch Coal May Get Booted from Wall Street

Last week, the New York Stock Exchange (NYSE) threatened to kick Arch Coal out of the Wall Street exchange after the company’s market value dropped below $50 million for 30 consecutive days, while shareholders have owned less than $50 million of the coal company’s stock. Because these conditions violate the NYSE’s listing requirements, Arch has 45 days to submit a plan to the exchange demonstrating how the company can re-achieve compliance with NYSE’s listing requirements within 18 months.

Arch Coal’s stock values have plummeted dramatically in recent years. According to ClimateWire, Arch’s stock fell from $350 per share in December 2010 to $1.03 a share on December 10, 2015. The company posted $2 billion in loses in the third quarter of 2015.

Arch isn’t the only coal company facing dire economic conditions. Alpha Natural Resources, Patriot Coal, and Walter Energy all filed for Chapter 11 bankruptcy protection in 2015.

Peabody Coal Fails to Disclose Vulnerability to Climate Change-Related Risks

In 2013, New York’s Attorney General, Eric Schneiderman, launched an investigation into Peabody Coal regarding the company’s failure to disclose climate change-related risks to investors. The investigation concerned Peabody’s annual filings with the Securities and Exchange Commission (SEC) in 2011, 2012, 2013, and 2014, in which the company asserted that it was not possible for it to “reasonably predict the impact” that future laws and regulations addressing climate change or greenhouse gas emissions would have on Peabody.

According to the New York Attorney General’s investigation, while Peabody’s SEC disclosures denied its ability to value climate change-related risks, the company’s internal market projections concluded that aggressive greenhouse gas regulations for existing power plants would reduce coal values by 33% to 38% in 2025, and a $20 per ton carbon tax would reduce coal demand by 38% to 53% below 2013 levels by 2020.

On November 8, 2015, Peabody Coal entered into an agreement with the New York Attorney General in which the company agreed that “any future SEC filings, or any future communications with shareholders, the financial industry, investors, the general public, and others” will not assert that it cannot reasonably predict the impacts that future climate policies would have on Peabody. The company also agreed that these communications would not contain any disclosures that were “inconsistent” with international findings that climate regulation could significantly impact demand for coal. 

Peabody filed a prospectus with the SEC on December 14, 2015, announcing its plans to sell $1 billion in stock. As reported by E&E News, while this prospectus listed a number of “risk factors” that may impact investments, it does not mention climate change, global warming, greenhouse gases, or carbon emissions. Meanwhile, following the finalization of the Paris Agreement, the value of Peabody Coal’s stock dropped by 13%.

The Paris Agreement may not have precipitated the shift away from coal-fired power, but the international climate deal will almost certainly help to expedite the transition to renewable energy. Investors should read the writing on the wall and begin to revise their portfolios accordingly. Those who don’t may eventually see their assets go up in smoke.

It’s Not (All) About the Money

By Melissa Powers, Director

            For the first time in several years, negotiators, delegates, and observers are leaving the international climate negotiations with a sense of optimism. Nearly every country in the world has promised to take actions to reduce greenhouse gas emissions. This is a significant improvement from past treaties, where only a subset of nations had agreed to reduce emissions. Although the treaty negotiations came down to the wire, as they always do, and although the Paris Agreement could no doubt have included stronger commitments and a more ambitious target, the agreement at least places the world on a better path to reduce greenhouse gases and help avoid unmanageable temperature increases.

Bill and Melinda Gates

            Even before the Paris negotiations were officially underway, it had become clear that the Paris outcome had a better chance of success when Bill Gates announced his intention to contribute to Mission Innovation, a private-public partnership that aims to spend $20 billion annually to support clean energy research. This money could help fill critical funding gaps and support the development of technologies necessary to reduce the costs of renewables, energy storage, and other essential components of a renewable energy transition. Bill Gates and other billionaire investors earned a great deal of well-deserved praise for their funding pledges, and I hope they produce major improvements in technology and substantial reductions in costs.

            But it is important to remember that, when it comes to the renewable energy transition, it’s not all about the money. Although access to capital is a critical component of renewable energy development, money alone cannot ensure an effective and quick renewable transition. Rather, we need strategic planning to ensure that renewables come online in the best places, that they can get affordable access to the grid, that the transition to renewables occurs without unnecessary contention, and that ratepayers—particularly lower-income ratepayers—can afford the renewable energy transition. Without much better planning and regulation, it is unlikely that money alone will facilitate widespread development, integration, and use of renewable power.

Wind and solar growth associated with tax credits.

          In fact, we can look at the amount the United States has already spent on renewable power development to understand the importance of effective planning and strategy, rather that just the availability of funds. In 2013, the United States spent about $15 billion in tax credits to support renewable energy deployment, primarily from wind and solar (it spends much less, approximately $1.5 billion annually, on energy efficiency and renewable energy research and development). These funds have enabled renewable energy technologies to become more efficient and less expensive, and they have also helped spur an unprecedented expansion of wind and solar power in the United States. But despite this expansion, uncertainty plagues U.S. renewable energy policy. This uncertainty affects all aspects of the renewable energy industry, from technological development and manufacturing, to renewable energy siting and development, to access to the transmission system, to the ability to sell renewable electricity at viable rates to willing buyers. The money that policymakers have dedicated to renewable power helps offset the unnecessary costs associated with policy uncertainty, but the money does not diminish the need for improved regulation. In fact, if we actually had a long-term strategic plan to transition the power system to renewables, the renewable industry would be much less dependent upon short-term financial incentives, and all players in the electricity sector would have a clearer framework for the future.

            Of course, this does not diminish the importance or generosity of private investors’ donations. It just means that money alone will not adequately facilitate the renewable energy transition.

On the Road to Cleaner Air: Jail Time for White-Collar Violators?

Part II – Legal Expert: Prosecuting White-Collar Violators Incentivizes Regulatory Compliance

Prof. Rena Steinzor, recently authored, 
Why Not Jail: Industrial Catastrophes, 
Corporate Malfeasance, 
and Government Inaction

By Brandon Kline, Energy Law Fellow

This is the second in a four-part series on the legal issues arising from the probe into an alleged nitrogen oxide trap (a "Defeat Device" in the vernacular) installed in vehicles manufactured by Volkswagen of America (VW).  Part 1 described the manner in which a "Defeat Device" operates and why it matters in the context of the federal Clean Air Act.  In Part 2, we discuss regulatory failure, alternatives to regulatory enforcement and the evidence that VW’s actions resulted in premature deaths. 

In recent weeks, VW submitted a recall plan for 2-liter diesel cars to the California Air Resources Board, and the automaker must continue to cooperate with authorities in developing a recall plan to fix this problem in other affected models. Both the California Air Resources Board and the EPA will exercise cooperative jurisdiction to review the plan, ensuring that the proposed actions restore the vehicles so that they meet clean-air requirements. 

While it is encouraging to see that VW has begun paying attention to emissions standards and that the responsible authorities are now fully engaged, the ensuing fracas demonstrates a regrettable instance of regulatory failure. 

By its nature, a regulation restricts a firm like VW from doing what it otherwise would have done, according to Nobel-laureate economist Joseph Stiglitz. “The purpose of government intervention is to address potential consequences that go beyond the parties directly involved, in situations in which private profit is not a good measure of social impact.” Here, Congress enacted the Clean Air Act to authorize the EPA to regulate emissions from VW's diesel engines. Emissions standards ensure that the effects of pollution don’t fall on VW owners and other parties, including particularly vulnerable members of the general public. 

As Stiglitz notes, “Regulation is necessary because social and private costs and benefits, and hence incentives, are misaligned.” To be sure, VW is motivated by profit. Meanwhile, car buyers are in search of an affordable automobile that will provide them the benefits for which they bargained. Here, VW customers were promised a clean-diesel engine that complies with applicable clean-air standards. At the same time, the pollution that results from untreated emissions goes beyond the parties directly involved (see below).  Absent regulatory intervention, some legal commentators have suggested alternative measures for incentivizing compliance.

1. Prosecuting white-collar criminals is a legal alternative when regulations fail to protect consumers. 

Last month, Rena Steinzor, a professor at the University of Maryland Francis King Carey School of Law and founder of the Center for Progressive Reform, published a paper titled Federal White Collar Crime: Six Case Studies Drawn from Ongoing Prosecutions to Protect Public Health, Worker and Consumer Safety, and the Environment.

In the days leading up to the VW disclosure, Lewis & Clark welcomed Steinzor as its 28th annual Natural Resources Law Institute Distinguished Visitor. Her lecture on “How White Collar Criminal Enforcement Can Save the Environment” argued for prosecution of individuals at corporations involved in criminal acts related to the environment, and addressed the related social justice issues. (See here for a link to the podcast.)

Before delivering the Distinguished Environmental Visitor lecture, Steinzor spent some time on our campus attending classes and sharing her scholarship with faculty and students. During our October conversation, we discussed a range of subjects, from fresh food deserts to the University of Maryland’s response to the difficulties facing Baltimore following the tragic murder of Freddie Gray.

In her recently published text, Why Not Jail, Industrial Catastrophes, Corporate Malfeasance, and Government Inaction, Steinzor recommends innovative interpretations of existing laws to elevate the prosecution of white-collar crime at the federal and state levels.

On our way back from attending the Climate Change law lecture, Steinzor explained how incidents of regulatory failure came to shape her current views about applying criminal law to white-collar crimes.

Prof. Steinzor advocates this approach for white-collar criminals where, as here, regulatory enforcement seems to fall short of serving its consumer protection function. This view is consistent with underlying theories of criminal law, sounding in efficiency and fairness, as well as deterrence and retribution. Criminal law is traditionally described as directing its injunctions exclusively to actual or potential criminals. 

Significantly, when the public learns about companies committing crimes in their community, they see a double standard. Therein lies the rub: it seems to be the typical case for white-collar criminals to escape the same type of personal consequences faced by other criminals. For instance, if a drug dealer gets convicted for operating a drug business, they go to jail; in contrast, the white-collar criminal who gets caught operating their company in an illegal way, typically pays a fine. “People are cynical and it’s not good for the country,” Steinzor said.

2. Harvard and MIT study: Volkswagen’s Defeat Device will directly contribute to 60 premature deaths across the country.

Beyond the economic malfeasance at VW, Steinzor reminds, “The results of the excess pollution sickened people and even triggered premature deaths.” The device that was installed triggered less thorough treatment of emissions when state and local authorities were not testing the car. Accordingly, "VW vehicles with the device routinely emitted unsafe levels of nitrogen oxide, a precursor gas that combines with volatile organic compounds to produce ozone or, as it is more commonly known, smog."

Steinzor’s conclusion is supported by an October 2015 study conducted by MIT and Harvard University, which quantified the U.S. health impacts of VW’s emissions defeat devices. Researchers based their calculations on measurements by researchers at West Virginia University, who found that the vehicles produced up to 40 times the emissions allowed by law. The study concludes, “VW’s cheat device, which resulted in pollution 10-40 times higher than applicable EPA standards, could result in as many as 59 deaths in the United States and impose ‘social costs’ (e.g., illness, days off work and school) of up to $450 million.”

Daniel Kammen, the editor-in-chief of Environmental Research Letters and a professor of energy at the University of California at Berkeley, says the group’s study provides a “rigorous evaluation of the scale of the impacts, which are potentially exceedingly serious.

“The analysis demonstrates the value of policy-inspired fundamental research where the air quality and health impacts of transgressions such as the VW issue can be calculated, and made available for public discussion,” says Kammen, who did not contribute to the research.

###

In Part 3 we highlight environmental crime prosecutions in general and the mens rea (or mental state) required for particular violations, focusing on the reasons VW is not likely to face criminal liability under the Clean Air Act in connection with the defeat device. In Part 4, we explore the scope of VW’s liability under other legal theories, in the context of recent guidance from the U.S. Department of Justice.