Tax Reform’s Possible Impact On Climate And Renewable Energy

As Republicans in Congress debut their proposed tax reforms today, climate and renewable energy advocates will be looking to see how the proposals will affect progress on these intertwined issues.

The most far-reaching — but unlikely impact — would be if congressional negotiators included a carbon tax. Many on the left, as well as some libertarians, have been urging a carbon tax for a long time (although some on the left would prefer command-and-control or sticking with the cap-and-trade schemes in the northeast and California). Republicans generally dislike taxes.

Despite the seemingly un-Republican nature of a carbon tax, leading Republicans like former secretaries of State James Baker and George Shultz and other former top government officials and business leaders have proposed a revenue-neutral carbon tax to be included in the debate over tax reform.

Although Congressional leaders have thrown cold water on the idea so far, the idea may actually have legs. Here’s why: Republicans need new revenues to offset their giant tax cuts for businesses. The carbon tax would provide those revenues. But to make the tax palatable to Republicans, it would need to be accompanied with significant regulatory rollbacks, such as on National Environmental Policy Act (NEPA) environmental review or the federal renewable fuel standard.

While it’s still doubtful a carbon tax will be included in the reforms, it would be a monumental policy shift. Those on the left would be wise to monitor its potential impact on environmental policy, particularly how it could preempt renewable and climate policies at the state level.

Meanwhile, tax reform could also impact electric vehicle and renewable energy deployment. Republicans want to completely eliminate the $7500 federal tax credit for battery electric vehicles, which would greatly hurt demand for the vehicles if it goes through.

On renewable energy, the obvious targets are the federal investment and production tax credits for solar and wind. While those are scheduled to phase out soon, the wind energy production tax credits would be more immediately undercut by the current proposed reform. And less obviously, a cut to the corporate tax rate would mean large profitable businesses would have less need to invest in renewable energy as a way to obtain tax credits (they would lose their “tax appetite,” in the parlance of energy deal-makers).

Either way, all this uncertainty around climate and energy policies involved in tax reform is likely dampening current investment plans in renewables and other clean technologies. So whatever the outcome of this process, it would probably benefit energy advocates if it wrapped up quickly.

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