Tax Opportunities for 360 California Companies' Cap and Trade Compliance
On December 16th 2010, the California Air Resources Board (ARB), which is essentially California's EPA department, endorsed the state’s cap and trade regulations. The measure sets a statewide cap on the emissions responsible for 80% of California's greenhouse emissions. The resolution covers 360 businesses, including 600 facilities. Tax advisers for the 360 companies should be engaged in integrating the major tax opportunities related to implementing the necessary emission reduction investments and offset solutions.
Pursuant to Energy Policy Act (EPAct) Section 179D, buildings making qualifying energy-reducing investments in their new or existing locations can obtain immediate tax deductions of up to $1.80 per square foot.
If the building project doesn't qualify for the maximum $1.80 per square foot immediate tax deduction, there are tax deductions of up to $0.60 per square foot for each of the three major building subsystems: lighting, HVAC (heating, ventilating, and air conditioning), and the building envelope. The building envelope is every item on the building’s exterior perimeter that touches the outside world including roof, walls, insulation, doors, windows and foundation.
Alternative Energy Tax Credits and Grants
There are multiple 30% or 10% tax credits available for a variety of alternative energy measures with varying credit termination dates. For example the 30% solar tax credit expires January 1st 2017 and the 10% Combined Power tax credit also expires January 1st 2017. The 30% closed loop and open loop biomass credit expires January 1st, 2014.
All alternative measures that are eligible for the 30% and 10% tax credits are also eligible for equivalent cash grants for the three years staring January 1st 2009 and ending December 31st 2011.
Enhanced Bonus Tax Depreciation
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act provides for 100% tax depreciation bonus for equipment placed in service after September 8th 2010 and through December 31st 2011. For equipment placed in service after December 31st 2011 and through December 31st 2012, the new law provides for 50% tax depreciation bonus.
California Source of Emissions Implementation Timetable
California’s Timing and Point of Regulation by Emissions Source
How the Cap and Trade Program Works
The underlying bill called AB32 sets a statewide limit on the emissions from the largest generators responsible for 80% of California's greenhouse emissions (GHG) and establishes a price signal to drive long term-investment in cleaner fuels. The cap declines each year and uses allowances to limit GHG emissions. One allowance equals one ton of GHGs. Entities subject to the law must either reduce emissions or compete for a decreasing supply of allowances. The program is designed with the goal of providing covered entities the lowest cost options to reduce emissions. Each year, the total number of allowances issued in the state gets reduced. The goal is that by 2020, there will be a 15% reduction in GHG compared to today so as to achieve the same level of emissions as the state experienced in 1990.
To manage the transition, ARB states that they will provide significant free allowances to all industrial sources during the initial period from 2012 through 2014. Entities that need additional allowance can buy them at quarterly auctions to be conducted by the ARB or buy them on the on the open market. Eight percent of a company's emissions can be offset utilizing credits from compliance grade projects in the forestry and agricultural sectors.
A rule set is outlined for providing offset credits in forestry management in urban forestry, dairy methane digesters and the destruction of existing banks of ozone depleting substances in the US. The ozone depleting opportunities primarily involve prior generation refrigerants in older refrigeration and air conditioning systems.
Utility Electricity Generators
Including the electrical utilities in the initial 2012 compliance group should
kick start the program since utilities are quite familiar with the available emission reduction
solutions and can utilize a variety of special tax incentives, some tailored for their industry to implement the necessary solutions. For example, utilities can now take advantage of the 30% tax credit for large scale solar PV installations at customer locations. These transactions help both the utility and the customer. The utility meets some of its cap and trade obligations and the customer locks in lower than market electricity cost for an extended time period.
Coal fired utilities are one of the biggest emissions generators. As a solution to reduce coal plant carbon dioxide emissions, a company can replace coal with biomass. Southern Company has already engaged in biomass conversion projects, including a project with its Georgia Power subsidiary. Furthermore, Southern Company is evaluating converting five additional coal plants to biomass . Qualifying closed loop and open loop biomass projects completed before January 1st, 2014 are eligible for a 30% alternative energy tax credit.
The following chart illustrates some of the tax effective strategies some of the California emission generator categories can consider implementing:
California Cap and Trade
Tax Enhanced Emission Reduction Solutions
Multiple Strategy Approach
The scope of emission reduction required is so great for some of these facilities that a variety of solutions over multiple years will be required.
Solution will include:
(1) Investments in existing properties to reduce emissions
(2) Shutting down all or a portion of high emission generation facilities
(3) Internal cap and trade – u sing the company’s own entities to reduce emissions
(4) External-third party cap and trade
The rules in this article are new and evolving. Facility owners will need to consult cap and trade experts and tax advisers who are closely monitoring developments in this area.
Concurrent Tax Planning for California and EPA Guidelines
A week after the California ARB issued its endorsement, the Federal EPA announced its landmark plan also aimed at the nation’s largest GHG emitters. The agency said it will announce a common sense approach and similarly will propose standards for power plants in
July 2011 and refineries in December 2011. This means that the largest California emitters in these two business segments should strive to implement solutions that simultaneously meet both the increased Federal and California emission standards.
California and the EPA are following the global trend and steadily seeking to curtail GHG emissions. The 360 California companies have variety of tax incentives they can use to help manage the process. Successful solutions will serve as case studies for the rest of the country confronting the same emission reduction obligations.
"Southern Company Breaks Ground on Biomass Plant." PR Newswire. 10 Nov. 2009. Web. 29 Dec. 2010. <http://www.prnewswire.com/news-releases/southern-company-breaks-ground-on-biomass-plant-69671882.html>.