This guest post is an excerpt from Congressional Testimony by Will Coleman before the House of Representatives Committee on Ways and Means, entitled Joint Hearing on Energy Tax Policy and Tax Reform. Please post your reaction and comments below.
A New Approach: Innovation Tax Policy
A new approach to energy tax policy that focuses on unlocking innovation is possible. The structure would create a simple volume‐based production tax incentive across a broad array of technologies, designed to support technologies as they scale and roll off as they hit maturity. Such a framework would provide certainty to investors across all stages and help to attract capital required to fill development gaps in the commercialization process.
Existing technology specific credits would be replaced with a common framework that supports all energy technology innovations. These credits would be slowly phased out over the full technology development cycle: a full credit would be provided to technologies as they successfully advance beyond the pilot scale; this would gradually ramp down as the technology approaches commercialization. Streamlining such a structure across a wide range of energy technologies, both currently under development and yet‐to‐be patented, would require the framework to maintain a measure of flexibility, but also support a firm foundation. While certain technology verticals inherently possess differing timelines associated with development cycles, a set of criteria could be established to create front‐ and back‐end parameters to define the “stages” associated with the phased approach. These parameters would be industry specific and would help group technologies into categories based on characteristics and functionality. For example, technologies under the umbrella of energy generation could be measured perhaps by megawatts (MWs) created, with each stage beyond construction of the first demonstration facility defined as a percentage of the industry average annual MW generated at commercial scale. Fuels could be viewed similarly through the lens of gallons‐produced, relative to an industry average at commercial scale. The creation of stage‐defining parameters spanning multiple technology categories would more effectively allow the private market to pick winners and losers compared to our current structure.
Establishment of discreet, transparent eligibility criteria would be essential to achieving the desired certainty for the investment community. Such criteria defining the universe of energy technologies eligible for such a credit could be based on the technology’s impact on broad policy goals including, potentially: energy security, national security, public health and economic return/domestic growth potential. The umbrella of eligibility could be defined using both proven and projected practical benefits of the technologies, connecting the technologies directly to firmly bipartisan policy objectives. A shift in tax policy to such a structure would (1) end the current practice of the government picking long‐term technology winners; (2) refocus federal support on early technology deployment where it is needed most; and (3) encourage private investment in innovation, which is a critical component to unlocking new economic growth.
Conclusion
In order to drive investment into the energy sector, the tax code needs to be restructured to encourage corporations to invest in new technology, align with the needs of start‐up companies, and provide access to a market currently blocked by policies that cater to incumbents.
In cases where the system does currently provide incentives and tax credits to support new technologies, many of them are not designed for small emerging companies. Start-ups do not have the balance sheets or track records of larger corporations and have trouble securing and monetizing the existing credits and incentives. As a result, the current system forces start-ups to either construct a consortium of unnatural third‐party relationships or go to market through the large incumbents, which can have dramatic impact on their value and investor interest. More simply, the limited ability of start‐ups to take advantage of tax credits hampers their ability to grow, innovate, and create jobs.
Once tax breaks are ensconced in the code they are incredibly hard to extricate. The energy industry is a robust example of how these breaks pile up. But I believe we have a rare opportunity to reassess whether the existing credits accomplish the goals that they were created to serve or the priorities we now need to meet. In today’s fiscal environment we need to make every dollar work toward stimulating growth and incentivizing investment in the next generation technology that will support our competitiveness. I am not saying that we need to cut all energy credits, but I am saying that we need to simplify them, refocus them, make them technology neutral, and make them easier for emerging companies to access.
To this end, we are calling on the federal government to articulate a stable, long‐term, rationalized tax policy based on the framework outlined above that the private sector can invest behind. Such a system will help level the playing field within energy markets, encourage market access for emerging technologies, and better reflect the needs of the innovative companies that fuel our economy. One thing I am certain of is that we will lose as a country if we resign ourselves to the technology of today. Other nations are looking to be the America of tomorrow. We must be willing to evolve as an economy and nation not only to keep pace, but to continue to lead the world in innovation.