A critical tool for cutting greenhouse gas emissions is buried in the fine print of the massive “Consolidated Appropriations Act, 2021,” signed by President Trump. This tool is a provision that offers permanent tax incentives for highly energy-efficient commercial buildings. This incentive can accelerate efforts to transform the buildings sector from one that causes some 15 percent of all climate pollution to one that is essentially pollution free.
But this positive result will depend on new interpretive advice from the Department of Energy (DOE) and the Internal Revenue Service to correct the flawed advice that has been required in the past.
More than 20 years in the making
The incentive first appeared in a legislation coauthored by Senators Olympia Snowe (R-ME) and Dianne Feinstein (D-CA), which was first introduced in 1999 but took six years to pass. NRDC worked closely with the offices of these two Senators, and with House co-authors Ed Markey (D-MA) and “Duke” Cunningham (R-CA) in developing this provision. Earlier Clinton-era tax incentives for energy efficiency had not included commercial buildings, and when we asked “why not?” these authors agreed to work together to fill the gap. This was a great example of collaborative bipartisanship, which we hope will be a harbinger of more cooperation on clean energy in the future.
The 179D provision offered commercial building owners — or the architects the owners designated if they were local governments that don’t pay taxes — tax incentives for buildings designed to cut energy consumption — and climate emissions — by half compared to then-current energy standards. This reduction was so ambitious that less than one half of a percent of new California buildings (and even fewer existing buildings) were meeting it, despite the facts that: 1) the state’s energy codes were more demanding than elsewhere, and 2) California utilities were already offering financial incentives for going beyond the code.
The new provision not only extends the offer of the incentive into the indefinite future, but also raises the level of ambition for efficiency being incentivized to update it for the immense progress the industry has made (in part due to the now-extended provision itself) since 2005 when it was first enacted. It requires further regular increases in the level of efficiency needed to qualify. Both raising the bar in the legislation and then requiring further steps up are very rare for tax extenders. Other than raising the bar for efficiency and making the incentive permanent, the new law makes no substantive changes in the previous provision.
How does 179D work?
Beyond the technical challenge of meeting the legislation’s goal of 50 percent savings, just demonstrating (through energy modeling) that a building’s design would meet the legislation’s energy goal seemed technically challenging to design teams. But these challenges were being overcome every day by designers in California, who could rely on special energy code software that did all of the hard work to calculate whether the goal was met (think TurboTax as opposed to doing your taxes by hand).
The Snowe-Feinstein law required the U.S. Department of Energy (DOE) to mimic the California procedures when establishing eligibility for the incentive, so that compliance would be easy to demonstrate. But this never happened — the official IRS/DOE guidance took an entirely different approach that was less accurate as well as harder to use. As a result, the effect of the incentives was hard to estimate but probably smaller than the bill’s authors (not to mention its advocates, such as NRDC) had hoped. [Search on hyperlinked site for Meg Waltner paper.]
Fast forward to 2021, and DOE has the opportunity to rectify this error. Much has changed in building energy modeling since 2005, and existing DOE energy modeling programs go most of the way toward meeting the goals of simplification and accuracy. Further DOE work to apply existing energy models and user interfaces to calculate qualification for tax incentives — a small and straightforward task — would allow more building developers and owners to instruct their design teams to meet (or even beat) the energy efficiency thresholds in the new bill. Easier-to-use models also will encourage buildings that reduce energy consumption even more than the targeted 50 percent. Thus the models will save money both in the first year when they get the tax advantage and then for decades to come in the form of lower utility bills.
Why is it so important now?
The stakes are immense. When the original bill passed in 2005, NRDC estimated that the 20-year greenhouse gas emissions savings from this bill would be on the order of 1 gigaton of carbon, along with avoiding some 120,000 megawatts of new power plants. That’s about twice the capacity of all the power plants in California.
We also now understand how tax incentives such as those of Section 179D feed into other policy mechanisms that can assure continual progress at a fast rate toward efficiency goals. We also see how new carbon savings in the short term are more important than they appeared 16 years ago. The reasoning for this is explained in my blog on meeting the Paris Agreement goals.
We also understand better the role of continual improvement in energy performance. When the Snowe-Feinstein bill was passed, NRDC and others argued that the incentive should expire after about 5 years, because if it succeeded in introducing innovations in efficiency into common use, no federal incentives would be needed to sustain them.
But the new law addresses this concern by asking DOE to raise the bar every three years, so we are asking the industry to meet ever-advancing goals just as the need for climate protection is increasing.
Finally, there is increasing awareness of the need to address efficiency in a way that includes people who may previously have been left out or left behind. The original Snowe-Feinstein language was ahead of its time in explicitly allowing this incentive to be used in rental housing, which is not usually considered a “commercial building.” Rental housing is more likely to be occupied by low-income people who will reap the benefits of greater comfort and health as well as lower utility bills.
The permanent extension of tax incentives for energy efficient commercial buildings could become a key driver of climate pollution reductions in the near term when they are most needed. But this will require DOE at long last to develop the implementation and verification methods that the original bill and committee report required (and set down in great detail).
We urge the new DOE leadership to work with us to make this happen.