This week, Senator Max Baucus, the outgoing Chairman of the Senate Finance Committee who has been developing a comprehensive overhaul and simplification of the federal income tax, introduced a bill that would scrap 42 existing federal energy tax credits and replace them with two new credits applicable to clean electricity and clean transportation fuels. Senator Baucus’ proposal, if adopted, would end the frequent, contentious legislative battles needed to extend the major existing tax credits, such as the production tax credit available for renewable energy investments, and various tax credits for biofuels production and manufacturing facilities.

The announcement, also this week, that Senator Baucus will be nominated by the President to serve as Ambassador to China, may take the steam out of efforts both to overhaul the federal energy tax credits and to reform the tax code. Nonetheless, Senator Baucus’ proposal is especially noteworthy because it would radically change the structure of tax incentives intended to promote renewable energy and alternative fuels. Senator Baucus’ proposal would henceforth apply a single tax credit rate to all sources of clean energy and to all clean fuels, with the credit calculation based on actual greenhouse gas emission reductions achieved (relative to a baseline) by particular generating facilities and fuels. The proposal represents an unprecedented effort, to be administered by the IRS and EPA, to create a national price (through tax subsidy) on carbon and to establish a uniform, federal standard for measuring greenhouse gas emission reductions. The simplicity of two consolidated tax credits applied across the board on a technology-neutral basis is, however, belied by the complexity entailed in making the IRS and the EPA co-administrators of the future transformation of U.S. energy policy.

Click here to read summaries of Senator Baucus’ proposal and click here to read the draft bill.