Sunday Nov 27, 2022

Energy Tax Credits in the Build Back Better Act Run Afoul of the World Trade Organization – AAF – American Action Forum

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Executive Summary

  • In the Build Back Better framework (BBB), the Biden Administration has made reducing carbon emissions, while focusing on “Buy American” provisions, a major goal.
  • To achieve this, the Build Back Better Act (BBBA) contains numerous climate-related tax credits that increase in value if the products they cover are produced in the United States.
  • These types of provisions are de facto protectionist domestic content subsidies which are prohibited by existing World Trade Organization rules.
  • The BBBA’s climate-related tax credits would damage relations between the United States and its strategic trade partners and would hurt American producers of clean energy.

Introduction

One of President Biden’s main goals in his Build Back Better (BBB) Framework is to reduce carbon emissions while adhering to “Buy American” provisions. The administration’s desire is to increase domestic demand for clean energy goods and products and to give U.S. manufacturers and firms priority in filling that demand. The White House states that the BBB framework “ensures clean energy technology . . . will be built in the United States with American made steel and other materials, creating hundreds of thousands of good jobs here at home.”[1]

To achieve these goals, the House passed a budget reconciliation bill, the Build Back Better Act (BBBA), which is the legislative vehicle for the BBB framework. It includes numerous tax credits for clean energy consumption and production. The tax credits increase in value for goods that are produced in the United States, and for those produced in unionized facilities. These types of tax credits, based on “Buy American” incentives, are de facto domestic content subsidies that are prohibited under existing World Trade Organization (WTO) rules. The BBBA would damage trade relations between the United States and its strategic partners and, in turn, would hurt U.S. producers and manufacturers of clean energy.

The Climate-Related Tax Credits and Domestic Content

The BBBA includes tax credits to incentivize the purchase of electric vehicles (EV). Buyers or new or used EVs would qualify for a $7,500 tax credit. EVs with battery cells manufactured in the United States would be eligible for another $500 in tax credits. EVs assembled at American factories with union-represented workers would be eligible for another $4,500 in tax credits. If all conditions are met, consumers could receive a tax credit of up to $12,500, provided the credit does not exceed 50 percent of the vehicle’s value. For more, see Ewelina Czapla’s and Isabel Soto’s analyses here and here.

The BBBA would also add and modify numerous investment and production tax credits on energy projects. Electricity producers that operate renewable energy facilities, including solar and wind, would be eligible for these credits. The value of these credits increases if the facilities use iron and steel products produced in the United States. There is also a provision to provide production tax credits for numerous solar and wind products. As with other credits, the value of these credits increases if the final assembly of the components is completed in a facility in the United States.

Protectionism and Running Afoul of World Trade Organization Rules

Because the tax credits increase in value based on “Buy American” incentives, they favor the use of domestic goods. This is in violation of Article 3.1(b) of the WTO’s Agreement on Subsidies and Countervailing Measures which states “subsidies contingent, whether solely or as one of several other conditions, upon the use of domestic …….

Source: https://www.americanactionforum.org/insight/energy-tax-credits-in-the-build-back-better-act-run-afoul-of-the-world-trade-organization/

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