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Why the Koch's Love Renewable MLPs

Sorry for the wonky title. But I’m concerned about growing environmental activist support for adding renewables to a popular tax-dodge for the oil industry, Master Limited Partnerships. The Koch Brothers have giddily endorsed it, and it masks a larger trend of abandoning command-and-control regulations for market-based solutions to climate change.

Earlier this year I gave a talk at the Good Jobs Green Jobs Conference discussing whether regulation or markets were renewables’ best friend. When President Obama prevailed on “Congress to get together, pursue a bipartisan, market-based solution to climate change” in his 2013 State of the Union address, he underscored that America’s climate policy—in the absence of any coherent national climate or energy policy—is largely market-driven. Indeed, the most dynamic feature driving energy policy is market-based: inexpensive natural gas, and not EPA regs, is displacing coal. Obama is quick to take credit, noting in his SOTU: “We produce more natural gas than ever before—and nearly everyone’s energy bill is lower because of it.  And over the last four years, our emissions of the dangerous carbon pollution that threatens our planet have actually fallen.” Now, I’ve cautioned that fuel-switching from natural gas to coal in electricity markets is due more to gas’ cost-advantages rather than its lower emissions content – and that we only have a couple of years left of “cheap” natural gas before we return to the era of higher prices and more volatility. A combination of swapping coal fired power plants for natural gas and the economic downturn have resulted in lower greenhouse gas emissions in the US.

European reliance on market-based structures to address climate change—the casino-like Emissions Trading Scheme—is a cautionary tale. Originally touted as market-driven auction to price carbon has collapsed. Within Europe, rising natural gas spot prices in combination with low permit prices in the EU ETS meant that there was a substantial incentive to generate electricity from coal plants rather than gas. Bloomberg Industries estimates that in the second quarter of 2012, European coal fired plants returned a profit of €16.3 per MWh, up from €9 a year earlier, whilst gas plants only just broke even.

US coal production continues to beat records every year fueled by record exports, particularly to Europe.

So while our fossil fuel production continues chugging along, Congress has echoed Obama’s call for market-based solutions (his much-lauded climate speech mentioned “market-based” solutions to saving the planet 3 times) with S.795, the Master Limited Partnerships Parity Act. MLPs are entities exempt from corporate income tax as long as they pay out all their income to shareholders on a quarterly basis. Congress was set to eliminate these tax avoidance schemes entirely in 1987, but at the last minute they were rescued, with Congress allowing MLPs for only a select few industries: oil & gas exploration (including fracking), pipelines, refining and coal mines. Recently, IPOs and acquisitions by MLPs have moved tens of thousands of miles of oil & gas pipelines from paying corporate income tax to not. Today there is $400 billion invested in MLPs, up from $40 billion a decade ago. As a result of not paying corporate income tax, fossil fuel MLPs cost Treasury (according to the Joint Cmte on Taxation) $1.5 billion/year. This corporate tax exemption is why MLPs are considered a tax loophole, which is why some in Congress put MLPs on the chopping block as part of tax reform.

In this era of fiscal austerity, there was growing, bipartisan support to eliminate these fossil fuel MLPs once and for all, closing the loophole as part of broader tax reform. And some in the financial sector have raised questions about the common practice of moving existing oil pipeline infrastructure into MLPs, claiming they “use accounting maneuvers to understate costs,” with the SEC investigating at least one oil upstream MLP, Linn Energy LLC. Now, closing a lucrative tax dodge for the oil and fracking industries induced panic in the oil industry, until they came upon a brilliant solution: instead of ending this tax dodge, why not invite other important consituentcies to the party? Which explains why the American Petroleum Institute and the Koch’s Americans for Prosperity have loudly endorsed S.795 the MLP Parity Act, which extends the tax dodge to renewable energy and energy efficiency partnerships. Progressives and clean energy advocates will be less able to target MLP oil giveaways if renewable energy companies also qualify.

So the Koch’s and Big Oil went from having their tax dodge on the ropes to now having major environmental groups—namely NRDCdefending MLPs. That’s not parity.

But here’s the real insidious plot. The Koch’s promotion of MLPs allows them to more easily attack command-and-control clean energy mandates like state renewable energy standards. The Koch’s have spearheaded efforts to demonize and repeal state renewable energy mandates. Their job will be easier if Congress includes renewables in MLPs, because then the Koch’s can argue, “Now that renewables are on equal footing with fossil fuels, we can do away with all of these big government clean energy mandates. Let Wall Street and the marketplace—not government—decide the level of investment.”

We have to understand that, while extending MLPs to renewable energy partnerships will provide some small boost to renewable financing, Wall Street—and not government regulations—will largely determine the pace of investment. And as long as renewables are left to compete with entrenched oil and gas MLPs for financing, renewables will continue to lose. Extending renewable energy to MLP is a market-based approach that is weaker than government mandates. The most successful incentive for renewable energy over the last decade have been state renewable energy standards (which explains why the Koch’s are fighting to repeal them).

We must do better. In 2003 Congress passed a 10% federal renewable energy mandate by 2020 (the bill was fillibustered and failed to get out of conference) and in 2009 the House passed a combined renewable/efficiency standard of 20% by 2039. We must understand that supporting MLPs as a means to promote clean energy investment will fail. Superior alternatives, such as federal mandates for utilities to produce or procure a certain percentage of their power from renewables is the program we need.

Tyson Slocum is Director of Public Citizen’s Energy Program. Follow him on Twitter @TysonSlocum