Incentives and Policies for Sustainable Business Programs: A Perspective from Ernst & Young...

Incentives and Policies for Sustainable Business Programs: A Perspective from Ernst & Young

September 7, 2012

Dominick Brook

Page 2 © 2010 Ernst & Young LLP

Disclaimer

► Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit www.ey.com.

► Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited and of Ernst & Young Americas operating in the U.S.

► This presentation is © 2012 Ernst & Young LLP. All rights reserved. No part of this document may be reproduced, transmitted or otherwise distributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP. Any reproduction, transmission or distribution of this form or any of the material herein is prohibited and is in violation of U.S. and international law. Ernst & Young LLP expressly disclaims any liability in connection with use of this presentation or its contents by any third party.

► Views expressed in this presentation are not necessarily those of Ernst & Young LLP.


Circular 230 disclaimer

► Any US tax advice contained herein was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code (IRC) or applicable state or local tax law provisions.

► These slides are for educational purposes only and are not intended, and should not be relied upon, as accounting advice.


Today’s agenda

► Relevance of Sustainability to businesses► Business implications

► Defining sustainability

► Business drivers

► Sustainability framework

► Sustainability incentives► Reduce - Energy efficiency

► Switch – Renewable energy and alternative fuels

► Innovation - R&D and Advanced Energy Manufacturing

► Offset – Clean Development Mechanism

► Traditional incentives► Legislative Update and Best Practices


5

Business implications

5


6

Defining sustainability

► This requires the balance of social, economic, and environmental demands — the three pillars of sustainability.

► The environment pillar is focused on environmental management of air, water and land systems , including greenhouse gas management.

► The social pillar includes management of issues such as ethical conduct, anti-corruption, labor practices, social justice and community engagement.

► The economic pillar reflects a need to decouple environmental degradation and economic growth. It also recognizes the value of providing jobs and tax revenue to promote local economies and infrastructure.

Environmental Economic

Social

Sustainable

Sustainability is a philosophy of meeting the needs of the present without compromising the ability of future generations to meet their own needs.

6

Page 7

Drivers of corporate response to climate change

Corporate response to climate change

Government regulation

Revenue generation

Expectations of stakeholders

► Environmental laws

► NGO operating guidelines

► Federal and state climate change programs

► Regional initiatives► Financial reporting

► New products and services

► Shorter payback models

► New business models

► Innovation investment

► Customers► Consumers► Investors► Employees► Media

Cost reduction

► High energy cost; expected increase in cost

► Operational efficiencies

► IT activity► Reduced waste► Cost of carbon


Mapping incentives issues onto the climatechange response

Resource efficient buildings, plants,infrastructures

Carbon management

Behavioral switch

Low-carbon energy sources

Reduction ofresource intensity

of supply chain

Resource-efficientproducts

Sustainablesourcing of raw

materials

Managing stakeholderexpectations

Reduce

Switch

Innovat

e

Offset

• Energy-efficient buildings• Energy-efficient plants• Research into improved

processes• Investment in new technologies

• Fuel-efficient distribution

• Recyclable packaging• Research into

sustainable products

• Training work force• Educating

customers• Home working• Transport

• Climate/sustainability policies

• Non-financial reports• Audit of emissions• Clarity/robustness of

claims made

• Climate/sustainability policies• Non-financial reports• Audit of emissions• Clarity/robustness of claims

made

• Water• Education

• Green energy supplies

• Green energy generation

• ESCO’s• JV’s

• Energy efficiency in suppliers• Energy in transport• Recycling• Water saving


Identifying the triggers of sustainability incentives

• Is your company investing in innovative R&D to create “green” products or services in response to market opportunities?

• Has you company invested in alternative vehicles for its fleet?

• Has your company invested in renewable energy?

• Does your company have or plan to install energy efficient property as part of a new building or a retrofit to an existing building (interior lighting, HVAC system, etc.)?

• Does your company have any LEED certified buildings?

• Does your company have diesel or gasoline powered vehicles/equipment that are used in an off-highway capacity?

• Has your company made significant capital expenditures to meet its energy efficiency goals?


Today’s agenda











Reduce: Energy Efficiency and LEED


IRC Section 179D deduction - Overview

► Federal tax deduction of $0.30 to $1.80 a square foot of the building up to the total basis of the energy-efficient property placed in service

► Energy-efficient commercial building property includes:► Light fixtures and controls, not light bulbs► New or replacement HVAC systems and controls► New buildings or replacements windows, roofs and doors

► Property must meet energy efficiency targets (compared to ASHRAE 90.1-2001) and prescriptive requirements

► Effective 1 January 2006 through 31 December 2013 ► Obama has proposed revising the incentive as part of the

“Better Building Initiative”


IRC Section 179D: value and benefit

Property Energy Efficiency (Compared to ASHRAE 90.1-2001)

Benefit (per sq. ft.)

Lighting (LPD) 25 – 40% LPD reduction $0.30 - $0.60

Lighting (Energy Modeling) 20% energy cost reduction $0.60

HVAC/HW 20% energy cost reduction $0.60

Building Envelope 10% energy cost reduction $0.60

Lighting + HVAC/HW + Envelope 50% energy cost reduction $1.80

Value of 179D deduction @ 35% ETR

Lighting Only HVAC, Building Envelope, Lighting

200,000 s.f building $21,000 - $42,000 $126,000

500,000 sq. ft. building $52,500 - $105,000 $315,000

1,000,000 sq. ft. building $105,000 - $210,000 $630,000

2,000,000 sq. ft. building $210,000 - $420,000 $1,260,000


Certification requirements

► Energy modeling:► Model the building with the minimum requirements of ASHRAE Std 90.1-

2001 then compare to actual installation to calculate % reduction in energy costs

► Third-party site inspection:► After the property has been placed in service ► Confirming that the building has met, or will meet, the energy-saving targets

and prescriptive measures contained in the design plans and specifications

► Letter of certification:► By “an engineer or contractor that is properly licensed in the jurisdiction in

which the building is located”


IRC Section 179D deduction:government allocation

► The 179D tax deduction can be allocated by a government entity to the designer of a government-owned building

► Government-owned building:► Federal, state or local government or a political subdivision ► May include: public secondary schools; public or state universities

buildings; airports; stadiums; arenas; city parking garages; corrections institutions (jails)

► Designer:► Person that creates the technical specifications for installation

of energy efficient commercial building property► May include: architect, engineer, contractor, environmental consultant or

energy services provider who creates the technical specifications for a new building or an addition to an existing building


Best building types for 179D

► Large Square Foot Buildings► WHY – deduction is dependent on square footage► Corporate HQ’s, Office Towers etc.

► Parking garages, warehouses, distribution centers► WHY – single light fixture type – large spaces► Significant improvement in high-bay lighting since 2001

► LEED-certified buildings► WHY – Energy Efficient designs


IRC Section 179D Deduction – Government Allocation

► The 179D tax deduction can be allocated by a government entity to the designer of a government-owned building

► Government-owned building► Federal, State, or local government or a political subdivision ► May include: public secondary schools; public or state universities

buildings; airports; stadiums; arenas; city parking garages; corrections institutions (jails)

► Designer► Person that creates the technical specifications for installation of

energy efficient commercial building property► May include: architect, engineer, contractor, environmental

consultant or energy services provider who creates the technical specifications for a new building or an addition to an existing building


State and Utility incentives overview

► There are three major types of incentive programs:► Prescriptive measures - Basic

► $30 per light fixture, $20 per occupancy sensor, $100 per ton HVAC► Generally there is a menu for pre-determined equipment and amounts► Applies to more basic, simple measures - lighting, HVAC, controls

► Custom Measures - Intermediate► Usually covers what the prescriptive programs don’t, similar pay scale► Customer must define, measure and validate the energy savings► Opportunities for industrial equipment & more creative measures

► Demand Response/Load Curtailment - Advanced► Customer makes a commitment to the utility on an annual basis► When the utility calls, the customer is to shed the agreed upon load



How to be successful with state and utility incentives

► What works► Discussions with actual facility managers, plant managers, energy

teams and design teams will uncover potential opportunities► Layer all available incentives to maximize ROI► Start where electric prices are highest in your portfolio► Start early – many cash programs require pre-approval► Use DSIREUSA.org as a starting point, but verify that programs

are still open


State and Utility Energy Efficiency Incentives

► Illinois - Energy Efficiency Grants► The State of Illinois and local governments have appropriated funds

for energy efficiency grants for inducing solar energy and/ or wind energy projects. This incentive is negotiated with the state and/ or local government based on a project’s specifications.

► Illinois - Energy Now► An energy efficiency program administered by the State that

provides millions of dollars in rebates to public facilities that make large-scale equipment improvements to their electric and natural gas systems. ► Includes the Public Sector Energy Efficiency Aggregation Program.

► Indiana - Sustainable & Green Building Incentives► Fee waivers and other design incentives for developers that

incorporate sustainability goals such as energy and resource efficiency, public transportation, and landscape and site design.► Offered in Bloomington and Indianapolis


Reduce – LEED Buildings


Green Building (LEED™)

► LEED – Leadership in Energy and Environmental Design

► LEED is a green building certification

► The LEED rating system is a voluntary, consensus-based national standard for high-performance, sustainable buildings

► Members of the US Green Building Council (USGBC), representing all segments of the building industry, developed LEED and continue to contribute to its evolution

► The USGBC is not associated with the federal government and is a non-profit organization


LEED for New Construction

► LEED-NC is a one-time certification

► Higher certification levels can be achieved by earning additional points

► LEED-NC evaluates and recognizes the performance of buildings in 5 accepted green design categories:

► Sustainable Sites

► Water Efficiency

► Energy & Atmosphere

► Materials & Resources

► Indoor Air Quality


A sample of LEED incentives in the US

VA – Separate Class of Taxation

MD – Baltimore, Carroll, Howard & Montgomery Counties Property Tax Credit

Chatham County, GA – Property Tax and County Tax Abatement

Cincinnati, OH – 100% property tax exemption

El Paso, TX – Grants for Commercial Buildings

Harris County, TX – Partial Tax Abatement

Southern California Cities – Financial Incentives

Monroe County, NY – tax abatement extension

NM – Sustainable building tax credit

OR – Business Energy Tax Credit

NV – Partial Abatement of property tax

Anchorage, AK – Permitting Fees Refund

Indianapolis & Marion County, IN – 30% Rebate

Florida Cities – Financial Incentives, Higher DensitiesChandler, AZ – LEED Fee

Reimbursement

Honolulu, HI – property tax abatement

King County, WA – Grants

SLC, UT – Expedited Plan Reviews

Longmont, CO – Fee Rebates

NY – 10% increase on other incentives

IA – Tax Credit

Il – Partial Funding


LEED for New Construction

► Density Bonus► Expedited permitting► Fee Waivers/rebates► Grants/tax incentives► Utility Rebates


LEED for existing buildings (LEED-EB)

► LEED has concentrated in new construction but existing buildings certified under LEED-EB have proven to lower operational costs

► The most important aspect when considering LEED EB is energy efficiency► Measured through EPA’s Energy Star Portfolio Manager► If a prospective building’s energy efficiency is at top quartile

performance, LEED-EB is much easier to achieve and /or a higher LEED level may be pursued

► Buildings that are already energy efficient may require very little beyond the required documentation, and adoption of policies and procedures to meet LEED-EB requirements


Incentives for LEED for Existing Buildings

► Incentives available for the retrofit and adoption of policies and procedures in areas of three states:► New Mexico (Income Tax Credit)► Maryland (Property Tax Credit)► Virginia (Reduce Property Tax Rate)

► Other incentives:► Grants► Registration and certification fee reimbursement► Enhanced market values► Higher rents► Branding/Marketing► Utility Rebates► 179D/48


Today’s agenda











Switch- Renewable Energy/Alternative Fuels

Farm Picture


Renewable Energy Investment Tax Credit (IRC §48)

► Equal to the energy percentage (30% or 10%) of the basis of each energy property placed in service during the tax year

► 30% Tax credit for:► Fuel Cells; Solar Energy; Small and eligible large wind; Closed

and open loop biomass and other eligible renewable systems► 10% Tax credit for:

► Geothermal, Micro-turbine, Combined heat and power, and Thermal ground-water energy

► Under the 2009 Stimulus Bill taxpayer can elect to take an investment tax credit of 30% rather than a production tax credit for wind, geothermal, biomass or hydropower

► Previously the basis of investment on which credit applied was reduced by other “subsidized energy financing”► Under H.R.1, the 2009 Stimulus Bill, this has been eliminated and

the credit can be taken on the full investment


ARRA 1603 Grant in lieu of the ITC

► Extended by the tax cut extenders act in December 2010 through to 12/31/2011

► Converts a Section 48 ITC to a cash grant

► Can qualify if construction begins before 31 December 2011 and the property is placed in service before relevant credit deadline► Two safe harbors, continual construction, and 5% expended

before year end

► Application due 10/1/2012


Renewable Energy Production Tax Credit (IRC §45)

► 2.2/1.1¢ per KWh credit for electricity produced by the taxpayer from qualified energy resources at a qualified facility and sold by the taxpayer

► Qualifying facilities through 31 December 2013► Closed-loop biomass, open-loop biomass, geothermal, small irrigation,

hydropower, landfill gas, waste-to-energy and marine renewables

► Wind placed-in-service date through 31 December 2012 ► AMT exempt for the first 4 years of the 10 year period► Under the 2009 Stimulus Bill the taxpayer can now elect to

take an 30% investment tax credit under Section 48 instead of a production tax credit


Tax credit monetization

► As long as the US government continues to subsidize renewable energy and climate change through the taxcode those companies without large tax liabilities will needto monetize

► Many tax credits can be monetized as long as the monetization structure is in place prior to credit being generated

► Tax credit monetization tends to be a complicated process as transactions are not cookie cutter, therefore it works best for transactions with a large amount of credits

► Expiration of Section 1603 will result in increased activity around tax credit monetization


State and Utility Incentives

► Vary greatly by state:► Corporate tax credits► Sales tax exemptions► Property tax exemptions► Utility rebates/production incentives► Grants► Loans


State Renewable Energy and Alternative Fuel Incentives► Illinois - Solar and Wind Energy Rebate Program

► Offered by the State of Illinois to encourage investment in smaller scale solar and wind energy systems.

► The program offers incentives up to 30% of the project cost for business applicants with a maximum rebate of $30,000.

► Indiana - Renewable Energy Property Tax Exemption► Property tax exemption offered on systems that generate energy

using solar, wind, hydropower or geothermal resources. ► Includes entire renewable energy system and affiliated equipment

that is unique to the system, including equipment for storage and distribution.

► Indiana - Sales and Use Tax Exemption for Electrical Generating Equipment► Equipment, machinery, and tools used in the production of

renewable electricity are exempt from the State’s gross retail tax.


Today’s agenda











Innovation – R&D and Advanced Energy Manufacturing


Innovation

► Internal product development► Alternative energy► More efficient products► Cleaner products► Battery technologies

► Joint development efforts► Contract research► LEED certifications

► Process improvement► Reduce emissions, reduce scrap► Cleaner manufacturing process/line► EPA Superfund program


Department of Energy Grant Funding

► Provides grants for energy efficiency and renewable energy projects

► In FY2009, more than $2.2 billion in funding was awarded to businesses, industries, universities and others

► Funding Opportunity Announcements (FOA) made throughout the year to solicit grant applications for certain projects or technologies

► Check regularly for opportunities ► Application periods are typically 60 days or less


48C tax credit for advanced energy manufacturing

► ARRA created a new allocated 30% ITC for facilities engaged in the manufacture of green products

► Potential qualifying assets and technologies :► Technologies that create energy from renewable resources (sun, wind, etc.)► Energy storage technologies (fuel cells, microturbines, etc.) used in

electric vehicles► Advanced transmission technologies that support renewable generation► Renewable fuel-refining or blending technologies► Energy conservation technologies (advanced lighting, smart grid)► Plug-in electric vehicles and vehicle components (motors, generators)► Property to capture and sequester carbon dioxide► Other property designed to reduce greenhouse gas emissions


Other Innovation Incentives

► Additional opportunities around capital expenditure plans► R&D Loans and Credits► State Energy Program Funding► Traditional Incentives – Job creation tax credits, Cap-Ex related

incentives, property tax abatements, sales tax abatements


Today’s agenda











Clean Development Mechanism summary

What is the Clean Development Mechanism (CDM)?•A mechanism under the Kyoto Protocol that allows developed countries with a GHG reduction target to invest in projects that reduce emissions in developing countries.

•CDM investments give rise to a project revenue stream via the sale of CERs, or Certified Emission Reduction units from the CDM.

•Standardized CDM project cycle must be complied with, as well as the requirement for the project to meet the ‘additionality’ concept

•As of September 2011, there are 6,930 projects in the CDM pipeline, 3,492 of which are registered


► Kyoto Protocol is the first international treaty in

which nations of the world agreed to undertake

targets in emission reduction

Classification of signatory countriesSet targets for reducing emissions

Kyoto Protocol

CopenhagenCancun

Flexibility Mechanisms to facilitate Low Carbon Growth

► The Protocol proposed flexibility mechanisms to enable participation of both Annex I and Non-annex I countries

in jointly reducing emissions globally

► Three flexibility mechanisms proposed –

► Clean Development Mechanism (CDM)

► Joint Implementation (JI)

► International Emissions Trading (IET)

► Nations agreed on an average

reduction of 5.2% of 1990 levels of

emissions of Greenhouse Gases

(GHGs)

► The Protocol recognized the concept of ‘common

but differentiated responsibilities’ in reducing

emissions

► Annex I countries received targets to

reduce emissions by 2012 (commitment

periods) while Non- annex I countries

did not have a target

Offset projects – Clean Development Mechanism


UNFCCC / EBIssues CERs

ProjectIdentification

CDM Documentation

Validation by DOE

Registrationwith UNFCCC

ERPA

Generation ofCarbon credits

Project Operation

ProjectConstruction

Verification/Certification by DOE

CDM project promoter

Buyer of CER

Endorsement by DNA

CER

1 2 3Project

implementation CER TransactionKyoto approvals

Key CDM process steps are demonstrated in the diagram below

Clean Development Mechanism procedure: Availing carbon credits


Today’s agenda










Slide 48

Qualifying Events for Traditional Incentives

► Create new business operations► Construction/purchase/lease of new facilities► Purchase of new machinery/equipment► Infrastructure improvements► Hiring and training of new employees

► Expand, realign or relocate existing facilities► Construction/purchase/lease of new/expanded facilities► Purchase of new machinery/equipment► Infrastructure improvements► Hiring/retention of new/existing employees► Training of new/existing employees

► Maintain existing facilities► Retaining existing workforce► Hiring due to employee turnover► Training of new and existing employees

Slide 49

Traditional Incentives: Opportunities

• Sales & Use tax exemptions/refunds

• Federal and state EZ Credits

• Federal and state research and development credits

• Capital investment tax credits

Tax Incentives

Training Benefits

• Training grants for prospective training expenditures

• Development and implementation of training programs through state agencies

• Training tax credits (retroactive or prospective)

Hiring Incentives

• Wage rebates, job creation grants and credits, employment related tax incentives

• WOTC/WtW• State point-of-hire

credits• Hiring and

employee screening assistance

PropertyTax Relief

• Negotiate real and personal property tax exemptions

• Structure Industrial Revenue Bonds (IRBs) for favorable property tax treatment

• Secure Tax Increment Financing (TIF) arrangements

• Property tax abatement

Non-Tax Incentives

• Infrastructure grants/assistance

• Low cost financing for capital expenditures

• Utility discounts• Waiver of permit

fees• Expedited permits• Free or discounted

land/building

“Green” Incentives

• Energy efficiency/GHG reduction incentives and credits

• Incentives for LEED-certified buildings

• §179D deductions• R&D and Manu.

incentives for green products

• Incentives for production of green products

New business operationsExpand, realign or relocate existing facilitiesMaintain existing facilities


Today’s agenda











2012 Legislative update

► Solyndra – new scrutiny on Sustainability-focused incentives► With cap and trade less likely in the US, tax incentives to

encourage renewable energy/energy efficiency may become more likely

► Incentives from states declining – more focus on federal incentives► Expired Incentives

► Alt. Fuel Tax Credit – Expired► Alt. Fuel Infrastructure Tax Credit – Expired► 1603 Grant in Lieu of tax credit

► Proposals/proposed extensions► Obama’s Better Building’s Initiative/179D► 48C extension – Introduced in multiple bills in last congress but not

based. Obama proposed $5B extension


Best Practices

► Understand what your company’s sustainability goals are and who is accountable for accomplishing them

► Ensure Tax is talking to Sustainability, Facilities and Operations ► What is being planned? What is being considered?► What would they like to do if ROI/payback period was right?

► Don’t limit yourself to traditional green incentives, also consider: ► Property tax abatements, sales/use tax exemptions, EZ

benefits, cash grants, DOE grants


Best Practices

► Aggregate green spend with general capital spend► New product lines? System upgrades?► Retention incentives? Leverage multiple facilities?

► Integrate your sustainability strategy at all levels across the organization► Places company at a competitive advantage► Better able to:

► Identify relevant incentives, grants and subsidies► Develop an environmental sustainability platform that reflects

broader business goals► Increase profits by improving the ROI and reducing the

investment payback period


ImplementIntegrate Identify

With other departments

within the organization in

order to …

Sustainability initiatives and expenditures that trigger

incentives ...

Process to secure tax credits and

other related incentives

Best Practices


Questions


The presenters would like to thank you for your participation and feedback!

► Dominick Brook► Columbus, Ohio► +1 614.232.7375► [email protected]

Date post:	01-Apr-2015
Category:	Documents
Upload:	gary-coller
View:	214 times
Download:	2 times

Incentives and Policies for Sustainable Business Programs: A Perspective from Ernst & Young...

Documents