Overhaul the energy tax-credit system

The wind Production Tax Credit (PTC) expired at the end of 2013, instigating the usual responses from clean energy critics and advocates alike. But the policy tug-of-war is ignoring the real issue: rather than continue the stale “expire or extend” debate, it’s time to make America’s clean energy deployment policies relevant drivers of innovation again.

For 20 years, the PTC has “greased the skids” for wind deployment, providing a 2.3 cents per kilowatt-hour subsidy for the first ten years of operation. Without a doubt, the subsidy has produced results – the installed U.S. wind capacity has grown from roughly two gigawatts in 1992 to 60 gigawatts today.

{mosads}However, the PTC has become a proxy war for U.S. climate and energy policy. On one hand, free market advocates argue the PTC is a rent-seeking government hand-out to uncompetitive technologies. Yet, the current energy superstars, shale natural gas and oil, have leveraged master limited partnerships (MLP) totaling $113 billion since 2007 to forgo paying any corporate taxes. Clean technologies aren’t eligible for such tax benefits.

On the other hand, environmental groups argue the PTC is a key public investment for a nascent industry competing against entrenched fossil fuels that contribute to global warming. Yet, the PTC no longer supports breakthrough wind innovation like it did in the 1990’s when most wind turbines were truly new technology. Today’s developers are more likely to choose commercial scale wind turbines that still aren’t cost competitive, especially when energy storage costs are taken into account, rather than invest in riskier, next-generation technologies.

In other words, the wind industry has matured, but the PTC has not. Many clean energy deployment advocates say this doesn’t matter and argue that wind and other clean technologies need aggressive deployment subsidies because the world must avert climate catastrophe.

But it is hard to see how the PTC achieves this goal. As ITIF has argued, simply subsidizing today’s expensive clean technologies has produced only modest gains in clean energy use in developed countries like the United States, and will likely produce even less in developing economies that cannot afford such subsidies. Modestly growing the clean energy market in developed nations will have little impact on reducing global carbon emissions if those policies or technologies cannot economically transfer to the rest of the world. And if the policy will not put the world on a global path to deep carbon reductions, what’s the point?

The United States should make the wind PTC a true driver of innovation so that wind energy becomes price competitive with fossil fuels everywhere, but two reforms are critical.

First, Congress should allow the PTC to expire, not because wind energy doesn’t deserve public support, but because the PTC has outgrown its use as an incentive for innovation. Similarly, conventional fossil fuel subsidies – such as oil and gas depletion allowances, drilling cost expensing, and production tax credits – should also be eliminated. The same reforms should hold for the Investment Tax Credit (ITC) that supports solar energy. The message here is that energy deployment policies of all stripes should do more than encourage installing the same technologies in perpetuity.

Second, in place of today’s energy subsidies, Congress should implement a permanent, technology-neutral tax credit that only supports emerging energy technologies looking to scale into the marketplace. A good tax structure to start with is the Energy Innovation and Manufacturing Tax Credit (EIMTC) proposed by Will Coleman of OnRamp Capital. The EIMTC would only support next-generation clean energy from demonstration until it reaches commercial production scale, at which point the line of credit would sunset and the technology would have to compete in the marketplace. Clean technologies already at commercial scale, such as natural gas and many wind and solar technologies already prevalent in the market, would not be eligible. The result is a flexible, long-term tax credit that fosters and accelerates clean energy innovation and provides long-term policy certainty.

Senator Max Baucus (D-Mont.) proposed a similarly deep overhaul of energy tax breaks, including replacing the PTC and ITC with a new production tax credit. The proposal advances positive reforms such as being technology neutral and providing a variable credit depending on the carbon intensity of the project.

Unfortunately, the proposal does little to incentivize innovation. Developers can take the credit for building a natural gas plant or existing generation wind turbine, but are provided no reason to invest in riskier clean technologies with longer-term transformational potential. The result may be a modest expansion of clean energy over time, but not the dramatic price declines for clean energy that global climate mitigation requires.

Undoubtedly tax reforms don’t come easy. These changes in particular require environmental advocates to truly get serious about putting clean energy on a path to global competitiveness through innovation and free-market advocates to shelve their hypocrisy over energy subsidies and recognize the potential benefits of targeted subsidies for innovation.  A policy conversation around reforming deployment subsidies to drive innovation will be more productive and beneficial to the long-term competitiveness of clean energy than the status quo.

Stepp is a senior analyst with the Information Technology and Information Foundation.