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ClimateProgress.org: The Subsidy Tease

February 15th, 2008

This post is by ClimateProgress guest blogger Bill Becker, executive director of the Presidential Climate Action Project.

When it comes to relationships, Congress is a big tease. Or so it must seem to the energy efficiency and renewable energy industries. Just when they think they’re about to go to the altar with the federal government, Congress becomes the runaway bride.

Everyone who’s anyone acknowledges that energy efficiency and renewable energy are indispensable to America’s future. They promise greater energy independence, clean air, steady prices, infinite supplies, a lower trade deficit, and a way to begin minimizing the suffering that will result from global climate change.

Due to the urgency of global warming, the future must start now with rapid diffusion of the clean energy technologies that are ready for market. We must also expedite the development of new efficient and renewable energy technologies and the industries that make, sell and service them.

To compete on the same playing field as oil, gas and coal — our entrenched and heavily subsidized carbon fuels — the clean energy technologies need federal help, including subsidies. For example, to help embryonic renewable energy industries reach viability, Congress implemented a Production Tax Credit (PTC) as part of the Energy Policy Act of 1992 and scheduled it to expire in 1999, seven years later. Since 1999, Congress has extended the credit for 1-2 years at a time and has allowed it to expire three times. It currently is scheduled to expire at the end of this year, along with a bundle of other tax benefits to encourage the use of more efficient windows, furnaces and building insulation.

The result of this on-again, off-again subsidy has been boom-bust cycles for wind energy and the other technologies covered by the credit. Each time the PTC is renewed, renewable energy projects begin to blossom. Then, months before the next expiration date, investment stops because of uncertainty. In an analysis of the PTC’s impact on the wind industry, researchers at Lawrence Berkeley National Laboratory concluded:

 

Due to the series of 1- to 2-year PTC extensions, growing demand for wind power has been compressed into tight and frenzied windows of development. This has led to boom-and-bust cycles in renewable energy development, under-investment in wind turbine manufacturing capacity in the U.S. and variability in equipment and supply costs, making the PTC less effective in stimulating low-cost wind development than might be the case if a longer-term and more-stable policy were established.

LBNL found that a longer extension of the PTC — 10 years, for example — would bring the installed cost of wind power down by up to 15% compared to off-again, on-again credits in place today, and would create more local economic development and jobs. The cost of a 10-year extension is estimated at $5.75 billion, a pittance compared to current tax breaks for the fossil and nuclear industries. By way of comparison, subsidy expert Doug Koplow at Earth Track estimates that federal energy subsidies totaled nearly $50 billion for fossil fuels in 2006, while nuclear energy received $9 billion.

The Congressional tease may be the result of some paternalistic micro-managerial impulse on the Hill. Or it may be the Members’ way of keeping these young industries on a short leash so they have to court Congress again every two years. Or it may be that Congress just doesn’t understand business.

For a new industry to get a foothold in the marketplace, it must attract capital to build its plant, buy its equipment, establish its supply chains and so on. To attract that capital, it needs a stable and sustained market for its products. It needs “patient capital” to get across the “Valley of Death” – that period in which a new technology is market-ready but not yet market-competitive, in part because it hasn’t achieved economies of manufacturing scale.

In some cases in the past, Congress has forced an incentive to expire so quickly that it was only available for a few months by the time the government’s rulemaking process was done. In other cases, Congress’ sunset date has simply been unrealistic. For example, the Energy Policy Act of 2005 contained a credit for new energy-efficient commercial buildings. But to qualify, the buildings had to be designed, financed and built to the stringent specifications of the credit within two years. As a result, few buildings were able to take advantage of the credit.

Some people argue the federal government should not be in the energy subsidy business at all. When it comes to federal subsidies for the production and consumption of oil, coal, gas and nuclear power, I agree. Mature industries are parasitic industries when they continue taking taxpayer money they don’t need. Public subsidies are particularly bad when they encourage bad behaviors — for example, continued dependence on disappearing resources or continued emissions that threaten permanent damage to the Earth’s ecosystems. Today, we taxpayers are subsidizing greenhouse gas emissions.

However, when an industry is in its infancy and its maturation is clearly in the nation’s interest — as most renewable energy and energy efficiency technologies clearly are — it is sound public policy to help it rise to its feet and traverse the Valley of Death. To mix metaphors, the nation can benefit from a marriage between the government and critical new industries. What an emerging industry does not need is a runaway bride.

Congress has had a long affair with oil, gas and coal. It’s time to break it off, to stop flirting and to settle down for a long-term relationship with the energy efficiency and renewable energy industries.

The energy bill passed by Congress last December originally contained a beneficial if temporary set of financial incentives to spur the growth of renewable energy technologies in the United States.

The bill included a renewable energy portfolio standard (RPS) that would require states to acquire part of their electric power from renewable resources. The RPS would have guaranteed a market for these technologies — one of the ways to help a new industry establish a foothold in the economy.

The energy bill also contained an extension of the Production Tax Credit (PTC) — a tax break for emerging renewable energy industries that Congress has a history of approving for only a year or two at a time.

The PTC and a package of other clean-energy incentives would have been funded by taking back about $12 billion in tax breaks from the oil industry. The trade-off was sensible not only because the oil industry doesn’t need the money, but because in some small symbolic measure, the repeal would have helped level the playing field for those young renewable energy industries trying to compete against oil, gas and coal industries that have been fattened for generations by the nation’s taxpayers.

When the White House yelled “TAX INCREASE” and threatened to veto the energy bill, Congress backed off.

As a result, many of the energy efficiency incentives contained in the Energy Policy Act of 2005 died on December 31 and others will expire in a few months. They include incentives for efficiency in commercial buildings; tax credits for installing efficient furnaces, air conditioners, water heaters, windows and other improvements in existing homes; incentives for manufacturers to make high-efficiency refrigerators, dishwashers and washing machines; the tax credit for residential solar system installation; and a tax credit for plug-in hybrid vehicles.

Because the future of the PTC and investment tax credits for renewables is uncertain, four of America’s trade associations for the renewables industry — including solar, wind, hydro power and geothermal energy — report that sales and new projects already are disappearing.

The head of the Solar Energy Industries Association predicts, for example, that 80 utility-sized solar electric projects, promising hundreds of thousands of construction jobs and more than 20,000 permanent jobs, will not be completed unless the tax credits are extended quickly.

On its face, it would seem that extending and expanding federal incentives for energy efficiency and renewable energy would be good economic stimulus, creating new jobs and new disposable income for Americans as their energy bills went down. The Senate Finance Committee apparently thought so, too. Earlier this month it added the package of clean-energy incentives to the economic stimulus bill designed to help blunt a recession.

 

Unfortunately, the Committee once again proposed to flirt with the clean energy industries rather than forge a long-term relationship, by extending the PTC for only two more years. In any case, tax incentives for efficiency and renewables didn’t make it into the final bill.

With the price of oil hovering right around $100 a barrel, it has never been more clear that America needs energy efficiency and renewable energy more than the oil industry needs help from American taxpayers. While Congress and the White House pondered ways to head off a recession, Exxon Mobil reported that its sales last year reached $404 billion, the equivalent of nearly $1,300 every second, more than the gross domestic product of 120 countries. Its profits were nearly $41 billion, the highest ever recorded by any company. Chevron reported profits of nearly $19 billion last year; Royal Dutch Shell reported profits of $31 billion, the largest ever for a British company.

Clean energy advocates in Congress say they’ll try again this year to renew a suite of incentives scheduled for expiration. They should move quickly. Randy Swisher, Executive Director of the American Wind Energy Association (AWEA) says the PTC needs to be extended at least eight months before a scheduled expiration date to avoid a slowdown in an industry’s development. That means that Congress must act by May of 2008.

I recommend a few other “shoulds”. Congress should pay for clean-energy incentives by rolling back the unconscionable and unnecessary tax breaks for Big Oil. Congress should extend tax incentives for solar, wind, geothermal and hydro-electricity for 10 years, not two. Congress should emphasize the economic stimulus these tax incentives will produce with new jobs and new disposable income for energy consumers — not a one-time check in the mail, but energy savings month after month. Congress should put these provisions in a separate bill whose fate is not complicated by other issues, and bring the bill to both floors for up-and-down votes.

As the 2008 congressional elections approach, let it be crystal clear which Members favor business as usual over the nation’s economic and environmental health.

A recent issue of Scientific American featured a “Solar Grand Plan.” Its authors described a way for the United States to obtain nearly 100% of its electricity and 90% of its total energy, including transportation, from solar, wind, biomass and geothermal resources by the century’s end. Electricity would cost a comfortable 5 cents per kilowatt hour.

U.S. carbon emissions would be reduced 62% from their 2005 levels. Some 600 coal and gas-fired power plants would be displaced. The federal investment would be $400 billion over the next 40 years ($10 billion a year) to deploy renewable technologies and suitable transmission infrastructure.

If that future seems too good to be true, then look at two other studies during the past 13 months that have reached similar conclusions, one sponsored by the American Solar Energy Society, the other by the Nuclear Policy Research Institute and the Institute for Energy and Environmental Research. All three concur that energy efficiency and renewable energy technologies can satisfy the nation’s demand for power without additional nuclear or fossil-fueled power plants.

If $400 billion seems unaffordable, consider: It’s less money than the federal government already has spent on the Iraq war, only a third of the $1.2 trillion that some experts now predict the war will cost, and only a sixth of the federal government’s current annual subsidies for fossil and nuclear energy.

 

And if a Solar Grand Plan seems politically implausible, read the newspaper. Last November, the Intergovernmental Panel on Climate Change said we have until 2020 to make major changes in greenhouse gas emissions. Two weeks ago the chief executive of Royal Dutch Shell told his staff that world oil demand will outpace supply within seven years. That means rapidly rising oil prices, more recession (the last five recessions in the U.S. were preceded by high oil prices), more power for oil-producing nations like Iran and Russia, and more likelihood of international conflicts.

The more practical — and certainly the more survivable — of these two futures is the Solar Grand Plan, an aggressive national effort to rebuild the economy on a foundation of efficiency and sustainable energy supplies. To get to that future, national energy and climate policy must have a few key ingredients.

First, as I argued in the first two parts of this series, we need sensible federal incentives to overcome the array of market imperfections that stand in the way of energy security. Those incentives must be large enough and sustained enough to allow renewable energy industries to become viable and to allow beneficiaries to use them.

Second, the industries need a substantial, assured market to spur investment. A national Renewable Energy Portfolio Standard would help, along with firm commitments by federal, state and local governments to purchase solar collectors, wind turbines, plug-in hybrid vehicles, energy efficient equipment, and so on.

Third, the federal government must stop subsidizing the energy technologies that are causing climate change and economic instability — coal, oil and gas. They are mature industries that can and should stand on their own two feet. Instead, they received nearly $50 billion in federal support in 2006, according to subsidy expert Doug Koplow. As a result, global warming remains a tax-supported enterprise in the United States even though, thanks to the work of the world’s scientists, we should know better.

As for the nuclear power industry, it receives about $9 billion in taxpayer subsidies each year, according to Koplow. Taxpayers have been subsidizing it since 1948. The industry still hasn’t figured out how to permanently store its wastes, protect its plants from terrorists, guard effectively against nonproliferation or compete in the marketplace without help.

How do we turn federal subsidies from pork into tools of good public policy — public policy, in other words, that truly enhances the security, prosperity and opportunity available to the American people?

Step 1: End virtually all subsidies for the oil, gas and coal industries and redirect the funds to research, development and commercialization of new renewable energy and energy efficiency technologies, carbon sequestration projects, programs that help those least able to cope with climate change and the downsides of climate policy, and local efforts to adapt to climate change impacts already underway.

Step 2: Conduct an inventory of all other federal subsidies that promote greenhouse gas emissions. Believe it or not, no such inventory has ever been done. Some of these subsidies will be surprising — for example, mortgage interest deductions for McMansions encourage bigger homes that, unless they are true green, are a significant factor in America’s growing energy consumption. To create transparency for the first time in how we subsidize climate change, the inventory should be put on line where everyone can see it.

Step 3: Create a nonpartisan, cross-sector presidential commission to recommend which carbon subsidies should be repealed, and which are necessary for national security or economic stability. These recommendations will remove the feedbags from a lot of sacred cows and the cows won’t like it. So, the recommendations should be handled like military base closings — in an all or nothing, up or down package placed before Congress.

Step 4: Create a “Climate Protection Performance Standard” for future subsidies. The standard should be based on the full life-cycle performance of the technology, service or resource being subsidized and require high net energy, net emissions, net water and net economic benefits. The standard could also include the subsidy’s projected impact on environmental quality, ecosystem services, energy independence and other critical factors.

This week, the New York Times reported that many types of biofuels produce more carbon emissions than they prevent, when factors such as soil tillage and forest-clearing are taken into account. A full-cost, life-cycle assessment would bring factors like this to light, rather than committing federal funds on the far less objective standard of political clout.

Step 5: Establish sliding scales. Subsidy levels should decline over time to spur early action. In addition, subsidies should be awarded on a sliding scale to reward best performers — for example, those activities and products that score best under the Climate Protection Performance Standard.

As we all know, the American people face several urgent issues without a lot of money to address them. Climate change and energy security are among them and are connected with many others, including health care costs and defense spending. We need to invest in our future far more carefully than we are doing today. We need to stop paying one another to destabilize the atmosphere.

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