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The Subsidy Tease — Part I

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.

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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.

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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.

— Bill B.