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Saturday, December 10, 2011
Gone with the Wind Subsidies
By Heritage Foundation @ 1:33 AM :: 7410 Views :: Energy, Environment, National News, Ethics

by Nicholas Loris, Heritage Foundation

The year 2012 marks a monumental yet depressing milestone for the wind energy industry: 20 years of tax credits.

The federal renewable energy production tax credit, which allows wind producers to take a 30 percent investment tax credit or receive a 2.2-cents-per-kilowatt-hour production tax credit, has been around since 1992. The tax credit expires at the end of 2012, and the wind energy advocates are already ramping up their efforts to include an extension in any end-of-the-year must-pass legislation. It’s time to let this wasteful, unnecessary subsidy run out.

The Wrong Way to Promote Technology

Let’s take it back to 1992. The parents are watching Murphy Brown, the kids are watching Full House, and people are rockin’ out to Nirvana and Dr. Dre. (Some things never change.) And wind was ready to usher in a new era of energy production. In fact, Matthew Wald wrote in a 1992 New York Times article, “A New Era for Windmill Power,” that “striking improvements in technology, the commercial use of these windmills, or wind turbines as the builders call them, has shown that in addition to being pollution free, they can now compete with fossil fuels in the cost of producing electricity.”

He went on: “Kingsley E. Chatton, president of U.S. Windpower, which operates 22 new-generation windmills here, said the economics of wind power was at the point where it ‘will compete with fossil fuel.’ Others agree.”

Twenty years of subsidies later, wind still only provides a paltry 2.3 percent of America’s electricity in 2010, and it still needs subsidies.

Jim Nelson, CEO of Solar3D, argues that government subsidies are obstructing innovation in the renewable-energy sector:

Operating subsidies, or installation subsidies, helps get clean energy sources installed but the problem is that current technology is not economically competitive. Everything we do needs to be done with a view toward global competitiveness. Unfortunately, because current technology is not economical relative to alternatives, it does not promote our competitiveness.

The problem is that subsidies promote technological malaise. They take away the incentive to innovate and lower cost by promoting business models geared more toward gaining favor with politicians than on technological innovation. The result is that subsidized industries quickly become dependent on government. At that point, long-term competitiveness becomes secondary to near-term survival, which is generally conditioned on more handouts.

Thus when the government support is threatened, the propped-up industry responds with pleas for more handouts. Recognizing that their survival depends more on securing subsidies than on technological innovation, subsidized industries reject such investments to the extent that they too are not subsidized by government. Hence, the vicious cycle of subsidies inevitably result in technological stagnation.

When 2.2 Cents Adds Up

That 2.2 cents doesn’t sound like much, but it is on average 40 percent of the wholesale price of electricity. Treasury says the tax credits costs taxpayers $1.5 billion annually. This is uncalled for. Not only is the nation facing $15 trillion of debt, but it already has access to ample supplies of diverse electricity sources that are perfectly capable of meeting our energy demands so long as government gets out of the way. Not only are the subsidies not needed, but they do not work. So regardless of our debt problems, taxpayers shouldn’t be subsidizing any energy source.

Artificially Creating Politically Preferred Jobs and More Lobbying Jobs Will Not Grow Our Economy

Wind-energy advocacy groups are on their megaphones screaming that without the extension of the tax credits, thousands of jobs will be lost. This is a half true, at best.

Subsidizing uneconomical industries, as perhaps the wind-energy tax credit has done for two decades, shifts labor and capital away from other sectors of the economy. Removing the subsidy would free up these resources to be more productive elsewhere in the U.S. economy. In the process, jobs that rely on taxpayer handouts would likely go away. But the newly available resources could then go toward the likely creation of more and better jobs.

If we produce more wind energy without subsidies, all the better, but the American Wind Energy Association says that may not be the case if the tax credit expires. Spokesman Peter Kelly said, “Industrywide we are seeing a slowdown in orders for towers and turbines after 2012 that is rippling down the supply chain and the big issue is the lack of certainty around the production tax credit that gives a favorable low tax rate to renewable energy.”

President of the Cheyenne and Laramie County economic development organization Randy Bruns echoed, “A lot of these projects, the economics change without that tax credit.”

If wind energy is not economically viable without the taxpayers’ crutch, then we’re propping up a market loser. If wind energy is a market winner, the subsidy is taking money out of the taxpayers’ wallets and putting into the hands of the wind producers. Neither case makes any sense.

Removing the government’s influence in the market reduces the need for more office space on K Street in Washington, D.C., the central hub of lobbyists. Just yesterday, Occupy Wall Street shut down K Street with protests, but they should direct their message to the root cause of lobbying—government controlling decisions that are best left for the private sector. If Occupy Wall Street is sincere in its fight against crony capitalism, it would be arguing for less government intervention into the economy, not more.

These problems will continue to persist so long as politicians continue to expand subsidies for their pet projects. When it comes to energy subsidies, we need to prevent the new and repeal the old.

That’s my 2.2 cents. I’d like to keep them in my own pocket.

---30---

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