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US Senate Examines Renewable Energy Tax Incentives

by Mike Godfrey,, Washington

30 March 2012

The Subcommittee on Energy, Natural Resources and Infrastructure of the Senate Committee on Finance has held a hearing on how the recent and pending expirations of key tax incentives affect the deployment of renewable energy facilities and energy efficiency measures in the United States.

The Subcommittee Chairman Jeff Bingaman (D – New Mexico) observed that, last December, it had met to consider the effects of short-term extensions and frequent expirations on the renewable energy industry, and that almost all of the witnesses had argued that intermittent incentives severely stunt the promise of clean energy in the US, with the constant threat of expiration preventing the build-out of a robust manufacturing sector and supply chain.

In a briefing paper released earlier this month, the Congressional Budget Office (CBO) observed that tax preferences for energy were first established in 1916, and until 2005 they were primarily intended to stimulate domestic production of oil and natural gas, and that it was not until 2006 that an increasing share of energy-related tax expenditures began to shift to renewables and energy efficiency.

The CBO has calculated that US tax preferences for developing and producing fuel and energy technologies totalled USD20.5bn in 2011. However, it also pointed out that, as, historically, tax preferences have been targeted toward encouraging, not discouraging, the use of fossil fuels, particularly oil, of the four major energy tax preferences that are permanent, three are for fossil fuels. The other is to support nuclear energy.

Much of the discussion in the Subcommittee centred on the tax credit for wind, which expires at the end of 2012, and the effect of it not being extended, but there are other important incentives (and the markets they encourage) for advanced biofuels, energy efficient homes, buildings and appliances, combined heat and power, fuel cells and advanced vehicles.

John Ragan, Vice President of Business Development and Government Affairs at TPI Composites, was worried at the effect that the expiration of the Production Tax Credit (PTC) will have on wind energy companies. The outlook for 2013, he insisted, is bleak due to the pending expiration of the PTC, which has expired three times since 1999 leading, in each case, to dramatic declines (70% to 90%) in new wind power development.

In practice, he continued, the PTC “has already expired as the delay in extending the renewable energy credits is reducing investment in wind energy projects scheduled to come on line in 2013. Wind investors and suppliers like TPI want to know what tax policies will apply before they commit to projects for the next calendar year.”

However, other testimonies at the hearing doubted the efficacy of the renewable energy tax preferences. The CBO had previously commented that tax preferences may not, in fact, be the most efficient use of resources. The most direct and cost effective method would be to levy a tax on energy sources that reflects the environmental and other costs associated with their production and use.

Subsidies (such as tax preferences) for favoured technologies may, in fact, mean that the government is paying firms or households to make choices about investment, production or consumption that they would have made anyway, without the tax preferences.

In his testimony, Dr Benjamin Zycher, from the American Enterprise Institute, stressed that, as a generalization, the experience in wind and solar power electric generating technologies can be summarized as high costs combined with low reliability, and that renewable power generation will achieve only a small market share in the US, notwithstanding large subsidies and other policy support.

“The subsidies that have been implemented in support of renewable electricity impose non-trivial costs upon the taxpayers and upon consumers in electricity markets,” he concluded. “The upshot is the imposition of substantial net costs upon the US economy as a whole. As has proven to be the case in most contexts, the outcomes of market competition, even as constrained and distorted by tax and regulatory policies, are the best guides for the achievement of resource allocation that is most productive.”

TAGS: environment | tax | business | tax incentives | energy | corporation tax | United States | tax breaks

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