Of Blind Spots Left & Right / Dr. Chu / Europe's Green Tax Cut

Yesterday, for the first time, the European Council adopted a new policy of green tax cuts for a broad array of energy efficient products, from boilers to automobiles. The measures are part of the €200 billion Economic Recovery Plan announced by the European Commission on November 26, and reported here. The Council also adopted a new climate change plan, featuring concessions in a revised emissions trading structure that allows poorer countries that are heavily dependent on coal to get a large amount of free pollution permits.

Remarkably, almost none of the major media have even mentioned the new green tax cut policy in their coverage of the Council's actions yesterday. Likewise, no one covered the original announcement of the policy, except this blog. It is as though the Congress passed a carbon tax for the first time, and the New York Times neglected to mention it.

So why the blind spot? Commenting last week, one reader, John Banner, offered the following plausible speculation:

One possible reason for that omission may be that this aspect of the recovery plan was deliberately released without fanfare by the European Commission for political reasons, in order to downplay the role of Britain and France in proposing the policy. Possibly, the EC felt that other Member States would more willingly adopt the policy if it was not perceived as simply a British/French triumph.

Could be. But the blackout goes beyond this one story. This idea has not emerged from either the left or right in America, as it did in Europe, until now. My guess is that, for the media and both the American right and left, the fact that green tax cuts combines elements from both camps, rather than making it interesting, makes it seem like some half-breed mutant idea, best scurried past with eyes averted. It is not pure enough for ideological comfort. So they ignore it, rather than examine it as a fresh alternative.

This is a speculation, mind you. I'd rather hear policy wonks speak for themselves. But my sense is that many liberals and some progressives are unlikely to get excited about a tax cutting policy proposal because they have spent years or decades denying that the Reagan and Bush tax cuts had any stimulus effect. They distrust the claims of supply-side economics that tax cuts can increase tax revenue by stimulating economic growth. Some are far more ideologically comfortable with policies that raise taxes (like a carbon tax or trade systems, windfall profits tax, etc.) with the prospect that any revenues can be spent on regulation, research, Federal eco-investments or some other favorite program. They are largely tone-deaf to criticisms that such tax-hikes can cripple the economy or cause widespread suffering, and instead rationalize that shifting green will create jobs, spur innovation, and stimulate the economy through cost saving from energy efficiency. While progressives largely support the existing and very successful limited tax incentives for hybrid cars and renewable energy, the idea of pushing this approach to the next level runs afoul of their basic American liberal ideology on taxation.

Interestingly, Europe's green tax cuts were first proposed by the center-left British Labour Party. Perhaps this was possible because the European left has not spent three decades denying the stimulus effect of tax cuts, and instead accepts the classical liberal view that tax cuts do act as a stimulus. As I will discuss below, I believe this view is gaining acceptance among the highest level of Obama's advisers, who are ahead of the ground troops in this respect.

For some conservatives, their lack of mind-share available for green tax cuts lies in that that they simply don't see a problem that needs solving. Many are global warming deniers. This is certainly true of many at conservative think tanks. Others, with the exception of people like Frank Gaffney and James Woolsey, even deny that oil dependence is a problem. So the argument goes, why do anything that creates an economic distortion, if there is no problem to fix in the first place?

The answer to conservatives is simple: hello, it's a TAX CUT. As Milton Friedman once said, "I am in favor of cutting taxes under any circumstances and for any excuse, for any reason, whenever it's possible." A green tax cut will have all the same benefits of any tax cut, plus the added stimulus of reducing energy costs by expanding supply and reducing demand. So, if you want, forget global warming, forget oil dependency. One problem conservatives should agree needs solving is rising taxes and an economy sliding into depression, and the best conservative answer to that is a tax cut, particularly one reducing spike-prone energy costs. Among themselves, conservatives should agree a green tax cut would be far more beneficial than many of the tax, spend and regulate enviro-policies currently on the table. Besides, a green tax cut is probably the best chance they have of seeing a major tax cut in at least four years because of the popular interest in shifting green. By championing aggressive green tax cuts, conservatives could help save the economy, the auto industry, the planet and capitalism itself. (If they weren't so busy shooting their own feet.)

The answer to progressives is that the looming depression squeezes out proposals that might damage the economy, as carbon tax or trade systems would by hiking energy costs up front. The Obama administration needs pragmatic green policies that are pro-growth in every respect, from the start, not just as a by product of eventual energy efficiency. As the world slides into depression, eco-wonks should ponder why (a) green tax cuts are part of the European Economic Recovery Plan, but carbon trading is not; and (b) why many poor countries, like Poland, would not go along with the carbon trading system unless their pollution credits were free. The reason is that the green tax cuts really are a green economic stimulus, and a carbon trade pseudo-tax system is, up front, a drag on the economy, however laudable in other respects.

Some commentators lament that Europe's climate goals are insufficient and were weakened by political opposition. That is because carbon trading and mandates cause pain, anger and opposition. These policies will never get us to the goals we need to reach because of the political/economic backlash they create. Eco-wonks need to focus on incorporating and preferring policies that are genuinely pro-growth from the get-go, like green energy tax cuts, if they wish to reach the right targets.

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Commenting on my last post, Tim Reed asked a great question:

What do you think of this? Chu mentions improving the tax environment for green energy without specifics, then goes right on to carbon caps and trading.

Here is the quote Tim is referring to:

Q. What is your vote for the best role of government in shaping long-term efforts? (Is FutureGen the right kind of model? If not, what is..? is N.I.H. a good model? Is the Energy Department the wrong venue?) A lot of economists say industry is just not able to focus that far forward in R and D. Do you agree?

A. We need to alter the playing field with tax and fiscal polices (such as a carbon cap and trade with a minimum trading value so that companies could plan for sensible, long-term investments). This has to be done in order to account for the so-called “externalities” - real costs that are not yet included in the price of various forms of energy. Developed countries have made this step with air and water pollution by enacting outright regulations and installing a cap and trade system.

Once industry is assured that the bottom will not fall out (such as price of oil, gas, or the trading value of avoided carbon, etc., suddenly plummeting) long-term investments will be made. The wind industry in Denmark and Germany proceeded in this way. Off the top of my head, $70/avoided ton would work wonders in spurring long-term investments and innovation.

Dr. Steven Chu, who is reported to be the top choice for Obama's energy secretary, is right about negative externalities and the need to adjust the playing field through tax policies. However, the tax policies he favors (a cap and trade pseudo-tax) could act as a significant drag on the economy, by effectively hiking taxes and energy prices. He has apparently not yet realized that the same incentive to shift green can be put in place, with a far more pro-growth outcome, by employing an aggressive "un-carbon" green energy tax cut.

However, I hold out great hope for Dr. Chu, and think he is at least friendly to the idea of tax incentives. In August, the Obama campaign made a significant shift towards supporting tax incentives for clean vehicles and renewable energy. As a high level advisor to the campaign, Chu was at least part of the team that gave their blessing to that change. Further, Dr. Chu's Berkley colleague Prof. Daniel Kammen, among others, is a leading proponent of the innovative BerkleyFIRST program that provides municipal financing for private solar power installations. The program greatly lowers the cost of such installations in part because of some hidden green tax cuts: first, municipal bonds are triple tax free, and Berkley pays no taxes, so the borrowing cost can be much lower than privately available; second, the loan payments are turned into a part of the home owner's property tax, and so become tax deductible from income, further reducing costs beyond what private financing could accomplish. I intend to post more about BerkleyFIRST soon, but the point here is that I believe some of Chu's close colleagues are increasingly aware of the value of green tax relief as part of an integrated solution.

Perhaps this is wishful thinking, but I believe that at the highest levels of the Obama team, there is a developing, sotto voce awareness of the potential of green tax cuts, but it is still brewing. However, despite European developments, there is little or no awareness about the policy among the media, or rank-and-file left or right in America.

Regrettably, I am doing a whole lot of speculating about what a whole lot of people think or know or don't know. And some of them I haven't even met. I'd love to hear: what do you think abut the European green tax cuts? The press blackout? The blind spots of left and right? How far can the concept go?

Europe Moves to Adopt Green Tax Cuts

Last week, in a dramatic about face and historic first, the European Commission, which drafts legislation for the EU, embraced green tax cuts as part of its European Economic Recovery Plan. The heretofore non-existent policy had been proposed only in just the last year by prominent politicians from both the left and the right, notably British PM Gordon Brown and French President Nicolas Sarkozy.

The Commission proposes "reduced VAT rates for green products and services, aimed at improving in particular energy efficiency in buildings," and indicates it will "urgently draw up measures for other products which offer very high potential for energy savings such as televisions, domestic lighting, refrigerators and freezers, washing machines, boilers and air-conditioners." The plan also calls for "Member States to provide further incentives to consumers to stimulate demand for environmentally-friendly products." In particular, "Member States should [reduce] property tax for energy-performing buildings" and also reduce taxes for "lower emission cars."

This same green tax cut proposal was first put forward by center-left British Labour Prime Minister Gordon Brown just a little over a year ago, and quickly garnered the support of center-right French President Nicolas Sarkozy. Brown argued strongly that "Lower taxes can make a big difference to whether people buy environmentally friendly goods." However, the European Commission quickly shot it down just last March. Since then, however, Sarkozy has become President of the European Union (with an ambitious green agenda) and the world economy has entered its worst crisis in decades. The EU is now willing to consider all means of economic stimulus at its disposal, and green tax cuts are now, for the first time ever, part of that mix.

The speed with which this proposal has gone from introduction to acceptance at the highest levels of the European government, in just about one year, is remarkable. While clearly the EC could be bolder and go even further with this concept, such as VAT (and other) tax reductions directly for ultra-high-mileage vehicles and green energy from renewable sources, it is likely that this is just the start, and there is more to come. That it has been championed by politicians from both the left and right is also noteworthy. Indeed it begs the question, if the European left and right can so quickly agree on the value of this policy, particularly as one of the few green policies that doubles as an aid to economic recovery, why isn't it even on the radar of their American counterparts?

If anyone has any ideas as to why, I'm all ears...

How to Save the Auto Industry (Without a Bailout)

Ever since the Big Three auto companies flew in with tin cups and private jets seeking a $25 billion bailout loan from Congress, the media and most pundits have been fixated on three extreme alternatives: bankruptcy, bailout, or government takeover. But there are other alternatives that avoid these extremes, if only folks would ask the right questions.

First, let's think through the problem. Has anyone else noticed the irony that the Treasury Dept. is spending $700 billion to encourage the credit markets to loan more money, but the auto companies, instead of going to the private debt market as they should -- are coming straight to the Congress? Aren't we bailing out the credit markets so that they will make exactly this kind of loan?

The right question to ask here is NOT should we bail them out, take them over, or let them go bankrupt. That is what everyone is asking. The right question, which nobody is asking, is: what can we do to encourage the private sector to finance the Big Three?

What is the problem? Detroit's labor costs are too high, and they are not producing the right kind of cars for the current market -- affordable, extremely fuel efficient vehicles, not the expensive gas-guzzlers they produce -- so their business model is unprofitable.

Logically, then, to encourage private financing, we need to find ways to help Detroit become profitable, either by reducing their costs, or by helping them produce affordable, green-powered vehicles profitably, or both. We also need to look for ways to make loans and other financing more profitable to investors.

Too bad the media, Congress and the punditocracy are all focused on extreme, unpalatable and not-so-helpful solutions: bailout, bankruptcy or government takeover. No one in these opposing camps seems to be asking how we can avoid such extremes: fix the problems, encourage normal loans and investments, and make the auto industry greener and more profitable without all the drama.

Here's one way:

We can spur both new loans and new equity investment if we make it extremely profitable and attractive for the auto industry to move in the right direction, towards producing and selling advanced green energy vehicles. We can do that in short order if we make the entire business of producing such green vehicles 100% tax free. To reduce costs and boost sales, revenue from green vehicles should be free of all state and local sales taxes, and all federal income tax. Further, the cost of all materials and components needed to build such vehicles should be tax free as well, to reduce costs and increase green vehicle profitability even more. Interest on loans or bonds to finance the development, production or purchase of such vehicles should be income tax free, making such loans more profitable. The stock and dividends of companies producing green vehicles should be capital gains tax free, in proportion to the percentage of revenue derived from such vehicles in the previous year, attracting more equity investors and encouraging management to shift green to escape taxes. All the above should hold true for businesses producing the infrastructure needed to support green vehicles, such as electric, hydrogen and natural gas fueling stations, all 100% tax free.

If we take these steps, we will vastly reduce the costs and increase the profitability of producing green vehicles. We will also make loans for producing and purchasing such vehicles more profitable and attractive to lenders, simply by making the interest tax free, but also by making the underlying business more profitable. Overall, we will immediately spur enormous debt and equity investment in a revitalized, highly profitable Big Three dedicated to selling as many green vehicles as possible, in order to maximize profits and minimize taxes for each company and their shareholders. Essentially, we would be creating a green goldmine for investors, one that is good for both America and the Earth.

The benefits of this approach extend well beyond the auto industry. A study by the Pacific Northwest National Laboratory estimates PHEVs have the potential to cut US oil imports by 52%, or 6.5 million barrels per day. Plug-in vehicles can reduce energy costs nationwide by using underutilized, off-peak energy, which is generally cheaper and would otherwise go to waste. Local trips could cost as little as the electric equivalent of $1/gallon of gasoline. These savings and benefits could be even more dramatic if combined with a smart grid and renewable energy sources, such as wind and hydro power, further reducing emissions and allowing the PHEVs to act as an on-demand power storage system, storing cheap off-peak power from an increasingly green grid, for use during expensive peak-load times -- with vehicle owners pocketing a profit. If tax freedom were extended to ALL green energy technology (vehicles, clean/renewable energy sources, smart grid development, etc.) that would supercharge investment in green energy, reducing overall energy costs, while stimulating the economy and creating millions of new jobs.

And of course, one of the nicest aspects of this approach is that it does not require a dime of upfront federal spending. Further, it lets the market (not the government) decide which green auto technology wins.

Is this somehow an unfair subsidy of green over gasoline vehicles? Many economist argue that oil, coal and gas guzzling vehicles are already heavily subsidized in a number of ways, such as the infamous $25,000 Hummer tax credit, but even more fundamentally in that these vehicles contribute heavily to the social costs of global warming, foreign oil dependency and oil-related wars, but get a free ride by forcing the taxpayer to pick up these costs. But raising taxes on carbon fuels and carbon producing technologies, such as automobiles, while correcting the free ride problem, would be disastrous for a struggling economy and a struggling auto industry. Tax freedom for green energy and green vehicles is another way to correct the free ride problem, but one that stimulates the economy, rather than depressing it. Instead of a carbon tax, we can implement a no-carbon tax cut for a much better pro-growth outcome.

Are we going too far with 100% tax freedom for green vehicles? Not at all, because Detroit and the American economy are in dire straits right now. There is no excuse to not pull out all the stops right now. Our economy is dangerously vulnerable to wild spikes in the oil market, which vulnerability can only be reduced by reducing demand for oil. This we must do fast, at full speed, not half-speed, or more oil spikes will greet us if and when our economy begins to recover, possibly choking off any rebound. We have a long, long way to go before 100% of American vehicles are highly fuel efficient, and an even longer way to go before 100% of vehicles use 100% renewable energy. We can always reassess and maybe throttle back later when we have reached a reasonable midpoint goal, when say the auto industry is profitable again and 50% of all vehicles sold are plug-ins and deliver 100 mpg or better. But right now, we need a profitable, green auto industry and less dependence on foreign oil. It is a rule of economics: if you want more of something, tax it less. Ergo, no tax on green autos.

Tax freedom for advanced green energy vehicles is manifestly in the national interest, not just to save the automobile industry and millions of jobs, not just to avoid economic depression, but in order to reduce the ongoing strategic, economic, environmental and security risks posed by foreign oil dependency and global warming. But even disregarding the larger goals, it is nice to know there is a sensible alternative to bailouts, bankruptcy or socialism, and one that lets the markets work as they should.

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Given the unattractive options being floated by the punditocracy, one worse than the next, I hope this original proposal can help move the national debate in the right direction. If you agree, please help by forwarding this link on to your friends, elected representatives, the Obama Transition Team, the media, the blogosphere, and anyone you know who might be interested and helpful. And thanks!

Since You Ask...

Today I received an email video link from John Podesta, leader of the Obama-Biden Presidential Transition Team asking that I (and millions of others, no doubt) send my policy suggestions to the Energy & Environmental Policy Transition Team leaders, Heather Zichal and Carol Browner.

Perhaps the point is not that they need fresh energy policy ideas, but more to demonstrate their inclusiveness and openness to all viewpoints. Or is it? Maybe, just maybe, they really do want to hear some fresh energy policy ideas, as the looming economic abyss threatens to put all their best plans on hold. Now I don't want to be too cynical, because it would be nice if they really are open to new ideas. But think about it: with trillions going to the current bank bailout, and who knows how many other bailouts lined up behind that, how are they going to afford the $150 billion they plan to invest in the renewable energy industry? Further, since the current economic meltdown was precipitated in part by skyrocketing energy prices, can they really risk making matters worse by instituting a cap-and-trade carbon "tax" that would only make energy even more expensive? Will there even be any windfall profits to fuel this agenda -- as they hope -- if the economy is on a respirator?

Perhaps the smartest players in the transition are thinking, hey, maybe we need a plan B, something cheap, effective, but not economic suicide, and honestly wondering if anyone has any bright ideas.

Here is what I suggested:

Dear John Podesta, Heather Zichal & Carol Browner:

Thank you for sincerely seeking new ideas from outside the fold. Since you ask, I'd be happy to suggest a low cost but ambitious solution to many problems, one that you may not have considered.

All the biggest problems we face (the economy, jobs, the auto industry, oil dependency, global warming, the Iraq War) have at least one common solution, and almost nobody has figured it out yet:

MAKE ALL GREEN ENERGY TECHNOLOGY 100% TAX FREE.

It is that simple. We don't have to spend money, or hike taxes. Bailout or bankruptcy are NOT the only options for Detroit. We can create millions of new jobs and fix the environment/economy/auto industry/oil dependency with a smart, green tax cut. No sales or income tax on revenue from clean, renewable energy or technology (like plug-in, flex-fuel hybrids) that radically decrease oil consumption. No tax on the interest on loans for green energy investments. No capital gains tax on companies' stocks and dividends in proportion to the percentage of their revenue that comes from green energy technology. That simple policy will supercharge private investment in clean and renewable energy technologies... on the order of $300 billion per year, or more. That will create millions of new jobs fast -- many more than you could create by federal spending alone. That includes billions of new investment in the US auto industry, as investors see a greener path towards an increasingly tax-free auto industry. Further, it will encourage oil, coal companies and utilities to voluntarily go green, in order to escape taxes. A carrot frequently works better than a stick.

Slashing taxes on green energy will directly lower the cost of green energy, but also lower the cost of ALL energy. Economic law states that increased supply results in decreased price. So new green energy investment will increase the total energy supply, decreasing the price of all energy, including oil and coal. Increased energy diversification and competition will create a permanent downward pressure on energy prices. Cheap energy will in turn stimulate every other sector of the economy, creating millions of non-energy jobs as well. By contrast, a carbon tax, or cap-and-trade, would raise the cost of energy, crippling the economy, and putting more people out of work.

Take note: NO FEDERAL SPENDING IS REQUIRED. Further, any tax revenue reduction will be minimal initially -- since green energy is now just a small part of the economy -- and as it grows, revenues will grow from green energy payroll taxes and other sources. A focussed tax cut on this one sector of the economy can lift all others by keeping the price of energy low for all, and producing massive domestic employment. A tax cut here will produce a massive tax revenue surge from the rest of the economy. Tax freedom for green energy will make the US the world leader in green energy investment in President Obama's first term -- in fact, most world green energy investment will go through the US for the tax advantage.

So forget the $150 billion federal "investment" over 10 years -- that is PEANUTS compared to what is really needed here and now, and what the private sector can do if you make green energy technology tax free. And please forget the stupid cap-and-trade proposal that does not really work and will only raise the price of energy, and further depress the economy. Tax freedom for green energy technology provides the same tax differential as a carbon tax, with the same incentive to shift green, but will stimulate rather than depress the whole economy by pushing energy prices lower.

(Oddly enough, tax-free green energy is logically the double-negative of a carbon tax: the no-carbon tax cut. Similar but diametrical concept, superior result.)

A 100% tax cut for renewable, clean energy technologies, vehicles and infrastructure is the cheapest and most effective stimulus you could provide right now for our struggling economy in general, and for financing a green revitalization of the auto industry in particular. And it is the absolute best and fastest way to achieve your goal of creating a clean, green economy, and creating millions of new jobs.

Let's see if anyone is listening.

Oh, by the way: YOU, FRIENDLY READER, CAN HELP. Please email the link to this page (http://tinyurl.com/5g83bx) to your friends, family and elected representatives -- and let's not forget the Obama Transition Team! To anyone who might be interested, tell them, please, to take a look at the idea and the link, that Tax Free Green Energy is the best way to save the economy and the planet at the same time, and that we prefer our energy cheap, green and tax free. Then ask them, please, to feel free to raise questions or comment, and pass it on.

Maybe somebody will eventually tell the President.

We can do it. Yes we can!

The Wrong Wish List: What the Green Energy Lobby Wants

Surfing to Green Wombat, Todd Woody's Energy/Technology column at Fortune, we can read about the renewable energy industry's five item wish list they hope to get next year from the Obama administration. The list contains two good ideas, two that are OK, and one that is just freaking terrible. While generally positive for renewable energy, the list does not contain the one GREAT idea that the industry really should ask for, which would make most of the rest unnecessary.
Here is the list as reported by the Wombat:

• A five-year extension of the production tax credit for the wind industry (it currently has to be renewed every year) to remove uncertainty for investors.
• A major infrastructure program to upgrade the transmission grid so wind, solar and geothermal energy can be transmitted from the remote areas where it is produced to major cities.
• Impose a national “renewable portfolio standard” that would mandate that utilities obtain a minimum 10% of their electricity from green sources by 2012 and at least 25% by 2020. Two-thirds of the states currently impose variations of such requirements.
• Mandate that the federal government - the nation’s single largest consumer of electricity - obtain more energy from renewable sources.
• Enact a cap-and-trade carbon market.

The Wombat notes that none of these are new ideas. More to the point, they are not great ideas. The last one is -- potentially -- an economy killer.
More effective than ANY of the above would be simply to make ALL renewable, clean energy technologies 100% tax free: free of all sales, income and capital gains taxes. No tax on plug-in, flex-fuel hybrids; no tax on electricity from wind/solar/hydro. No income tax on profits from such revenues. No capital gains tax on the stock of such companies, in proportion to the percentage of revenue derived from green energy technologies. As a nation, we need MASSIVE new PRIVATE investment in green, renewable energy. The only way to get there is by giving green investors a long-term, permanent incentive that keeps working regardless of swings in oil prices. And investors and consumers LOVE tax free. That is how you do it.
And that is what the industry should be asking for. And it makes sense, because renewable energy does not impose the high, negative externality costs on society (pollution, global warming, foreign oil dependency) that some carbon fuels do. Therefore renewable energy deserves a significant tax advantage versus oil and coal.
So what is wrong with the industry's wish list? Let's start with the worst of it.

Cap-and-trade -- especially the Obama version -- is basically a carbon tax by another name. But you may ask, didn't I just call for a tax differential between renewable energy and oil or coal? Sure, but the effects of a green tax cut versus a carbon tax hike would be quite different. Both would promote a change to renewable energy, but the carbon tax would wreck the economy by jacking up energy prices. A Green Energy Tax Cut creates the same tax differential and will accomplish the same shift over to renewable energy, but instead with an global economic boom led by entrepreneurs keeping the cost of energy as cheap as possible through increased competition. Energy has become expensive enough as it is… do these folks want to make it even MORE expensive? What are they thinking? Do they want to bring on a depression? We need cheap energy to thrive.

It is sad to see the renewable energy industry -- which should be unambiguously protective of the common good -- calling for a policy that might benefit the industry in the short run, but would severely damage the world economy overall. Especially when there is a much better alternative at hand.
The five year extension of the production tax credit is the best item in their wish list by far. They just need to think a little bigger: Make renewable energy 100% tax free. Also, to nit pick, production tax credits (as a front end subsidy before the company has earned a single dollar or produced any energy) are questionable policy from the point of view that they can make an unprofitable or fictitious business seem profitable to the initial investors, but it really only appeals to those investors needing a tax shelter. However, if the tax incentive is on the back end, the elimination of all sales or income tax on actual revenue earned, or capital gains tax elimination, while that is a huge incentive to any and all investors, it also requires that the basic business be profitable in order to make sense. The tax benefits only kick in if there is actual revenue and profit. That is better for the taxpayer and the consumer, because is costs less here and now, and there is no subsidy for unprofitable or fictitious business models. Basic market mechanisms are preserved that allow the low cost green energy producers to thrive and win.
Two of the items, the "smart-grid" infrastructure proposal and the "renewable portfolio standard" mandating utilities increase their use of renewable energy... these are wonderful goals, but frankly unnecessary policy proposals if green energy technology becomes 100% tax free. If a company can lower the capital gains tax due on its stock, or decrease its sales and income taxes by increasing its green energy revenues, it will certainly make that shift. Utilities certainly will build the grid to reach wind and solar energy sources, and will rush to sell more renewable energy, if they have the incentive to do so. They only need the carrot, not the stick.
In fact the stick (i.e. mandates) can backfire and make enemies, if the utilities push back politically to escape the mandates. That is what happened with the EV1. But there is no reason the utilities would not become a political ally with the renewable energy industry if the proposal instead avoided mandates and provided a path for the utilities to lower their taxes by going green.
Many of the industry proposals will cost a fair amount up front. There will be great pressure on Obama to cut spending. The industry would do well to offer an alternative that will be far more effective in sparking an explosion of private green energy investment, but costs nothing up front.
The renewable energy lobby should start asking for the right thing. And it would do better to avoid asking for expensive, unnecessary stuff that places undue burdens on the public or on other industries. Making all green energy tech 100% tax free would supercharge private investment in (and public demand for) clean renewable energy, while letting the market pick the winners. It would also make the US the world leader in green investment in Obama’s first term.

Election Day: Who has the Green Energy Edge Now?

Since August, when he offered no specific tax incentives for green energy, Obama has made a significant shift in his energy policy that makes him a bit more Green Tax Cut friendly that McCain: Obama now pledges a $7,000 tax credit for "advanced vehicles," which is more than the $5,000 in the McCain plan. He also wants to extend the Production Tax Credit for renewable energy for 5 years, which is a bit more specific that McCain's call to "rationalize" the system of tax credits for renewable energy.

This gives some hope that an Obama administration is warming to the idea of green energy tax cuts -- or at least realizes that tax incentives are the most effective and popular of the existing policies to promote green energy. Of course, I can't help noting that the information on the Obama website seems to change week to week, literally, with the plan being re-written continuously. Since this blog began in July, I have read perhaps five different versions of the Obama energy plan, with very significant changes. For instance, the current version of the plan does not mention the $25 billion a year Federal Venture Capital Fund for renewable energy that I criticized in August as a foray into Venture Socialism.

So far, the changes seem to be in the right direction. However, there is still much that is unhelpful and perhaps counterproductive in both the Obama and McCain plans. Ironically, McCain's notion that his administration will start construction of 45 nuclear power plants also rings of socialism -- these plants should only be build if private investment judges them commercially viable once all insurance, risk and waste transport and storage costs have been figured in.

Obama's plan retains $150 billion in renewable Federal renewable energy investment over 10 years, and a hidden carbon tax in his cap-and-trade plan -- both ideas are problematic and have been discussed in previous posts. There is much to be wary of here. According to reporting by Deroy Murdock, as early as last January, Obama made statements indicating that he would not mind bankrupting much of the American coal industry via his cap-and-trade plan. One can only hope Obama is moving away from such unhelpful thinking, as is indicated by recent shifts in his energy plan.

Steve Hargreaves is right!

It seems the actual renewable energy industry folks are saying what I am saying: both Presidential candidates, and Congress, and many big name environmental advocates, are failing to provide leadership on the one policy that the renewable energy industry REALLY needs: green energy tax cuts. Everyone and anyone interested in promoting green, renewable energy should take a quick look at Steve Hargreaves brief article for CNNMoney.com about how both candidates and Congress are ignoring the assistance that renewable energy really needs: long-term, predictable tax incentives to spur development, investment and demand. Then, if you have a minute or ten, call your representatives and favorite Presidential candidate, and tell them to help pass green tax cuts NOW, and make this policy central to the campaign.

Obama's Energy Plan (Part 1): Venture Socialism?

I want to like Obama. I really do. He's young, dynamic, eloquent. Many of my best friends and nicest relatives support him. He sounds like he might be a "New Democrat," looking for innovative, market-oriented, small government solutions.

But he is just not.

Take a look at his energy plan. The most striking aspect of the Obama plan is what it does NOT include: not a single kind word for all the various existing tax incentives that have spurred along the development of hybrid cars, solar power and other clean technologies. These incentives have been hugely successful in convincing millions of Americans to buy cleaner, more efficient hybrids, or put solar panels up on their roofs. Expanding these successful programs is key to moving America over to green energy. But not a single mention of these in the Obama plan. No commitment to either expanding or even maintaining these policies.

That omission should be profoundly disturbing to any serious environmentalist.

Anyone interested in keeping government lean and efficient should also be disturbed, because these tax incentives are the one extremely effective solution that does not require new taxes, spending or regulation, that does not grow the government.

By contrast, McCain's energy plan is way ahead of Obama's in his support for a wide array of existing and new tax incentives for green energy. We will take a look at that later -- McCain does not go as far as he should in supporting complete tax freedom for green energy -- but for now, back to Obama.

Obama should be applauded for the few incentives he does propose: incentives to encourage cellulosic ethanol, E85 pumps at gas stations, and retooling of auto plants to produce more fuel efficient cars. But those three narrow incentives are nowhere near enough... and smack of government bureaucrats trying to pick winners and losers in the green energy universe for political reasons. For instance, ethanol may not be the best solution out there for a transportation fuel, compared to say, plug-in natural gas hybrids. Ethanol does not reduce carbon emissions or dependence on foreign oil, while natural gas vehicles do both, dramatically. But ethanol has a very powerful farm lobby behind it. Green energy development should not be driven by such politics. Green energy tax cuts should be broad based, across the board, letting the market pick the winners among the most cost effective, carbon neutral/negative technologies available.

So if Obama does not support existing and successful green energy tax incentives, what does he support? Unfortunately, most of his solutions are typical Big Government initiatives, based on increasing taxes, spending and regulation. I will come back to the new taxes and regulations in my next post. But the worst aspect of Obama's plan is the new spending, which Mr. Obama calls "investment."

Obama proposes $150 billion investment over ten years for a variety of green energy technologies, plus an additional $50 billion over five years for a "Clean Technologies Venture Capital Fund." In addition, he plans to double federal energy R&D budgets, and proposes unspecific amounts for investment in "clean coal," clean tech worker re-training, and clean tech manufacturing conversion.

So you may ask, what is wrong with all that? After all, this blog proposes that we need massively more green energy investment. Well the research part of it is good, very good. We need good solid research on these technologies, both private and public. No problem there. The problem is with the various investment schemes.

Obama is proposing to launch the very first federally-funded venture capital firm ever. Sounds exciting, sure. The problem is, when you do that, it is no longer venture capitalism. It is venture socialism. And that -- state investment in and ownership of key industries (i.e. socialism) -- carries a host of pitfalls that true (i.e. private) venture capitalism avoids.

1) It fosters corruption, and can easily turn into a protection/payola racket. We absolutely do not want to train our green CEO to come clamoring to politicians for their personal access to the public teat. Politicians should never be able to wield that kind of power -- it is incredibly corrupting. Companies end up being given investments for political payback reasons -- because they gave the right campaign contributions and other perks -- not because they are the most efficient green energy company. Bureaucrats and politicians start picking winners and losers based on the size of their lobby, not the competitiveness of their technology. All such investment decisions should be strictly private, and NEVER EVER put into the hands of politicos.

While Obama and the people around him may have the best of intentions, one has to wonder how many of his contributors are wealthy green entrepreneurs who have done the math and figured that, for their $25,000 contribution, they get a favored spot in the line for the $25 billion a year that B.O. plans to "invest." If so, it stinks. We need to close the doors on all payola schemes, not create new ones.

2) State funding becomes a crutch for inefficient businesses that never bother to learn how to be independent because they have political connections. Many state owned businesses, like Amtrak, lose money continuously, and become dependent on state financing to survive. The best way to avoid that fiasco with green energy is to never let such companies become dependent on state financing in the first place. Making green energy tax free avoids that pitfall, because, even with such tax advantage, such companies still must be profitable to survive and keep their (private) investors happy. State funding allows favored companies to operate indefinitely at a loss; tax exemption does not.

Lastly, Obama's state-funded investment schemes are simply not enough to do the job that needs to be done. We need way, WAY more new investment than $25 billion a year, and the only way we can get the investment numbers we need is to massively motivate private investors and consumers.

Look at the numbers: Last year, world investment in renewable energy technologies was $148 billion. If we want to reach the point where clean, renewable energy accounts for 50% to 100% of the US and global market in 10 - 20 years, we need to raise global green energy investment by about 500%, from the present $150 billion annually, to $750 billion. $25 billion is really peanuts . You are only going to get the kind of numbers we need through the free market, by radically changing the economic picture, by making the entire green energy sector tax exempt on account of the good it does our nation and the planet.

If the US does that, we will certainly hit our annual $750 billion globally in the next president's first term, and most of it will be invested through the tax-advantaged US markets, making the US the world leader in in green energy, supplying both US and international needs. Obama's plan won't get us there, can't deliver those numbers, and will cause our green energy sector to fall behind Europe, China, South Asia and Latin America.

The crying shame of all this is that Obama really should be backing green energy tax cuts, and NOT these quasi-socialist state investment schemes. Not only because the former policy will actually jump start a green energy revolution and the later will not. But also, because, doing so would certainly burnish his image as a "New Democrat" favoring innovative small government, free market solutions. Instead, it seems he is being ill-served by his advisors, who would rather have a scheme that allows the future Obama administration to write multi-million dollar checks to outstandingly rich green entrepreneurs (and potential donors) who may give a few thousand to the campaign right now.

Sadly, these advisors are leaving Obama open to some very serious criticism, and give McCain the opportunity to put himself forward as the truly green candidate. However, it is not too late for either Obama or McCain to step forward and seize the initiative on this issue.

To be continued soon re Obama's energy taxes and regulations, and then the McCain plan. T. Boone Pickens plan next week. Stay tuned.

Tax Nudge versus Tax Free?

An anonymous comment on the last post speculated that a "tax nudge" might be sufficient to solve our present problems, rather than the complete tax elimination that is here proposed on green energy. While a "nudge" is certainly a step in the right direction, it is not enough. Here is my reply to anonymous explaining why:

I doubt a mere tax nudge is sufficient. If we want to reach the point where clean, renewable energy accounts for 50% to 100% of the US and global market in 10 - 20 years, we need to raise global green energy investment by about 500%, from the present $150 billion annually, to $750 billion. The only way to do that is with a massive reallocation of private investment, which will need to be driven by some major incentives such as proposed here. If the US makes green energy 100% tax exempt, I have no doubt that not only will we reach those investment goals in a few short years, but that most of global green energy investments will funnel through the US, making us the leader in a new era of prosperity driven by clean technology. If we do less than that, the leadership will be taken by others, the transition will take many more decades, while global warming and our national foreign oil addiction proceed apace.

Remember, the incentives must be of sufficient magnitude to persuade the carbon industry to diversify, happily and without backlash, to carbon-free sources.

I will explore this point more in future posts. NickName, commenting on the first post, made an excellent point about the need to define green energy. I will flesh that out a bit more in future posts.

If any of you have information of interest regarding green energy or proposals to promote it and end global warming, please post them in the comments, and I will try to explore them, in future posts.

Coming later this week: analysis of the energy proposals of John McCain and Barack Obama.

Al Gore: The Good, The Bad & The Unsustainable

Yesterday, former Vice President Al Gore made a speech which his staff at wecansolveit.org describe as "inspiring," issuing "a powerful challenge: producing 100 percent of our electricity from renewable energy and truly clean carbon-free sources within 10 years." Clearly, this speech was intended to be a watershed event, setting the bar high with respect to energy/environmental policy for the coming election. Here is the low down:

The Good: In the first 75% of his speech, Mr. Gore truly is inspiring. He makes the case for switching to renewable, clean energy more powerfully and eloquently than could most. Anyone who has seen "An Inconvenient Truth" will find familiar territory here, but updated, with strong insights into the current fever pitch of the fossil fuel mess. What can be said: he is right, I agree completely, and he says it so dang well.

Further, Mr. Gore is deliberately setting the bar high. Even if it is not realistic that we can do away with fossil fuels in just 10 years, as many commentators seem to think, it is great that Gore is calling for a goal that pushes politicians to take the issue seriously.

The Bad: Buried 80% of the way through his speech, in one short paragraph, is what Mr. Gore himself identifies as the very crux of his policy proposal. How strange that it is almost hidden, given such short treatment, as though he knows this part is going to go over like a lead balloon. Hear the heart of what he proposes:

"America's transition to renewable energy sources must also include adequate provisions to assist those Americans who would unfairly face hardship... We should guarantee good jobs in the fresh air and sunshine for any coal miner displaced by impacts on the coal industry. Every single one of them.

Of course, we could and should speed up this transition by insisting that the price of carbon-based energy include the costs of the environmental damage it causes. I have long supported a sharp reduction in payroll taxes with the difference made up in CO2 taxes. We should tax what we burn, not what we earn. This is the single most important policy change we can make."

Unfortunately, even though Mr. Gore is right that carbon-based energy is getting a free ride, the core solution he proposes would be incredibly and unnecessarily painful. Frankly it would be disastrous for America, and unsustainable to boot. Gore does not say it directly, but if you read carefully, there can be no doubt that Al Gore proposes to bankrupt the coal industry, and probably oil too, within 10 years. (Which is why he proposes aid for coal miners: "Every single one of them.") But the damage may go way beyond that. The US economy is already reeling from the shock of skyrocketing oil prices. To add a carbon tax on top of that would be to effectively jack up the price of oil and coal even further. Doing so could well trigger an even more severe recession that we are already in, if not a global depression. All of us would suffer. Maybe that is part of the plan: reduce carbon emissions by collapsing the world economy.

Further, slashing payroll taxes would effectively collapse the social security, medicare and unemployment systems funded by those taxes -- at a time when Gore proposes government aid to tens or hundreds of thousands of laid-off carbon industry employees. Now, social security and medicare are off-topic for this blog, but it is no secret that these systems are approaching insolvency. To propose that these systems now be funded by a tax on industries that Mr. Gore plans to destroy is obviously unsustainable and dangerously irresponsible.

Whether or not reducing carbon emissions by collapsing the economy is the actual plan, there can be no doubt that this kind of ultra-painful shock-therapy -- which will only increase the financial hardship ordinary Americans are already feeling -- is totally unnecessary. There is more than one way to solve the dirty energy problem quickly, some painful, some painless. Hiking taxes abruptly on dirty energy is the painful approach.

Making clean, green energy 100% tax free is the painless alternative -- and far more effective to boot.

Rather than hiking the price of oil and coal, and dragging down those industries and the entire US and world economy with them, simply give a huge boost to the green energy sector until such time as renewable and carbon-free energy dominate the market. That way, instead of causing pain and depression, one is sparking a green energy revolution, creating new industries, hundreds of thousands of new jobs and a new era of prosperity based on clean, green technology. (See the post "Houston, we have lift off!" below for the basic argument for green tax cuts.)

Mr. Gore is actually 100% right about the need for a tax differential between clean and dirty energy to account for hidden social costs. He is merely wrong about the safest and easiest side of the equation to adjust.

The Unsustainable: Mr. Gore, despite the wonderful work you have done to fight global warming, you can't propose bankrupting entire industries, destabilizing social security and medicare, hiking prices and throwing the world economy into a downward spiral, and expect that such a policy will actually be adopted... or if it is adopted, that people will actually stick with it as the suffering gets worse and worse. It is an unsustainable policy. It will produce an ENORMOUS political backlash that will make it fail.

Sustainability has become an increasingly important concept for both environmental sciences and economics. It should also be a key consideration when crafting policy and legislation. Will a policy be sustainable? Or will it produce so much hardship and pain, and such a backlash of opposition, that it will be doomed to fail? We need effective policies, but especially ones with minimal backlash.

Too often, environmental reformers seem to be stuck in an outdated ideological groove that makes it far more important for them to punish and coerce what they see as corporate evil doers than boost entrepreneurial do-gooders. Bashing the bad guy is emotionally satisfying to be sure, but it is a behavior that is more appropriate to comic books than economic policy: ultimately, it causes fierce political backlash that finally kills the policy. It has happened time and again -- look at the collapse of California's well-intentioned attempt to coerce the automobile industry into producing electric cars. It is far better policy -- much more sustainable and easier to implement, provoking much less backlash and hardship -- to help the good guys win, than to coerce and punish everyone else.

Any policy that is going to solve the carbon problem can't outright kill the carbon industry in a few years -- or create massive national hardship and economic chaos -- because the backlash will simply be too severe for the policy to be implemented or sustained.

Rather, we need to give the carbon industry a way to profitably transform itself: to move the carbon industry to ever cleaner methods, to replace the dirty old technology and ultimately to diversify from carbon to carbon-free energy. Simultaneously, we need to give completely clean, green, carbon-free technologies the greatest possible advantage with complete tax freedom, so that these become the dominant energy sources.

If we do that, rather than triggering a depression, we can insure a new age of prosperity, with minimal backlash. It seems just insane to see Mr. Gore, who is so rational and has done so much for the green energy revolution, make proposals that will cause massive suffering and blowback -- and so ultimately fail -- when far more effective, sustainable, prosperity-inducing alternatives exist.

Mr. Gore's current thinking seems, apparently, a bit too stuck in the old school, comic book bash-the-bad-guys brand of politics. Which is a shame... one hopes that a "New Democrat" would be a bit more open to unleashing a creative explosion of green entrepreneurship by tax cutting (versus tax hiking) solutions. Maybe he just hasn't considered all the possibilities. His heart is in the right place, bless him, and the problem he wants to solve is very, very real. He is really so close to the right answer, he's just focused on the wrong side of the equation. My hope and expectation is that he will soon rethink this and get it right.

R. R. Richardson

Houston, we have lift off!

Welcome to the launch of the Green Energy Tax Cuts blog! You are in at the birth of an idea that could change the world -- every bit as ambitious and doable as the Apollo Missions to land men on the moon -- but what we need, here and now, is a feasible plan to jump start the Green Energy Revolution in the US and around the world. The idea is simple but powerful: given the perfect storm of crises facing our nation at this time -- skyrocketing petroleum prices, global warming, insanely expensive oil-related wars and geopolitical quagmires -- ALL green energy technology should be tax free at all levels of government. That means free of all sales, income and capital gains taxes. That one policy would do more to encourage the extremely rapid development of green energy technology in this country and abroad, and break our nation's dependence on foreign oil, while lowering energy costs overall. It would spur the creation not only of hundreds of thousands of new jobs, but of whole new industries, and insure that the US becomes the world leader in these new technologies.

Think of it: no sales tax on green energy cars, powerboats, airplanes, appliances, machinery or heating and cooling systems. No income tax on revenue from those products, or on energy produced from green energy sources: wind, solar, hydro, geothermal, etc. No capital gains tax on the stock of green energy technology companies, and pro rata capital gains tax breaks for companies that are partly devoted to green energy. Such a simple straightforward policy will lead to massive new investment in these technologies, and massive consumer demand for them.

All we need to do is unleash the free market and level the playing field. Level the field? Currently the playing field is NOT level, because petroleum leads to many HUGE unintended costs (think pollution, global warming, Katrina, foreign wars, terrorism). These costs are mostly NOT borne by the oil industry, but by the American taxpayer. Green technologies do not carry these costs, and in fact will help America escape these costs. So Green Energy deserves to be tax free because it can save the taxpayer trillions in petroleum subsidies and cleanup costs. That tax break is the most painless cost our country can pay in order to escape our addiction to foreign oil, and all the massive extra costs that addiction brings.

This simple but radical idea is not yet on the radar of any presidential campaign that we know of, which all seem to be sadly ineffective when it comes to energy and environmental policies. We do not need government spending boondoggles disguised as "investment," as Mr. Obama now proposes. We don't need piecemeal tax incentives or inventor prizes for this or that technology, as Mr. McCain proposes. Government should not be in the business of promoting one green technology over another, but should make all of them tax free, and let the market choose the best. We need one simple clear policy that will massively bootstrap green energy, in all its forms: making ALL green energy technology tax free across the board is it.

This blog will consider the energy and environmental proposals of all major candidates and think tanks, applauding the worthy and hopefully improving the rest. We will offer online petitions and other tools for activist promoting green energy and green energy tax cuts. Readers will also find a section here devoted to cool green energy innovations, products and investments. You will see a lot of changes: this is just the first post.

And we want to hear from you: can you help? Are you the person that can introduce this idea to Barack Obama or John McCain? Do you know of any think tanks promoting a similar idea, or that should take up the cause of green energy tax cuts? Do you have any thoughts for the blog -- or technical abilities to contribute to online advocacy for our cause?

Hopefully, the Green Energy Tax Cut proposal will transcend left and right, and have an appeal across party lines. The idea combines the best of both the right and the left, to create what could be called Supply-Side Environmentalism. Supply-side economics holds that, if you want more of something (either prosperity or a clean environment) just tax it less. It will be a great accomplishment if we can motivate both the tax cutters of the right and the environmentalists of the left to drop the dogma and mutual suspicion to come together to solve the greatest challenge facing out nation today.

R. R. Richardson