Thursday, November 13, 2008

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.

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