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.