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RENEWABLE ENERGY INCENTIVES

Key Points

·        The proposals would extend and modify existing tax incentives for energy conservation and renewable energy and add some new ones.

·        Any investment subsidy provides some short-term stimulus, but “green” jobs do no more than other jobs to promote economic recovery and investments in new and alternative technologies may be slower in coming.

·        Tax incentives for renewable energy and conservation reduce fossil fuel use, potentially slow global warming, reduce dependence on oil imports, and could spur the development of new technologies that can sustain themselves in the future without credits. However, the proposed credits are not large enough to have much impact on global warming or oil imports and are less cost-effective than policies that directly raise prices of fossil fuels, such as a carbon tax or tradable permits that limit total carbon emissions.

·        JCT estimates that the tax incentives for conservation and renewable energy would cost $20.0 billion over 10 years. The extension of the production credit for electricity produced from renewable resources accounts for almost two-thirds of the total cost.

Current Law

There are many tax incentives that promote energy conservation and renewable energy. Among these are business credits for electricity produced from renewable energy (wind power, geothermal etc.), investments in renewable energy property, and tax-exemption of bonds to finance certain renewable energy property. Individuals can receive credits for purchases of alternative fuel vehicles (electric cars, hybrid vehicles, plug-in hybrid electric vehicles, and fuel cell vehicles), and for a wide variety of energy-saving residential investments (such as solar and photovoltaic energy systems; high-efficiency water heaters, heating, and air conditioning systems; storm windows, storm doors, insulation, and other energy-saving property). The Energy Policy Act of 2005 added new and expanded tax subsidies for alternative energy production and conservation investments by businesses and households and for some traditional energy sources (“clean coal” and natural gas refining), at a revenue cost then estimated at $8 billion over 5 years and $14 billion over 10 years.

Many of these incentives are scheduled to expire after short periods. These sunset provisions limit revenue loss, but may also limit the credits’ effectiveness.

Stimulus Proposal

The proposal would extend and modify a number of existing tax incentives for renewable energy production and conservation and add some new ones. These include:

·        Extending a credit for electricity produced from renewable resources through 2012 for wind energy and through 2013 for other qualifying renewable energy sources (The credit is now due to expire at the end of 2010).

·        Allowing businesses to claim a 30 percent investment credit for property used to produce electricity from renewable sources (in addition to solar, which already receives the credit) in the year the property is installed through 2012 for wind energy property and through 2013 for other renewable energy property. Taxpayers could use this one-time credit if they find it more advantageous than the production credit (above) that is claimed over time as electricity is generated from the property.

·        Removing the current cap on the business investment tax credit for small wind property and eliminating the current law basis reduction for subsidized energy financing.

·        Removing dollar caps on the 30 percent residential credit for solar thermal, geothermal, and small wind property and the basis reduction for property that receives subsidized financing.

·        Increasing the credit for specified energy-efficient property to 30 percent for 2009 and 2010, up to a per-dwelling limit of $1500 per taxpayer , while capping the credit for certain specified investments.. 

·        Increasing through 2010 the tax credit to 50 percent up to a maximum of $50,000 ($200,000 for hydrogen) for business alternative refueling property (benefiting gas stations that install alternative fuels pumps that dispense E85 fuel, hydrogen, and natural gas) and raising the credit rate to 50 percent and the maximum credit to $2,000 for individual refueling property.

·        Increasing the credit for plug-in electric drive vehicles to $2,500 plus $417 for each additional kilowatt hour of battery capacity between 5 kilowatt hours and 16 kilowatt hours  and raising to 200,000 the vehicle limit for the credit, (once a firm has sold the limited amount of qualifying vehicles, the credit phases out over the next year), allowing the credit against the alternative minimum tax, providing a tax credit for plug-in electric drive conversion kits, and expanding credit eligibility to some plug-in vehicles that would not otherwise qualify.

·        Authorizing the issuance of additional tax-exempt bonds to fund qualified energy conservation and renewable energy projects.

·        Modifying the current law carbon sequestration credit to require that carbon dioxide used as a tertiary injectant be sequestered in permanent geologic storage.

·        Raising the tax-free benefit employers can provide for transit to the amount allowable for parking and clarifying that certain transit benefits apply to federal employees.

Discussion

While any investment or production tax credit can boost the economy by lowering costs of capital or production, credits limited to new energy technologies may generate less short-run stimulus than other incentives. It may take more time for these projects to gear up and for new investors to perceive that the credit would make an otherwise unprofitable technology profitable.  Many of the incentives are temporary, which may spur an acceleration of investment, but also could deter new activities that require multi-year subsidies. Because some of the proposals prevent existing subsidies from expiring, they could maintain some credit-dependent activities that would otherwise cease. However, they would also support investments that would be profitable without the credits.

The incentives may promote more energy conservation and renewable energy and thereby help retard global warming and reduce U.S. dependence on oil imported from insecure foreign sources. Prices of carbon-based fuels do not reflect either the long-term economic costs of global warming or the adverse effect on national security of increased dependence on imported oil. However, these selective tax incentives may encourage the use of less efficient production technologies that do not reduce fossil fuel consumption much.

The most direct way to reduce over-consumption of carbon-based fuels (such as coal, oil, and gasoline) is to increase their price. This can be done either by new excise taxes or by “cap-and-trade” systems that, for example, allocate permits that limit total allowable carbon emissions, but allow them to be traded, thereby creating a cost to producers for carbon emissions and raising the price of carbon-based fuels. Higher fossil fuel prices reduce consumption in the short run by encouraging people to drive less or turn down their thermostats. They encourage investments in energy-efficient capital and alternative energy sources in the medium run and, most importantly, spur development of new technologies to replace fossil fuels in the long-run.

Instead of using taxes or emissions caps with tradable permits to raise energy prices, Congress has sought to reduce fossil fuel use by subsidizing alternative technologies and conservation. In general, these subsidies are less cost-effective than price increases. They can encourage businesses and households to invest in specified energy-saving technologies, but they do not reduce overall consumption of energy-intensive goods and services or encourage energy savings, except through those technologies Congress has specifically chosen to subsidize. Moreover, some tax incentives have been found to have adverse effects. For example, heavily subsidized alcohol fuels such as ethanol have driven up food prices, contributing to global hunger. Such subsidies are very hard to remove once they have outlived their usefulness, since they develop powerful constituencies.

Some of the provisions create fewer distortions than others. In general, it is preferable to provide incentives for production rather than investment because production subsidies influence what is produced (for example, renewable energy), but not how it is produced (with capital or labor). Investment credits are more cost-effective than tax-exempt financing, because the benefits of tax-exempt financing are shared between high-income savers who receive higher after-tax returns and businesses that see a lower cost of capital. In that regard, the production credit for renewable energy may be relatively more cost-effective than others because it subsidizes output of a broad range of technologies that displace fossil fuels in electricity generation, without biasing choice towards one energy solution or altering relative prices of capital and labor in production.

Grade: C

Would spur some new investment that would help economic recovery, but some projects may take time to gear up. Although not included in the grade, the proposal gets extra credit to the extent that it would encourage investments that would reduce carbon emissions over the long term. However, there are far more effective means to achieve that end.

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