Navigant Research Blog

Feed-In Tariffs Can Offset Carbon Offsets

John Gartner — May 15, 2009

Feed-in tariffs have landed in America, and before long it will likely be a full-on invasion.

Feed-in tariffs require utilities to pay a premium to customers who produce renewable power, most often through wind or solar. Enacting feed-in tariffs has been a huge success in Germany and Spain, propelling those countries into a leadership position with regard to solar installations.

Signals are indicating that a national feed-in tariff is going to happen; it’s just a question of when. Our neighbors to the north in Ontario are fine-tuning a feed-in tariff proposal. Gainesville, Florida is the first U.S. city to enact a tariff, and the Maine legislature has drafted a feed-in tariff proposal. Feed-in tariffs are also at the nexus of twin Obama administration goals: attacking climate change while supporting green jobs.

To meet renewable energy targets, feed-in tariffs can be more effective than other forms of incentives because they are production-based. Government incentives (tax credits) for purchasing equipment are normally paid upfront and do not require continued production, whereas feed-in tariffs are less risky because they only kick in after the equipment is in use.

Feed-in tariffs can also help utilities, companies and consumers to avoid future costs. The assignment of costs to carbon emissions is imminent — both directly and indirectly. When you are taking advantage of a feed-in tariff, you are producing energy that is nearly carbon-free.

One of the criticisms of feed-in tariffs is that utilities will distribute the cost of the incentives to all customers. True, but when utilities pay extra for power sans emissions, they may in the future be avoiding the need to purchase carbon credits or paying carbon taxes on other forms of power generation. Given the choice, most customers would prefer to pay a few cents more for solar power than for a carbon tax. Increased renewable power production also mitigates the vulnerability of swings in coal, natural gas and petroleum prices.

Finally, offering feed-in tariffs can also satisfy state renewable. Feed-in tariffs help to reduce the long term cost of renewable power by temporarily creating demand above normal market conditions. Accelerating the ramp-up to volume production will drive the cost of energy down while also creating local jobs.

Feed-in tariffs that are phased out over time may not be the ideal for free market lovers, but considering the current climate towards making fossil fuels more costly, they may be preferable to tax credits or carbon taxes.

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