Navigant Research Blog

The Economic Argument For Production Tax Credits

— December 31, 2012

With the U.S. Congress struggling to reach a deal on the so-called fiscal cliff, the Production Tax Credit, or PTC, has become an object of intense scrutiny.  Enacted in 1992, the program functions by awarding a corporate tax credit for each kilowatt-hour (kWh) of electricity produced by specific technologies.

The PTC for wind expires at the end of 2012, unless Congress votes to retain it.  Critics of the subsidy have suggested that retaining the PTC distorts markets in favor of a technology that would not otherwise be competitive to cheaper energy sources like coal and natural gas.  Technically, these critics are correct about the function of a subsidy (which the PTC is).  But they’re missing the point.

Ignoring the subsidies that coal, oil, and natural gas also receive, the PTC’s function is not only to help out nascent technologies, but also to help compensate new technology for its environmental benefits.  Wind energy, like most of the other technologies to which the PTC applies*, produces no carbon dioxide.   The credits help put a price on the damages from carbon emissions, by subsidizing non-polluting technologies.  In fact, the PTC is set at a level that falls within the range of estimates per ton of carbon.  In a 2005 paper in the journal Energy Policy, Richard Tol, a scientist at the Institute for Environmental Studies in Amsterdam, examined numerous estimates of the dollar damage of carbon emissions and found that the median cost was about $14 per ton of carbon; this falls within the $11-$22 dollar per megawatt-hour price of the subsidy provided by the PTC.  Well-designed subsidies and taxes, their analogue, can be economically efficient, if politically unpopular, since they maximize the value of carbon reductions.  In that sense, the PTC acts less as a political instrument, and more of an economic one.

From a jobs standpoint, the PTC has had significant positive impacts on the economy.   Expiration of the PTC for wind energy would reduce the sector’s 75,000 jobs by nearly half.   Obviously this is not the invisible hand of the free market, but government intervention on behalf of job creation is hardly a novel concept.  The oil and gas industry received approximately $7.1 billion during the 2002-2008 time period – subsidies that no doubt helped create jobs in that sector.

Finally, expiration of the wind PTC would increase the cost of installed wind capacity, and reduce the amount of total installed wind power.  Previous PTC expirations in 2000, 2002, and 2004 led to decreases in wind installations ranging from 73% to 93%.  A similar situation now would put the federal goal of 20% wind power by 2030, set by former President George Bush and endorsed by President Obama, out of reach.

*Biomass, waste-to-energy, and anaerobic digestion do emit carbon dioxide in the final stages of electricity production.  However, there has been much debate about this, and the whole production process may indeed be carbon-neutral or carbon-negative.

 

In Disasters, Cleantech Opportunities

— December 26, 2012

In recent weeks, to the surprise of many, carbon tax legislation has re-entered the debate at the federal level.  Given the revenue raising opportunity the tax would provide, and with cuts to the sacred cows of Medicare and Social Security off the table for both parties for now, many wonder if the carbon tax could win new support as part of, or a consequence of, the fiscal cliff negotiations.

This would be a remarkable turnaround, considering that a cleantech championing Democrat-controlled Senate and House in 2009 could not even pass the American Clean Energy & Security Act that called for a 20% national renewable energy target.   Indeed, there has been little enthusiasm on Capitol Hill to renew the federal wind power production tax credit (PTC), which has been successful in terms of deploying wind power and creating jobs, in blue and red states alike.  The effect of the PTC expiration will be to stop wind power development in its tracks.

The renewed talk of a carbon tax stems from one little-noted fact: cleantech has always fared well in the wake of national disasters.  The combination of Hurricane Sandy and the fiscal cliff could form just the tonic that cleantech supporters need to achieve meaningful legislation to support clean energy deployment in the United States.

Consider the following political gains made by the cleantech industry in the past 12 years:

During the George W. Bush administration, despite federal inaction, several states emerged as leaders for deploying clean energy.  Between 2001 and 2008, 24 states established renewable energy targets or standards, enacting a wave of incentive schemes to fill the void at the federal level.  Thirty states plus Washington, D.C.  have enacted such targets and standards today (although many are currently under attack and may not survive).

Bush’s Boldness

A little more than a year after Hurricane Katrina, with oil prices around $70 per barrel, the prospects for advancing clean energy industries in the United States seemed dim.   In his 2007 State of the Union speech, though, George W.  Bush made the bold statement that our country is addicted to oil, shocking many of his fossil fuel industry supporters with increased investment in clean technology research and the introduction of the U.S. renewable fuel standard, which led to significant public and private investment in biofuels, in particular.  The prospects for achieving the targets for advanced renewable fuels (cellulosic biofuels) are low, but Bush’s move helped move the industry into a new phase.

In 2009, with the U.S. economy contracting, the newly elected Obama Administration unleashed $770 billion in cleantech stimulus funding that has been the single most effective investment for the U.S. cleantech market ever.

These examples underscore the herky-jerky nature of cleantech support and deployment in the United States, which has hamstrung the competitiveness of investors, companies, and the nation.  I personally think that the 2-15 Washington Wizards (a disaster of an NBA franchise) located only a few miles away, have a better chance of winning the NBA title than the carbon tax has of being passed on Capitol Hill.  Nevertheless, the prospects for positive action on federal support for clean energy are better than they’ve been in years, thanks partly to disasters both natural and manmade.

 

In Obama’s Second Term, Hopes For a Meaningful Climate Change Policy

— November 19, 2012

In the wake of super-storm Sandy and President Obama’s re-election, the subject of climate change and even the term “global warming” are back on the table, if not fully on the political agenda.  Speculation as to whether the United States will finally adopt a national climate policy abounds in the media.  During his acceptance speech, Obama proclaimed: “We want our children to live in an America that isn’t burdened by debt, that isn’t weakened by inequality, that isn’t threatened by the destructive power of a warming planet.”

The possibilities range from extracting natural gas through hydraulic fracturing or “fracking” without causing environmental harm, to cementing the EPA’s role in regulating carbon emissions from new power plants, to stricter federal oversight of deep-water oil exploration and production, to a final decision about the Keystone XL oil pipeline, and even to a carbon tax as part of tax code reform.  Given the mounting federal deficit, the possibility of a cap and trade policy is not to be easily dismissed: a new report from the Congressional Research Service (CRS) cites one study that claims that a modest carbon tax of $20 per metric ton would generate approximately $88 billion in 2012, rising by 64% to $144 billion by 2020.

Pressure Mounts

Yet the general consensus is that carbon tax won’t be enacted, though there will most likely be a significant debate about various alternatives.  At least, the subject is no longer taboo.  The day after the election, Senate Majority Leader Harry Reid (D-NV) expressed his expectation that Congress would make progress on climate change action.  “Climate change is an extremely important issue for me and I hope we can address it reasonably,” Reid continued “… as we’ve seen with these storms that are overwhelming our country and the world, we need to do something about it.”

Despite the renewed hopes that the United States will finally take meaningful climate change action, it will undoubtedly be an uphill battle for the White House.  Opposition to any form of climate change initiative that might affect U.S. businesses has not wavered in the GOP-controlled House, and a number of Democrats from oil-producing states have joined Republicans in opposing climate legislation.  Instead, it’s more likely that lawmakers will push for less controversial proposals, such as expanding green energy and energy-efficiency programs to help reduce carbon emissions.

Although the prospect for any major change on climate policy on Capitol Hill looks slim, it’s not hopeless.  With no re-election worries, Obama should be free to tackle environmental issues in his second term. Yet, when asked about climate change at a November 14 press conference, he endorsed taking action to mitigate carbon emissions, especially if it would create more jobs, but provided no details.  Moreover, international pressure is mounting, as the second Kyoto Protocol (Kyoto 2) is under consideration.  In this new round of the Kyoto Protocol, nations are asked to commit to a target of 5% reduction of carbon emissions between 2000 and 2020.  While Australia has joined the European Union and smaller economies by announcing its commitment to this goal, the United States, together with China – the two highest emitters of greenhouse gases – have merely signed a non-binding pledge and are working toward a new agreement that will not take effect until 2020.  One wonders how many natural disasters it will take before all nations face the facts and take action.

 

U.S. Bucks the Tide on Carbon Taxes

— October 31, 2012

Concerns about rising carbon emissions on a global basis have prompted many nations to implement taxes on their carbon-emitting industries.  According to a Climate Commission report, in 2013 33 nations and 18 sub-national jurisdictions will have adopted some form of national carbon tax that covers around 850 million people, about 30% of the global economy and 20% of global emissions.

Although the European Commission proposed a carbon tax in 2010 to charge companies between $5 and $39 per metric ton of CO2, that legislation has not yet been agreed upon by its 27 member states.  However, many European countries have enacted their own carbon tax, including Denmark, Finland, Ireland, the Netherlands, Norway, Slovenia, Sweden, Switzerland, and the United Kingdom.

Finland was one of the first countries to introduce a carbon tax, in 1990 (with a 2010 price on carbon of $26 per metric ton of CO2).  Sweden and Norway enacted carbon taxes a year later, followed by Denmark in 2002.  Today, Norway, the 8th-largest oil exporter in the world, has one of the most aggressive carbon taxes in the world.  The Norwegian government has recently proposed to double its carbon tax on offshore oil companies to more than $71 per ton of CO2 and to almost $9 per ton of CO2 on its fishing industry.  In the United Kingdom many large companies pay a price for the carbon they emit through the EU’s emissions trading scheme.  Examples of carbon tax adopting nations in Asia Pacific are Australia, India, South Korea, Japan and China, which has run pilot emissions trading schemes in a number of provinces and cities to eventually implement a carbon tax on high energy-consuming companies.

What about the United States?  The United States has resisted a nationwide carbon tax policy. Indeed, the current U.S. Congress has made every effort to prevent any action to curb carbon emissions by the Environmental Protection Agency (EPA).  Most recently, on September 21, the U.S. House of Representatives voted in favor of Stop the War on Coal Act (H.R. 3409) to prevent greenhouse gas (GHG) reduction measures, including a ban on any action by the EPA to address climate change.  Given this political climate, a nationwide carbon tax is not very likely in the foreseeable future.  However, California has taken matters in its own hands by enacting its own carbon trading scheme, including a carbon tax, as part of its Global Warming Solutions Act, enacted in 2006.  To meet the state’s carbon emissions reduction goal of matching 1990 levels by 2020, California developed a cap-and-trade program that included a carbon tax on 300 companies, including several utilities, deemed to be the most serious polluters.  Today, California’s cap-and-trade program is linked to Québec’s cap-and-trad scheme, with the first auction scheduled for November 14, 2012.

To be sure, carbon taxes are not without serious challenges and criticisms.  Critics object that such taxes will inevitably be passed onto consumers, could result in industry and electricity production moving to other countries, and won’t significantly reduce carbon emissions.  Yet, countries around the world, convinced that emission trading schemes coupled with carbon taxes are the most cost-effective and efficient ways of reducing emissions, are taking steps to tackle climate change by pricing carbon.  At the same time, policymakers in these countries realize that taxes alone are not enough: broader environmental policies on a national level need to be in place to reduce carbon emissions.

 

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