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.

 

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