This document originally appeared in the October 1, 2012 edition of Tax Notes.
Furchtgott-Roth argues that tax breaks for alternative energy do not make sense because wind and solar power raise the cost of electricity, disproportionately affecting low-income Americans and slowing economic growth.
The United States is spending a lot to go green. Federal support of green industries in fiscal 2012, including tax breaks for wind and solar energy, electric cars, and home energy efficiency improvements, totaled more than $12 billion. But what we're buying with those tax breaks is more expensive energy, which is slowing our economy and adversely affecting low-income individuals. GDP growth is low, unemployment is high, and both political parties are vying to see who can show the most concern about the poor. We should reexamine our green priorities.
Data from the Joint Committee on Taxation estimate $6.2 billion in losses from tax expenditures for green energy in fiscal 2012, including $1.3 billion for wind energy producers, $400 million for solar production, and $1.3 billion for increasing energy efficiency of existing homes.1 (See Table 1.) From 2011 to 2014, tax expenditures on energy subsidies will total $29 billion, according to JCT data.2
Energy Innovation Tracker, a nonprofit and nonpartisan research project, has reported that in addition to the tax expenditures, the federal government has spent $6.3 billion on green energy projects this year.3
An April study by the Brookings Institution indicates that federal support of clean technology will amount to more than $150 billion between 2009 and 2014. Brookings found that $16.1 billion has been spent in 2012: $4.8 billion in tax expenditures, $9.9 billion in direct expenditures, and $1.4 billion in loan programs.4
Past budgets have included funds for green jobs training. For instance, the American Recovery and Reinvestment Act gave the Labor Department $500 million for research grants and green-job training. The fiscal 2010 budget gave the department $8 million "to identify green economic activity and produce data on the associated jobs."5
Most people think green is good but pay little attention to the increase in the cost of energy from renewables. According to the Electric Power Research Institute, generating a megawatt hour of electricity made from wind and solar from natural gas in 2015 will cost between $49 and $79. A megawatt hour from onshore wind will cost between $75 and $138, and from solar photovoltaic will cost at least $242 and as much as $455.6
The Energy Information Administration has calculated average levelized costs for power plants brought online in 2017. For plants fueled by wind, the cost is $96 per megawatt hour, compared with $66 per megawatt hour for plants fueled by natural gas. Biomass costs $115 per megawatt hour, and photovoltaic solar costs $153 per megawatt hour.7
Some states are requiring consumers to purchase electricity made from wind and solar through renewable portfolio standards. It's been estimated that electricity in states with renewable portfolio standards costs 32 percent more than in other states.8 Those standards are tightening, making electricity more expensive. California, for instance, is requiring 33 percent of its electricity to be produced by renewables by 2020, even though its 2012-2013 budget deficit is $16 billion.
Table 1. Tax Expenditures for Alternative Energy, Fiscal 2012
Tax Expenditure Dollars
Credit for energy-efficient improvements to 1,300
Credits for holders of clean renewable energy
Credits for holder of qualified energy conservation 40
Credit for alcohol fuels 100
Energy credit (section 48)** 500
Credits for electricity production from renewable
resources (section 45)
Open-loop biomass 300
Biomass, geothermal, hydropower, solar, small 120
irrigation power, municipal solid waste*
Credits for clean coal facilities 200
Credits for the production of energy-efficient 100
Credits for alternative technology fuels* 40
Credit for clean-fuel vehicle refueling property* 60
Residential energy-efficient property credit 200
New energy-efficient home credit* 20
Credit for alternative vehicles other than plug-in* 40
Credit for plug-in electric vehicles 300
Credit for investment in advanced energy property 400
Exclusion of interest on state and local government 40
private activity bonds for energy production
Deduction for expenditures on energy-efficient 200
commercial building property
Expensing of exploration and development costs, 100
fuels other than oil and gas
Excess of percentage over cost depletion (fuels 160
other than oil and gas)*
Amortization of air pollution control facilities 200
Five-year MACRS for certain energy property 300
(solar, wind, etc.)
10-year MACRS for smart electric distribution 100
FOOTNOTES TO TABLE 1
* Derived from average yearly expenditure on line item from fiscal 2011
to fiscal 2014.
** Includes solar, geothermal, fuel cells, microturbines, combined heat
and power, small wind, and geothermal heat pump systems.
END OF FOOTNOTES TO TABLE 1
Source: JCT, "Estimates of Federal Tax Expenditures for Fiscal Years
2011-2015," JCS-1-12 (Jan. 2012), Doc 2012-894, 2012 TNT 11-21, and Manhattan
Those higher prices slow our economy. Compared with most major economies, the United States is relatively energy intensive, and an increase in energy prices raises the cost of doing business here more than elsewhere. As a result, the United States becomes a less attractive place to invest. To U.S. consumers, the effect on demand of a price increase in energy caused by use of expensive renewables is no different from a price increase caused by a tax. The rational energy policy for the United States and other energy-intensive economies is to pursue low energy prices.
Further, new 2011 data from the Labor Department's Consumer Expenditure Survey, published September 25, show that higher energy costs disproportionately affect those with lower incomes, because they spend a greater percentage of their income on electricity, natural gas, and gasoline. (See Table 2.)
On average, U.S. households spent 7 percent of their 2011 income on electricity, natural gas, and gasoline and motor oil. But households in the lowest income quintile spent 24 percent of their income on those items. Electricity bills alone took nearly 10 percent of household income for the lowest quintile.
That is very different from households in the middle quintile, which spent 10 percent of their income on the same items, and those in the top quintile, who spent 4 percent. The distance between the lowest and middle quintiles is substantial because low-income Americans are heavily dependent on energy purchases.
Table 2. Energy Costs as a Percentage of Income
by Income Quintile, 2011*
Lowest Second Third Fourth Highest
All 20 20 20 20 20
Households Percent Percent Percent Percent Percent
Income after $61,673 $10,074 $27,230 $45,563 $72,169 $153,326
Natural gas $420 $243 $338 $386 $472 $659
Percent of 0.7% 2.4% 1.2% 0.8% 0.7% 0.4%
Electricity $1,423 $985 $1,234 $1,429 $1,603 $1,863
Percent of 2.3% 9.8% 4.5% 3.1% 2.2% 1.2%
Gasoline and $2,655 $1,227 $1,981 $2,694 $3,295 $4,073
Percent of 4.3% 12.2% 7.3% 5.9% 4.6% 2.7%
Sum of natural $4,498 $2,455 $3,553 $4,509 $5,370 $6,595
Percent of 7.3% 24.4% 13% 9.9% 7.4% 4.3%
* Not all percentages sum because of rounding.
Source: Department of Labor, Bureau of Labor Statistics, "Consumer
Expenditure Survey" (Sept. 2012), and Manhattan Institute calculations.
When originally enacted in the mid-2000s, tax breaks for green energy9 were justified on two grounds: reducing U.S. dependence on Middle Eastern oil and lowering carbon emissions from oil and coal, which may damage the environment by causing global warming.
However, with the discovery of 200 years of inexpensive, domestic natural gas (with a price now around $2.50 per million Btus), the United States has a source of domestic energy that is far less expensive than wind or solar power. Natural gas can be used to generate electricity to power electric cars if Americans want to buy them. General Motors Co. and Ford Motor Co. are building dual-fuel pickup trucks that run on natural gas and gasoline, and more commercial vehicles use natural gas. It is possible to imagine passenger cars running on natural gas, as they do in other countries, once distribution networks are set up.
Further, Canada and the United States are increasingly able to access reserves of shale oil, which is already resulting in an unprecedented boom in oil production in North America.
At a September 13 hearing of the House Energy and Commerce Subcommittee on Energy and Power, John Freeman, managing director at Raymond James & Associates, testified that new drilling technologies have put the United States on track to become the world's largest oil producer before 2020. Freeman said:
America is blessed with an abundance of natural resources; we are the largest producer of natural gas in the world, the second largest producer of coal, and in the next several years we'll become the largest oil producer in the world. The future has never been brighter for achieving energy independence.
Another witness at the hearing, Daniel Ahn, chief commodities economist with Citigroup, testified:
The economic consequences of this energy revolution are momentous. The United States may see a minor Industrial Revolution, led by the energy and energy-intensive manufacturing sectors, but generating virtuous cycles of job-creating activity through the rest of the economy. The United States is in the midst of a historic energy revolution that could see its total supply rival that of Saudi Arabia or Russia in global oil and gas markets.
Even though the United States might be less reliant on Middle Eastern energy, many people are concerned about carbon's effect on global warming. However, with China, India, and other emerging economies unwilling to limit their emissions, U.S. efforts will have practically no effect on global warming. Rather, it appears that with its green energy preferences, the United States is damaging its economic growth with no particular benefit.
Some scientists, including Nobel Prize-winning atmospheric chemist Paul Crutzen, believe that altering some features of the Earth's environment, or geoengineering, would be a more cost-effective and efficient way to combat global warming.10 Geoengineering would be less disruptive to business activity, less threatening to employment, and most important, would reduce global warming even if large countries such as China and India did not agree to reduce their emissions.
Not so long ago, tax preferences for expensive green energy were justified on the grounds that they liberated us from dependence on the Middle East and reduced global temperatures. But now the United States can produce inexpensive natural gas. Reductions in U.S. emissions won't reduce global temperatures without similar action by emerging economies, which show no signs of cooperating. Further, higher costs for electricity produced by renewables disproportionately affect low-income earners. It's time to rethink the rationale for subsidizing renewable energy through the tax code and requiring consumers to use it.
1 JCT, "Estimates of Federal Tax Expenditures for Fiscal Years 2011-2015," JCS-1-12 (Jan. 2012), Doc 2012-894, 2012 TNT 11-21, and Manhattan Institute calculations.
3 See http://energyinnovation.us/.
4 Jesse Jenkins et al., "Beyond Boom and Bust: Putting Clean Tech on a Path to Subsidy Independence," Brookings Institution (Apr. 2012).
5 Department of Labor, "The 2010 President's Budget for the Bureau of Labor Statistics" (2010).
6 Electric Power Research Institute, "Program on Technology Innovation: Integrated Generation Technology Options" (June 2011).
7 Energy Information Administration, "Annual Energy Outlook 2012," DOE/EIA-0383 (June 2012).
8 Robert Bryce, "The High Cost of Renewable-Electricity Mandates," Manhattan Institute (Feb. 2012).
9 But what about tax preferences for oil and gas, some of which are shared by other industries? For instance, the domestic manufacturing deduction, estimated to cost $11.6 billion over 10 years, is shared by all domestic manufacturing. (See Office of Management and Budget, "Budget of the U.S. Government Fiscal Year 2013" (Feb. 2012), at 236, Doc 2012-2919, 2012 TNT 30-41.) Manufacturers can take a tax deduction for domestic production of 9 percent; oil companies can deduct at 6 percent.
President Obama has proposed eliminating the domestic manufacturing deduction for oil and gas companies so that they would be the only domestic manufacturers not to qualify. It makes no sense to punish one industry by removing a tax benefit that applies to many. If domestic manufacturing is not worth a deduction, it should be repealed for all industries, not just oil and gas. To be consistent, all tax preferences should be eliminated.
10 Paul Crutzen, "Albedo Enhancement by Stratospheric Sulfur Injections: A Contribution to Resolve a Policy Dilemma?" 77 Climatic Change 211 (Aug. 1, 2006).
END OF FOOTNOTES
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