Chaos Predicted If Renewables Tax Breaks Die

on September 23, 2011 at 6:00 AM

With half a dozen renewable tax breaks slated to expire in three months, witnesses told a key House committee that simply letting them all die will cause “chaos” for the energy industry.

Virtually all today’s witnesses, speaking before a joint hearing of the House Ways & Means’ subcommittees on Select Revenue Measures and Oversight, favored phasing out current technology-specific tax credits, either as part of a full tax code overhaul or replacing them with technology-neutral incentive mechanisms.

Witnesses generally said technology-specific tax breaks, like ethanol or wind production tax credits, are relatively inefficient and could have the unintended consequence of hindering other innovation.

But simply letting the long-standing breaks expire, as many conservatives are contemplating, would scare off energy investors, they said. Rather, investors need certainty, including certainty about how tax breaks will phase out, they said.

A Speeding Vehicle

The energy industry is like a car traveling 65 miles per hour down a highway, said Neil Auerbach of Hudson Clean Energy Partners. He said it’s one thing to want a light touch on the steering wheel, but simply taking both hands off the wheel at full speed is “perilous.”

Expiring at the end of this year are tax breaks for biodiesel, ethanol, natural gas refueling equipment, renewables manufacturing, and the so-called 1603 provision allowing renewables developers to collect investment tax credits as cash up front, rather than a tax credit. The production tax credit for the wind power industry expires at the end of 2012.

Auerbach and Will Coleman of Mohr Davidow Ventures said government support remains essential to help renewables scale up, and cut their costs, so they can compete with conventional energies. Coleman said over the last century, oil had received five times the support renewables have and nuclear, 10 times. Witnesses agreed renewables costs are demonstrably coming down now, and all subsidies should have set phase-out mechanisms.

Tim Greeff of the Clean Economy Network said the current tax code is a “patchwork” of fixes for specific technologies, and creates a “boom-bust cycle” with periodic one- or two-year extensions that leave investors with continuing uncertainty. Greeff urged the lawmakers to articulate an energy policy vision and “technology-agnostic” tax mechanisms that let markets pick the most efficient innovations.

The Problem With Metrics

Kevin Book of ClearView Partners and Coleman both stressed the need for good metrics to assess the relative efficiency of technologies. That’s not always easy, Book warned, as cost-benefit calculations are highly dependent on underlying assumptions. For instance, he calculated the cost of one ethanol tax credit at $148 per barrel of oil displaced over the tax lifetime, but that changed to $10 a barrel when calculated over the 15-year financing life of an ethanol facility.

Book also cautioned that a national energy strategy should include a diversity of technologies, and some provision should be made for “moonshot” ideas – ones with lots of promise but needing development support.

Greeff stressed the importance of taking a comprehensive view, and looking beyond taxes for energy policy. For instance, utilities in many states now make money only selling electricity and have no incentive for efficiency, he noted. Other witnesses agreed reducing oil dependence had to be a goal for security and the economy.

Donald Marron, Director of the Urban Institute’s Tax Policy Center, said he realized taxes are not a word many in Congress want to hear, but said well-designed taxes, such as ones on oil or carbon, are a more market-oriented way of accomplishing goals, without the government picking technology winners.

Fossil Fueling Renewables

Auerbach supported the “reverse auction” concept, in a pending bill from Representative Devin Nunes (R-CA), which would expand oil and gas drilling and devote a portion of the increased royalties to renewables. Projects would bid for assistance in regular federal auctions, and the most efficient projects would win grants. Auerbach said that method would have the market set support payments.

Lawrence Lindsey, President/CEO of The Lindsey Group, said the best approach would be a wholesale rewrite of the tax code to get rid of specific subsidies and corporate income taxes, and replace the latter with cash-flow taxes. He said innovation should be left to the market except when national interests are at stake and a subsidy can meet a “rigorous” cost-benefit test.

Photo Caption: Representative Dave Camp (R-MI) (center) is chairman of the Committee on Ways and Means.