Pay-Go for Renewable Energy Credits

While Congress and the Presidential candidates are busily debating far-reaching energy proposals, the existing tax credits for wind and solar power and other renewable energy are still slated to expire at the end of the year. The uncertainty about their continuation is apparently beginning to slow down new installations and may be putting some of those vaunted "green collar" jobs at risk, at least temporarily. Although a broad consensus supports their renewal, the hang-up is over funding. I'd like to offer an alternative that at least makes policy sense, if not political sense. Its appeal will be limited by the reticence of both sides of this debate to be seen explicitly raising the price Americans pay for energy.

I've lost count of the number of times the Senate has missed extending the Renewable Electricity Production Tax Credit (PTC) and the Solar Investment Tax Credit (ITC) this year. Six? Seven? One of the latest such efforts was S.3335, the "Jobs, Energy, Families, and Disaster Relief Act of 2008". Voting against something with that title must have felt like voting against motherhood and apple pie, although the bill should more accurately have been designated the "Renewable Energy and Comprehensive Pork Act of 2008," including as it did such diverse provisions as a "Seven Year Cost Recovery Period for Motorsports Racing Track Facility," "Provisions Related to Film and Television Productions," and my favorite, the "Modification of Rate of Excise Tax on Certain Wooden Arrows Designed for Use by Children." I wish I were making this up. Having previously failed to satisfy the requirement for revenue neutrality, also known as "Pay-Go", by singling out the oil & gas industry for loss of a manufacturing tax credit--an idea resurrected in the proposed "Gang of 10 Compromise"--the revenue provisions of this bill focused on tax changes on deferred income and securities transactions.

All of this seems unnecessarily convoluted. If the Congress wishes to adhere to the principal of revenue neutrality with regard to incentives for renewable energy, the most sensible place to seek funding is one that also encourages energy demand reduction, to complement the PTC's and ITC's supply and efficiency contributions: a tax on the forms of energy these renewables are intended to displace. Contrary to a widely-held misunderstanding, oil accounts for less than 2% of the US electricity supply, so wind , solar, and other forms of renewable electricity displace virtually no petroleum. But even as Americans are driving less and consuming less gasoline, thanks to high fuel prices, electricity demand continues to grow steadily. From April 2007 through March 2008, US electricity demand was running 2% ahead of the previous 12 month period, on a par with its five-year average growth rate of 1.6%. Considering that last year 72% of our power was generated from the combustion of fossil fuels, taxing electricity consumption to pay for the extension of the PTC and ITC would reduce both demand and emissions, while hastening our widely-desired conversion to renewable energy sources.

I've seen a wide range of estimates of the cost of renewing the PTC and ITC. At last year's installation rate for wind power alone, extending the PTC indefinitely would add roughly $300 million each year to the federal deficit, compounded. That aggregates to about $17 billion in lost federal tax revenue over 10 years. A tax of 0.1 ¢/kWh on sales of fossil-fuel-generated electricity would raise more than $25 billion over that period, while increasing the average consumer's monthly bill by only about $1 per month. If we're looking for "Pay-Go" that aligns policy with purpose, that seems like a much better candidate than taxing other forms of energy production and potentially leaving us even less energy-secure than we were.