July 1, 2009

Wind Power: Good Enough Not to Need Subsidies

This commentary appeared in the July 2009 issue of Illinois Business Journal.

In March, I had the good fortune to see 20 impressive windmills just off the Danish coast. Looking out over the water at such a sight, it is easy to understand the attractiveness of wind power. It’s renewable, no-carbon, and no-pollution, and is probably the best use of a wind-swept expanse of water that is still close to a large city. Also, Reason magazine recently compared the costs of different energy sources and found that the cost of windpower (9.3 cents per kilowatt-hour) is not too far off from the national average of (9.6 cents).

So why subsidize it?

Economists use the term “rent-seeking” whenever makers and sellers of a product ask politicians to pass laws that give them an advantage over their competition. Most of us call it corporate welfare. It is damaging to the overall economy because it changes incentives. Instead of creating the best products for the lowest cost, companies curry favor to get the best deal from federal, state and local officials.

It is hard to deny that wind power advocates have been very successful at that. Much of the reason our federal and state tax systems are so complex and unclear is because they are littered with all sorts of special exemptions, deductions, exclusions, and credits for particular activities. Rather than just using the tax system to raise the revenue needed to fund the programs society wants, politicians have adopted the “Michigan model” and turning the tax code into a tool to manipulate the economy and pick winners and losers.

There are few sectors of our economy with more profit potential than energy innovation. No one today can know what great energy innovations will be made over the next few decades, and no one today can know what investments will be duds and which ones will pay off tremendously. The ones who get it right will probably see an enormous payoff. Energy innovators should take the risks of their investments just as they take the profits, without relying on corporate welfare.

Nevertheless, Illinois residents may decide that funding wind power development is an important goal deserving of taxpayer dollars. If that is the case, it should be done after open debate, and through the normal budget appropriation process. Unfortunately, that is not what has happened. Tax credits like the 8-year wind tax credit are rarely scrutinized as closely as direct appropriations, and proponents know it. Once in the state’s tax code, they can line their pockets with little threat of repeal. And the state’s decision to grant sales tax exemptions to any industry that state officials deem to be “high-impact” is almost an open an invitation to make large political donations.

Wind power does have some limitations. There are not many windswept sites near large cities that can accommodate the land footprint that windfarms need, so remote sites are usually chosen, necessitating transmission lines and their expenses and inefficiencies. Wind is intermittent. There are also environmental impacts associated with turbine blades killing birds.

The risk of granting subsidies is that they will waste taxpayer dollars by encouraging development of wind energy in unsuitable and otherwise unprofitable sites. Wind power has proven that it can be an environmentally friendly and successful part of a local power grid. But it is unlikely that wind will be replacing oil and coal anytime soon, and trying to do so could turn into an expensive mistake. Every dollar that federal and state incentives push into wind power development means one less dollar that could have been used for a more successful alternative energy solution, or for some other important government priority.

For its own reasons, the wind industry has taken any number of government handouts, including tax credits, funds filtered through other government agencies, and state mandates designed to tilt the market in their favor. That’s a shame, because there’s ample evidence that wind is doing okay without corporate welfare being needed. If the wind industry’s growth is dependent on continued subsidies, that’s another way of saying that further investment is uneconomical.

Taxpayers have two choices for Illinois. They can trust the suits in Washington and Springfield to pick the next winning energy technology, and risk the future of the Illinois economy on that bet (just as Michigan bet on the auto industry). Or, they can stand down their government and all of its “incentives,” and let inventors, retailers, and consumers decide what works and what doesn’t.

Investment should flow to the projects that makes the most sense to consumers and investors, not to the projects with the best lobbyists. Illinois residents will be better off if they empower scientists and consumers instead of politicians, and keep the hot air out of wind.

Joseph Henchman is tax counsel and director of state projects at the Tax Foundation, a nonprofit tax research group in Washington, DC. Go to www.TaxFoundation.org.