Winding Down the Wind Tax Credit

November 14, 2012

Among the many decisions regarding taxes and spending facing Congress during its lame duck session is the possible renewal of the wind energy production tax credit (PTC). Regular readers know we’re very critical of such tax credits for violating the neutrality principle: when the government gets to pick the winners and losers in a particular industry, it distorts the market and reduces the incentives for innovation. (When politicians play venture capitalist with tax dollars, they also sometimes pick the wrong players, as with Solyndra.)

The idea behind this tax credit is that it will help get a new and necessary industry on its feet. Once that happens, the industry can support itself and will stop needing the handouts. But wind energy is not a new concept: the first wind turbine built to generate electricity was in 1887. According to the US Energy Information Administration, renewable energy makes up 7% of current US energy usage and it’s only projected to increase to 11% in 2035. That’s total renewable energy, meaning wind usage is an even smaller fraction and is not expected to significantly increase in the next twenty years. If those are the stats, it suggests that subsidies will not make wind energy a widely used alternative to fossil fuels.

Even if it could be a viable alternative, the tax credit itself is not structured to incentivize that. Right now, the federal government subsidizes wind energy production at 2.2 cents per kilowatt-hour. Daniel Simmons from the Institute for Energy Research pointed out because production isn’t tied to demand, producers have no incentive to provide energy when it’s in demand because they get the credit based solely on how many kilowatts are produced. It reminds me of the story of the Soviet factory owners that produced so many tons of nails regardless of whether they met a need in the economy.

The Senate Joint Committee on Taxation estimates that, if the credit is renewed, it will cost about $12 billion over ten years. For windswept areas near major cities, wind energy is already viable without the tax credit. In other places, only a wasteful amount of subsidies can make that energy competitive with other sources. As we look for credits worth eliminating or reforming, this might be one candidate.

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