The fiscal cliff deal is not only preventing certain politically motivated energy tax policies from falling off the cliff, but it’s also resurrecting ones that have been dead and buried for a year.
Lumped into the 157-page fiscal cliff bill are extensions of energy handouts that were originally scheduled to retire, as well as retroactively rewarded tax breaks for renewable energy that expired at the end of 2011. The inclusion of these targeted tax breaks is a clear indication that Congress is not serious about (1) reducing spending, (2) ending the government’s meddling in the energy sector, or (3) standing up against political interests.
The extension and resurrection of the targeted tax credits will reduce revenue by $18 billion over 10 years. Production tax credits for wind (totaling $12 billion) were renewed for another year and made even more generous. Thanks to the new bill, wind and other renewable energy projects can receive the tax credit simply by starting construction by 2013, rather than once they begin generating electricity, as the law originally specified.
Further, the fiscal cliff deal retroactively rewards a production tax credit for biofuel and biodiesel production, which expired in 2011, and extends it through 2013. Tax credit extensions also go out to electric motorcycles, alternative fueling stations, coal facilities on Indian lands, cellulosic ethanol, and energy efficient windows, appliances, and new homes.
Reactions from supporters of the extensions demonstrate why these economically unjustified provisions should not be handed out in the first place. A CEO of one wind farm developer, who is hoping to build three new wind farms, said, “Obviously, the extension makes it all finance-able. It will get us through another year.”
If the wind farms were truly economically competitive, they should be financeable without the generous support of taxpayers. Instead, the quote speaks to the level of dependence on the subsidy that some in the industry have reached. Rather than innovating to lower the cost of their power, companies spend more financial and human resources lobbying to receive these extensions.
As the extension gets the industry through “another year” (even though once a company receives the subsidy, they receive it for 10 years), they’ll be right back at the bargaining table when the credit expires, adamantly pushing for another extension.
Regardless of whether subsidies go to wind, nuclear, or coal, subsidies distort prices by disguising the costs of certain energy choices while exacerbating the costs of others. This extra leg up for some hamstrings real competition. Removing all of the preferences for all energy sources empowers producers and consumers—the best arbiters of market successes and failures.
Congress choked under pressure, took a bad idea, and ran with it. Far from addressing the real problem of spending, Congress prolonged some of the worst energy policy. Congress played when it should have passed on extending expiring energy subsidies and broadly lowered tax rates–and passed when it should have played on making real fiscal change.