Energy policy was a hot topic for prospective Republican nominees for President at last week’s Iowa Agriculture Summit (Ag Summit). Unfortunately, a number of the contenders are getting the issue wrong, voicing support for targeted tax credits for wind and the ethanol mandate because of industry pleas about “uncertainty,” a gambit the industry has used for decades. These subsidies haven’t established viable industries but rather have created dependence on taxpayers. The only way to institute political certainty and create flourishing energy markets that benefit consumers and businesses alike is to end federal policies that subsidize and mandate specific energy sources and technologies.
The two major energy handouts discussed at the Ag Summit were the renewable fuel standard (RFS) and the wind production tax credit (PTC). The RFS, also known as the ethanol mandate, guarantees biofuel producers a share of the market by forcing refiners to blend 36 billion gallons of ethanol by 2022. The wind PTC provides a generous subsidy of $23 per megawatt hour. Neither has worked, resulting in an economically uncompetitive industry dependent on the taxpayer.
Politicians and proponents of preferential treatment for energy technologies often conflate market uncertainty with political uncertainty. Uncertainty frequently presents itself in the marketplace—prices change, consumer behavior changes, new competition emerges. Disruption in the marketplace drives innovation, spawns new products and ideas, and generates benefits for all. Businesses are better able to adapt when they aren’t forced to worry about the federal government creating additional and unnecessary uncertainties through new policies or regulations.
Uncertainty in the marketplace is not bad; it allows unwanted products to fall by the wayside and diverts resources to the innovations and products consumers want. Political and regulatory uncertainty, however, does cause unwelcome and unnecessary challenges for businesses. Supporters of subsidies and carve-outs preserve those problems by convincing politicians to extend these bad policies or to enact regulation beneficial to their specific industry but harmful (or more harmful) to the rest.
If presidential candidates truly want to create an environment where businesses can flourish, they should permanently eliminate political and regulatory uncertainty by eliminating the policies that create that uncertainty in the first place. Instead, they should focus on removing all preferential treatment. That means permanently eliminating the wind PTC and the RFS and any other special treatment for energy technologies.
Picking winners and losers in the energy sector (or any sector for that matter) encourages dependence on these bad policies, but “we’re dependent on the taxpayer” isn’t as easy to sell to Congress and the public as “we need certainty and predictability.” Handouts that were supposed to help companies get off the ground continue decades later. When they are set to expire or run out of money, their lobbyists are back at the table asking for more.
The debate over the wind PTC is a prime example of political uncertainty caused by bad policies. Politicians and proponents of the subsidy have been talking about a phase-out for decades. In 2015, politicians are making the same arguments. Lobbyists, politicians, and other beneficiaries of the wind credit lament that the debates over the extension create uncertainty for businesses and point to the big drops in production when the credit expired in the past.
The PTC expired in 2000, 2002, and 2004, and annual wind installation decreased by 93 percent, 73 percent, and 77 percent, respectively. Wind energy advocates call this a boom-and-bust cycle created by unstable policy. The policy does in fact create this boom-and-bust cycle because these taxpayer-funded subsidies prop up an uncompetitive technology and direct more resources to wind production than would occur without the handouts. The way to end that cycle is to end the subsidy permanently.
If the begging had stopped the first time officials pleaded they needed only a few more years to be cost-competitive, this conversation would have been over two decades ago. In fact, the special treatment from the government reduces incentive for that technology to become cost-competitive because the focus is more on securing the next wave of handouts. Removing the political uncertainty by eliminating all preferential treatment for energy companies (handouts, tax credits, mandates, loan guarantees) will promote a clearer picture of the market that gives Americans more choices at lower costs.