Wednesday, July 30, 2008

A Holisitic View

In the world of Washington politics, one man's incentive may be another man's subsidy or boondoggle. A Wednesday afternoon posting on the Wall Street Journal's Environmental Capital blog reported the Senate's rejection of an attempt to extend tax credits given to renewable energy projects. The posting describes the on-again/off-again life of renewable energy tax credits and the punishing effect their uncertainty has had on investment in wind energy projects. Each time the production tax credit has lapsed, investment in wind energy has fallen off sharply, roiling the wind industry:

The U.S. has never had long-term clean-energy subsidies in place; usually they are renewed for a year or two at a time. Lots of people in the industry blame that unpredictability for the stop-and –start pattern the clean energy industry’s developed over the last two decades. New projects generally come to a standstill the year after tax credits expire. The American Wind Energy Association, a trade group, lambasted the Senate and pointed to “116,000 jobs and nearly $19 billion in investment at risk.”
Whatever your political or economic beliefs, we think it important to look at government incentives holistically. Incentives stimulate the development of asset-intensive projects that induce economic activity for engineering, procurement and construction services early in life. Project expenditures for construction, operations and maintenance can add high paying jobs to neighboring communities and increase the amount of payroll and income taxes paid to local, state and federal government. Depending on state and local tax laws, plant operations may contribute substantial additional property, sales, inventory, or other types of tax payments to government coffers, to say nothing of the non-economic benefits resulting from creation of each new energy facility. (Studies of the economic benefits of various U.S. nuclear power plants are available on the NEI web site.)

To illustrate this point, GE Financial Services recently released a study of the net effect of the production tax credit given to wind energy projects. The study found that the net effect on the U.S. treasury from installation of 5.2 gigawatts of wind facilities supported by the production tax credit would be a return of $250 million - not a loss. The study is available at the GE Financial Services web site and worth perusing as Washington weighs policy options for stimulating the development of new energy sources.

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