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Transforming Production Tax Credits

Three reasons to make them a permanent part of U.S. energy policy.

Fortnightly Magazine - July 2006

For the past decade, the renewable energy industry and various branches of the federal government have engaged in an ungainly, enormously unproductive two-step on production tax credits (PTC) for renewable energy projects, and for wind projects in particular. The back-and-forth choreography is sustained by two unchallenged misperceptions about the PTC: That it has no fundamental justification, and that the value of the credit goes totally to developers.

The PTC can be transformed into a keystone of an effective energy environmental policy. However, to achieve this transformation, the misperceptions must be challenged.

Begin with the current PTC. In broad terms, it offers an inflation-adjusted credit against taxes on certain types of income for every kilowatt-hour generated for the initial years of the operating life of a qualified renewable technology. (The details of the PTC vary by technology, but the basic principles hold for all.) The PTC never was permanent. It initially was passed for a period of seven years, and since has been renewed for periods as short as one year.

As every expiration date draws near, critics mount a campaign against both the PTC and the eligible renewable technologies. The typical critique says there is no legitimate role for government intervention, making the tax credit an unjustified subsidy to developers that serve to prop up a resource the market otherwise would not permit to exist. The renewable energy industry, especially representatives of the wind industry, counters with its own campaign. Typically, the dance ends with a compromise: The credit is renewed, but only for a very short period of time.

The start-and-stop nature of this process has driven inefficiencies into the renewable industry and prevented the development of domestic component suppliers. Project developers cannot build up a stable team of installers because installations have, for periods of a year or more, plummeted. In addition, a strong national development effort could trigger an increase in demand for the many component parts that go into renewable projects, providing at least a potential spur for domestic manufacturing.

This stop-and-start nature of the demand generated by the PTC makes it very hard to justify the kind of investment in new production lines that capturing this potential would require.

Three Reasons Why

The PTC should be made a permanent part of U.S. energy policy for at least three reasons. First, and foremost, the PTC can provide a critical part of an energy environmental policy to remove carbon emissions from electricity generation and ultimately to stabilize the U.S. share of global emissions. Technologies that remove carbon emissions from the generation of electricity provide a public good that should be paid a public return. The PTC is one effective way to provide this return to developers. This very simple recognition transforms the PTC into a keystone component of an effective climate stabilization policy.

Second, if you look at who receives the benefits, or where the incidence of the tax

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