The Wind Production Tax Credit and the Case for Ending All Energy Subsidies

Article excerpt

In a New York Times article entitled "A New Era for Windmill Power," journalist Matthew Wald writes,

   A new generation of windmills that Don Quixote could never tilt at
   is ready to take its place as an economical and important source of
   the nation's energy.

      Because of striking improvements in technology, the commercial use
   of these windmills, or wind turbines as the builders call them, has
   shown that in addition to being pollution free, they can now
   compete with fossil fuels in the cost of producing electricity. (1)

Although Wald's article reads like it could be found in this morning's New York Times, it was actually written in 1992--the same year Congress passed and President George Bush Sr. signed into law the Energy Policy Act of 1992, which provided a renewable-energy-production tax credit, which has largely benefited wind companies and is now more commonly known as the wind production tax credit (wind PTC). (2) The wind PTC was set to expire on December 31, 2012, (3) but was extended as part of the negotiations to avoid a combination of tax increases and government spending cuts. (4)

The discussion over the wind PTC extension serves as a useful microcosm of the debate over energy subsidies in general. Proponents of the wind PTC and other energy subsidies argue that government support is essential to spur innovation, compensate for decades of conventional-fuel subsidies, compete with other nations, prepare for replacement of fossil fuel resources we are rapidly exhausting, and reduce global warming. (5) Advocates argue that if the subsidy is not extended, the industry will atrophy and jobs would be lost. (6)

Opponents respond that extending the wind PTC will not save the planet, replace conventional fuels, or lead America to energy independence. Instead, opponents argue that an extension of the wind PTC will perpetuate subsidization in the American energy sector and encourage technological stagnation by shifting resources away from productive use. (7) This Article argues that Congress and the administration should work to remove all subsidies for all energy sources to transform our energy economy into a competitive, market-oriented system.

I. WHAT ARE SUBSIDIES?

The general economic rule of thumb is that if you want less of something, tax it, and if you want more of something, subsidize it. Subsidies come in many shapes and sizes and are thus often difficult to define comprehensively. Direct spending, targeted tax credits, loan guarantees, production mandates, and policies that artificially lower the risk of an activity are all part of the energy-subsidy world. However, this is certainly not an all-encompassing list. The definition of a subsidy as a direct transfer of money to a group or industry is underinclusive.

While this Article will mostly examine one type of subsidy--the wind PTC--it will use the following broader definition of subsidy: Using the political process to support the production or consumption of one good over another.

II. WHY SUBSIDIES ARE BAD ECONOMIC POLICY

Subsidies are bad economic policy because they misallocate resources and reward political connectedness as opposed to sound economic ideas. In general, there are two types of companies that receive subsidies. First, there are companies that receive subsidies because their technologies need help from the government and cannot compete economically "without taxpayer support. Second, there are companies that would, and often do, receive investment from the private sector because their technology is profitable or because investors find their technology promising. In this second case, the subsidy partially offsets private-sector investments that would have been made without the subsidy, and taxpayer dollars pad the company's bottom line.

Government support that targets one industry or technology over another encourages technological stagnation. …