Cross-posted at
My Left Wing
This is a diary about energy policy. Specifically, it's about energy supply policy. I'm going to try to ease off on the wonkery - I tried it once before, and discovered that Jerome a Paris and the whole Energize America crew do it better than I do. I'm going to leave out most of my facts and numbers this time - if anybody's wondering I'll respond in comments, and hey, maybe if there's a big response to this I'll follow up with another one. But this time, I'm going to suggest a different conceptual framework to look at energy policy, and show what sort of legislation might flow out of it.
I'm not breaking any new ground on where I place the finish line. We need a massive shift toward renewables. I'll give a brief overview of why on the flip, but the environmental and economic necessity of such a shift is pretty well accepted at this point. Where I see the problem is in our approach. Those seeking to shift our mix of energy sources have traditionally relied on one or another tax/subsidy scheme. "What we need to do," such a plan will usually go, "is give wind producers a tax break and tax gthe internal combustion engine." In an ideal world, such a policy would have exactly the intended results. In the world we live in, however, I submit that such plans are barking up the wrong tree entirely.
What's wrong with tax/subsidy schemes?
Two things especially:
1) They're rigid and complex. Complexity breeds inefficiency, invites corruption, and can't help but be riddled with loopholes. Additionally, all it takes is for the drafters of the legislation to miss one rising trend or bet on the wrong technology, and the entire scheme ends up promoting the adoption of entirely illogical infrastructure.
2) They fight the people they should be working with. Capitalism is a tremendously powerful engine. Free markets act more quickly, efficiently, and inventively than any government could hope to. You don't have to be a right-wing market cultist to accept that. Liberal economic policies all too often paint the free market, and big business especially, as the implacable enemies of the common good. This view is both untrue and unhelpful. Business can be an invaluable friend or an intractable enemy, depending on which is more lucrative at the time. If we really want to make progress, we need to figure out how to make progress profitable.
A better approach, then, would be to develop simple measures to bring the interests of the nation and its industries in line. At that point, we would no longer need to tell industry which sorts of energy to invest in, because investing in those technologies would be a no-brainer from a business perspective.
Yeah, and your point is?
There's one key fact we have to work with that helps direct our course - traditional fossil energy sources are fuel-cost heavy. It doesn't cost that much to build them in the first place (in a relative sense), but it costs a great deal to keep them running. Renewables, on the other hand, tend to be investment-cost heavy. A wind turbine costs a great deal to put up, but next-to-nothing to keep running. To oversimplify, if the cost of building a coal plant plus the expected cost of fuelling it is less than the cost of building an equivalent capacity of wind turbines, you'll build a coal plant. If it's vice versa, you'll build the turbines.
There's an additional consideration that enters into the decision making process, though, and that's time. In 10 years, it's likely that most of the executives, employees, and investors in a particular company will no longer be there. That means they want their profits now. That means that even if the price of coal is expected to rise, thus making the wind turbines more cost-effective over the long run, a business decision-maker might be tempted to go with the coal anyway, because it's cheaper in the short run. Conversely, the main government incentive for wind capacity installation, the Production Tax Credit (PTC), works over the long term, paying wind producers a fixed amount per kilowatt generated. Thus, the incentives to build fossil are immediate, and the incentives to build renewable are long-term.
Anybody wondering which is more compelling?
With this in mind, I see one policy which just might solve our problem. But you're not gonna like it.
You still want to hear it?
OK, here it is:
Tax Cuts, tax cuts, tax cuts
What on Earth am I talking about? OK, start by dumping the entire current subsidy structure - the PTC, the refiner tax credit, the reserve depletion credit, the works. Then replace it by instantly depreciating all investments in the energy sector.
- Bonus Explainer -
For those of you with better things to do than study the tax code, here's how depreciation works. When a business makes an investment, they can "depreciate" it over the investment's expected life. For example, if you buy a piece of machinery for a million dollars with an expected life of 10 years, each year you can take a depreciation credit of $100,000, which counts against your business's profits. So, if you're paying taxes at a 30% rate, each year you save $30,000 on your tax bill. Instant depreciation means that instead of taking $30k a year for 10 years, you take an immediate $300k lump sum.
Why does this help? Because it shifts the incentive to make renewable investments forward. Remember how it used to be that you saved money on the coal plant now, and you got the wind subsidy later? With this policy in place, no matter what you do, you get your results now. And that means that the incentive to build the fossil-burning plant regardless of the long term cost advantage of renewables evaporates.
Of course there are problems with this approach. It's inefficient, for one thing. We're going to end up subsidizing new oil refineries along with the solar farms. But the fact is, we need new oil refineries. We need a lot of unpleasant things. And this policy accepts and runs with the fact even if we controlled the congress, we're not going to be able to get anything done without the cooperation of the industrial drivers of the American economy. In addition to being inefficient, it's insufficient. It doesn't address the demand side at all, and it's probably too blunt an instrument to deal with all eventualities. That's why I don't propose enacting it on its own. Tax policy can never completely replace regulation, and we shouldn't try. It sure is nice when it can make command-and-control unnecessary, though,
The point is, right now, the GOP paints us as the party that opposes business, while they support it. A lot of the time, we walk right into it. That's just dumb. Instead, let's try it this way - instead of putting the country to work for business like they do, let's put business to work for the country. Seems like it's worth a shot.