2014 Is the Year to Reform Energy Subsidies

We need a technology-neutral approach to energy taxes.

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Having dealt away highly effective bipartisan budget caps before leaving town for the year, Congress is looking ahead to 2014 priorities, searching for reforms that might lift its approval rating from the gutter. Corporate tax reform – a priority for both parties and popular with the business community – may see new life, though Senate Finance Committee Chairman Max Baucus's expected appointment to an ambassadorial post leaves many speculating about who will pick up the mantle of leadership on the issue in his chamber.

Baucus has been introducing measures to address one of the most complex and politicized areas of U.S. tax structure: the complex web of subsidies and credits related to energy. Baucus is right when he says we need a more technology-neutral approach to energy taxes. When our tax code is used to pick winners and losers in energy markets, consumers shoulder the financial burden through higher electricity rates and lost economic activity. But recent research suggests that one of the largest energy subsidies impacting our economy and the cost of electricity may not be in our tax code at all, but right above our heads in the power grid that carries that electricity.

[See a collection of political cartoons on energy policy.]

A recent L.A. Times article on the state of our national power grid highlighted the rarely discussed challenges that renewable energy poses for our electricity infrastructure. "Green" energy is the most unpredictable form of power generation, the Times notes. After all, wind doesn't always blow and the sun doesn't always shine. And that's a challenge for power companies and an electrical network that depends on reliable energy supplies.

A Caltech report found that by 2030, about $1 trillion is expected to be spent nationwide in bringing the grid up to date, partially to cope with the demands of irregularly generated renewable energy.  These substantial costs aren't being paid for by the renewable energy suppliers, but by consumers. California is coping with the stress that the state's renewable standards are putting on the grid, due to a state program to mandate energy storage. Southern California Edison warns the program will cost "up to $3 billion with uncertain net benefits for customers."

California Edison's warnings about the costs for electric grid improvements are no surprise, given the long history of wasteful government mandates and subsidies for renewables. While renewable electricity makes up only a fraction of electricity generation, federal and state governments have spent significant resources directly and indirectly subsidizing it. Take the infamous Sec. 1705 loan-guarantee program by the Department of Energy, which supported fiascos like Solyndra. According to research by the Reason Foundation, approximately 94 percent of the funds from Sec. 1705 went to solar and wind projects, and the majority of investments went to just a handful of firms (many of which had poor credit status in the first place). By directing resources toward particular technologies, the funding distorted research and investment. 

[See a collection of political cartoons on the economy.]

Billions in failed loans and the potential for a trillion dollars in hidden subsidies to retrofit our grid to handle renewables is only half of the economic story. Even with government support, renewables aren't competitive in the absence of other heavy-handed government intervention to also eliminate competition from conventional fuels like coal. While state and federal governments pay for upgrades of the grid with one hand, they're denying and preventing private investments for coal power plants with the other through unobtainable regulations intended to make investment in coal power production effectively illegal.

When resources are directed politically and not rationally, consumers and our market-driven economy suffer. If Congress is serious about achieving a more technology-neutral energy policy, it must also revisit provisions outside the tax code that attack traditional fuels and end up providing billions in preferential treatment for renewables.

Pete Sepp is executive vice president for the National Taxpayers Union.

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