Wind Energy Subsidies are as Useful as VHS Tape Subsidies

This is a post from The Foundry, a blog by the Heritage Foundation. See it here.

The wind production tax credit (PTC) is set to expire at the end of this year, which has the industry crying out for continued subsidies.

In an article titled, “We Need Wind Subsidies Like We Need VHS Subsidies,” Nicolas Loris of The Heritage Foundation makes the case that the wind energy tax credit makes as much sense as a VHS production tax credit.

Can you imagine the logic: “We can’t afford to lose our VHS tape manufacturing plants. They provide valuable jobs. Americans need a variety of ways to watch recorded entertainment.” Loris says this is what proponents of wind energy tax credits sound like.

Wasting taxpayer dollars on different but similar programs—claiming that these subsidies really are necessary to create jobs or prevent layoffs—simply creates a “subsidies for me but not for thee” mentality in Washington. Renewable energy production tax credits have received support from Democrats, Republicans, and industry groups, but that doesn’t make it good policy.

The credit is a huge handout to wind producers, allowing them to sell their electricity for less than market price. They would profit even if they offered it for free—because they would still pocket the subsidy.

The subsidy is already equivalent to 50 percent to 70 percent of the wholesale price of electricity. And that isn’t the only special-interest treatment wind producers receive.

“Though you would not know it from wailing and gnashing of teeth over the expiration of the production tax credit, many states also have renewable energy standards that force ratepayers to buy wind, solar and biomass produced electricity, regardless of how much it costs,” said David Kreutzer of The Heritage Foundation. “These renewable standards are separate from—and, for wind-power producers, in addition to—the PTC.”

A business that cannot survive without taxpayers paying 50 percent of the costs does not help the economy. Instead, it eats up more value than it produces.

Policies like the production tax credit concentrate benefits on a few recipients and spread the costs among the rest of us through higher taxes and energy costs. They hurt the economy by making production more expensive, which puts U.S.-based products at a competitive disadvantage. This means fewer jobs for American workers.

Those production expenses also make necessities more expensive for consumers, who are already hurting from the higher energy costs. Higher prices across the board hit lower-income Americans the hardest.

Congress should let the wind production tax credit expire as scheduled and offset the resulting tax hike with broad tax reductions elsewhere. This should be only the first step toward eliminating energy subsidies—and seeing which energy producers can provide the best service at the most affordable prices for Americans.

President Obama often refers to an “all of the above” energy strategy when he advocates for taxpayer funding of energy production like wind and solar. Loris puts it succinctly: “The only ‘all of the above’ strategy America should embrace is the answer to this question: Which of these energy sources should we not subsidize? A.) Fossil Fuels B.) Nuclear C.) Renewables D.) All of the Above.”

Here is the complete article, “We Need Wind Subsidies Like We Need VHS Subsidies,” by Nicolas Loris of The Heritage Foundation:

Remember VHS? Imagine this:

“VHS has been a staple of the American way of watching television and movies. VHS has supported countless manufacturing jobs, and even though there are better products out there, let’s face it: we need a variety of ways to watch our programs. The states and local economies that have VHS production facilities have experienced and benefited from VHS production, but without a little help from the taxpayers, jobs will be lost and the industry will atrophy. VHS production has bipartisan support, will be good for American manufacturing jobs, and will diversify our program-watching ability. America needs VHS, and VHS needs the taxpayers’ help.”

The above plea isn’t real, but this extremely flawed style of economic rationale is what’s driving the justification for wind energy production tax credits (PTC).

With enough taxpayer dollars, you can prop up just about any industry. But it doesn’t mean those jobs are adding value and growing the economy. Still, politicians use this nonsensical thinking to justify projects that benefit them at the expense of the rest of America. The latest is the push to extend wind energy’s subsidies through 2016.

Governors Sam Brownback of Kansas (R) and Terry Branstad of Iowa (R) sent a letter to the House and Senate committees negotiating the payroll tax extension asking to include an extension of the PTC for wind energy. Unsurprisingly, they use VHS-style thinking that wastes taxpayer dollars and destroys economic value.

According to their letter, “The wind energy sector is an American success story that is helping us build our manufacturing base, create jobs, lower energy costs and strengthen our energy security.”

One might wonder how the wind industry can be considered a success story if it needs taxpayer handouts to survive.

Nonetheless, the governors wrote that “As a country we should support energy diversity and the development of all domestic resources, creating an ‘all of the above’ energy strategy. In order to prevent the nation from being too heavily reliant on a single energy source, our state and national energy plans have long relied on varying policies and incentives, such as the PTC, to deploy technologies that ensure a diverse, domestic energy fleet.”

There are major flaws here. First, an “all of the above” energy strategy does not justify subsidizing all of the above. Second, we have a diverse, competitive electricity sector that includes coal, natural gas, nuclear, hydroelectric, wind, solar, and oil (about 1 percent). And finally, that diverse energy mix is produced almost entirely domestically.

The only “all of the above” strategy America should embrace is the answer to this question: Which of these energy sources should we not subsidize? A.) Fossil Fuels B.) Nuclear C.) Renewables D.) All of the Above.

The main argument for extending the wind subsidy is that failure to do so will result in job losses. “Unfortunately, the leading wind project developers and manufactures are canceling their plans for 2013 and wind development will grind to a halt due to the uncertainty of a PTC extension,” the letter states.

“A recent report completed by Navigant finds that an expiration of the PTC would lead to a nearly 50 percent decrease in the number of wind energy jobs,” according to the letter.

If Navigant’s numbers are accurate, it means two things: 1.) The subsidy has been artificially propping up jobs in the industry and shifted labor and capital away from other, more productive sectors of the economy; and 2.) Wind can compete without subsidies and the industry won’t entirely disappear.

Removing the subsidies could actually benefit the wind industry in the long term. Rather than having the subsidies promote technological stagnation in the industry, investments and resources would flow toward the most promising wind companies and technologies. This would allow for a strong wind industry that that can compete without subsidies. If the result is more wind energy without subsidies, all the better.

Policies like the production tax credit concentrate benefits on a few recipients and disperse the costs among the rest of us through higher taxes and energy costs. If wind energy is not economically viable without the crutch of taxpayer money, then we’re propping up a market loser.

If wind energy is a market winner, then the subsidy is taking money out of the taxpayers’ wallets and simply padding the bottom line for the politically connected.

An extension of the wind energy tax credit makes as much sense as a VHS production tax credit.

“We can’t afford to lose our VHS tape manufacturing plants. They provide valuable jobs. Americans need a variety of ways to watch recorded entertainment.”