This policy brief calls for either a reduction in or complete elimination of federal tax credits on both wind and solar power. Even though many scholars believe that wind and solar tax credits may help end American reliance on traditional sources of energy, the current incentives are controversial and must be changed. Policymakers should strive to eliminate inflation from wind and solar energy production tax credits, harmonize investment tax credit schedules, and end all residential energy efficiency tax credits or reduce them. Instead, the federal government should modify the advanced nuclear tax credit and do away with some of the solar industry’s legislative agendas, and the commence construction modification provision to be precise. The implementation of the steps discussed below is a win-win solution for all the stakeholders in the clean energy industry, allowing America to effectively move towards its desired renewable energy culture.
Reduced or Eliminated Federal Tax Credits on Wind and Solar Power
Background and statement of the problem
Energy is a key component for American households, towns, cities, states, and regions. Barradale (2010) confirms this by asserting that the availability of energy has been the primary driver of beneficial socioeconomic outcomes. For instance, were it not for energy, many manufacturing firms, ranging from automobile to food processing entities, would not exist. Consequently, the American GDP would lag behind many other global economies. Even with the prevalent benefits of energy, the production and use of energy have given rise to z related problem: climate change. Research has shown that the production and consumption of energy from traditional sources, such as coal and petroleum, is the leading cause of carbon emissions leading to climate change (Barradale, 2010). Since historical times, America has relied on coal and petroleum as sources of energy.
Figure 1: A graph showing the production of conventional v. renewable sources of energy in the U.S.
Source: U.S. Energy Information Administration (2015)
Figure 1 above shows that the U.S. has been overly dependent on non-renewable energy sources since the 1700s, but little attention has been placed on renewable options. It the use of non-renewable sources of power surged dramatically since 1900 and has seemingly reached a point of no return. Even though the production of renewable sources of energy is taking shape, Figure 1 above shows that the pace is unusually slow in comparison.
The high production of petroleum, natural gas, and coal demonstrates that the U.S. is among the leading drivers of climate change in the world. In an attempt to improve its image and decrease reliance on these sources, the U.S. is increasingly encouraging the Americans to embrace a culture of wind and solar power. These energy sources are cleaner than coal. Federal tax credits on the wind and solar power are one of the primary incentives for moving towards this new direction.
Figure 2: The historical rate of greenhouse gas emission in the U.S. from 1990 to 2015
Source: U.S. Environment Protection Agency (2017).
Figure 2 above confirms that the use of conventional electricity has given rise to a surge in the level of greenhouse gases emitted. However, as from 2007, the rate of greenhouse gas emissions decreased. This is a clear indication that the American public is indeed shifting towards renewable energy sources, hence the primary effect of the energy federal tax credits.
Statement of the Problem
Despite its appealing nature, federal tax credits on wind and solar power are controversial. Rossetti (2017) argues that substantial tax credits for such power have promoted a situation in which solar and wind energy providers pay their customers to purchase electricity and remain highly profitable. Tax credits for solar and wind power has also created disharmony in investment tax credit schedules. Wiser, Bolinger, and Barbose (2007) and Energy Department, ?U.S. Energy Information Administration (2011) explain that under the current law, solar and wind power investments usually receive a tax credit worth 30% of their investment. Surprisingly, the investment tax credit for other numerous sources of clean energy has expired (except for geothermal tax credits, which are a small 10% credit). Such treatment is deleterious as it tends to promote a clear preference for wind and solar while decreasing the competitiveness of other sources of clean energy (Wiser, Bolinger, & Barbose, 2007). Because of these adverse effects, policymakers have justification to reduce or eliminate federal tax credits on wind and solar power.
Figure 3: Preference for renewable and carbon neutral sources of energy in the U.S.
Source: Davidson (2009)
The pie chart above shows the preference of solar and wind energy over the other sources of clean energy. It is well evident that solar energy is the most preferred followed by wind power. This is especially because the two sources of energy are subject to better federal tax treatment when compared to hydro energy and other clean power sources.
Policy Analysis and Recommendations
One of the first steps that policymakers should adopt is eliminating inflation from wind and solar energy production tax credits. Under the current legislation, Rossetti (2017) expresses that the tax credit rate is at 1.5 cents/kilowatt hour from qualified sources of clean energy. When indexed for inflation, this provision amounts to about 2.3 cents. Rather than having this stipulation apply to the wind and solar power alone, it is essential for the policymakers to set production tax credits for qualifying sources at 1.5 cents/kilowatt hour without indexing for inflation. Presently, only wind and solar energy producers gain due to favorable tax credit treatment, while the majority of other clean energy source providers experience consistent losses (Barradale, 2010). But by eliminating indexed inflation from wind and solar energy production tax credits, all the providers of clean energy could profit while financing their customers to buy their electricity. It is expected that the federal tax revenues will increase as all clean energy businesses and not those who deal with wind and solar alone, will be carrying out productive ventures.
The second measure should be harmonizing investment tax credit schedules. This calls for the policymakers to equalize the investment tax credit eligibility across all qualified sources of clean energy. What this means is that wind, solar, thermal, combined heat and power, as well as geothermal sources of energy should all be able to claim the same level of tax credit. The current energy policy allows solar and wind energy sources to claim a 10% investment tax credit through 2028 (Rossetti, 2017). The preference should be eliminated to achieve harmony in investment tax credit schedules. All tax credit for qualified clean energy sources should end after 2022. The implementation of this recommendation anticipates a rise in competition within the clean energy source industry with no particular type of preferred energy. Consequently, as revealed by Borenstein and Davis (2016), the environment and consumer choice will benefit. The environment will benefit because there will be a balanced exploitation of natural sources of energy. The current energy policy only encourages the use of wind and solar sources, while others lay idle, which means that an ecological balance is disrupted (Borenstein & Davis, 2016). With investment tax credit schedules harmonized, there will be a desire to exploit even the other energy sources. Concerning consumer choice, users of cleaner energy will be allowed to select from a range of clean energy sources (Borenstein& Davis, 2016). Hence, if they are not satisfied with one source, they can try another one without gaps in prices. Such a consumer experience is more fulfilling and will promote the use of all types of qualified clean energy.
The next measure should be to eliminate the residential energy efficiency tax credits, or at the least, reduce them. The current law provides homeowners with an opportunity to claim tax benefits. This especially applies to those that have made investments in domestic clean energy. Nonetheless, as mentioned earlier in this policy brief, the administration of these tax credits is discriminative with the solar and wind power receiving favorable treatment. Homeowners that have invested in wind and solar energy have access to tax credits amounting to 30% of the qualifying expenditures (Rossetti, 2017). Because tax credits for investment in fuel cells and geothermal heat pumps have expired, the homeowners have vastly shifted their attention to solar and wind power investments. Therefore, the policymakers should make an effort to eliminate the 30% residential energy efficiency tax credits. If this is not possible, the level of credit should be reduced drastically to 5%. This change, however, should not apply to wind and solar investments alone but to all other expenditures. As such, a 5% residential energy efficiency tax credits should also be mandated on fuel cells and geothermal heat-pump purchases and installations (Rossetti, 2017). If these tax credits expire, the conclusion should be applied in the same period for all clean energy investments for homeowners. While federal revenues will reduce substantially with the implementation of this strategy, the move will necessarily end the preference for solar and wind energy investments by homeowners and promote balanced purchase and installation of all qualified clean energy.
The next policy step should be to modify the advanced nuclear tax credit as Fox (2014) suggests. Under the current law, the U.S. Treasury has discretion to provide tax credits for those individuals and companies that have invested in advanced nuclear power plants. According to Barradale (2010), a person or organization is eligible for the advanced nuclear tax credit as long as it does not exceed 6 gigawatts over a period of 8 years. Apparently, a typical nuclear power production plant produces between 1 and 2 gigawatts in this very period. The modification of the advanced nuclear credit requires two critical changes. First, as documented by Rossetti (2017), the provision of tax credits should be re-allocated after every stipulated 8-year period. Second, the advanced nuclear tax credits should be eligible even where they are transferred to other individuals and groups in the nuclear supply chain and not to electricity producers alone (Fox, 2014). While this policy might be targeting nuclear energy, it has a paramount effect on the solar and wind energy tax credit scheme. As such, to accommodate the modifications, policymakers would be required to scale down incentives provided in the case of other energy sources (Wiser, Bolinger, & Barbose, 2007). Solar and wind power tax credits will be the most affected considering the rate stipulated by the current law. It would convince the government that the solar and wind tax credits should be decreased from the present 30% rate to utmost 10%. The policymakers have to be convinced that only such a level of decrease, and not any other, will bring about a better solution. The need for persuasion prevails especially when accounting for the possibility that the government might want to implement only a slight decrease in tax credits so as to ensure that wind and solar energy sources are still the preferences.
The ultimate policy recommendation is to eliminate commence construction modification provisions, which is an aspect of the solar industry’s legislative agenda according to the Solar Energy Industries Association (2017). The provision allows projects covered under the American Constitution—Section 48 to be precise—to be eligible for the Investment Tax Investment if project construction begins before the statutory cessation of the 30% ITC (Solar Energy Industries Association, 2017). Such a provision is damaging as it necessarily promotes a preference for solar energy over the other sources of qualified clean energy. Hence, commence construction modification drives project developers into making more solar energy infrastructural investment relative to expenditures on different types of energy sources. If the modification is eliminated, project investors will no longer have the incentive to invest in solar energy infrastructure. Therefore, these investors will be prompted to try other types of clean energy sources.
The principal purpose of this policy brief was to call for the reduction or elimination of federal tax credits on the wind and solar power. While these tax credits are aimed at promoting a shift from the conventional sources of electricity to renewable options, it is evident that the continued administration of the incentive has brought adverse outcomes in American society. There is a preference for wind and solar power more than any other clean sources of energy, and this is detrimental to environmental well-being, consumer choice, and clean energy production overall. Several measures and steps must to be implemented to accomplish the policy recommendation. Policymakers should strive to eliminate inflation from wind and solar energy production tax credits, harmonize investment tax credit schedules, remove or significantly reduce residential energy efficiency tax credits, modify the advanced nuclear tax credit, and cease to commence construction modification provisions. These suggested options are vital since they will ensure that the preference for different clean energy sources of power is balanced and that all clean energy businesses are profitable even where they finance their customers during purchases. In other words, if the steps discussed are implemented, a win-win solution for all the stakeholders in the clean energy industry will be created, and America will efficiently move towards the desired renewable energy culture.
Barradale, M. J. (2010). Impact of public policy uncertainty on renewable energy investment: Wind power and the production tax credit. Energy Policy, 38(12), 7698-7709.
Borenstein, S., & Davis, L. W. (2016). The distributional effects of US clean energy tax credits. Tax Policy and the Economy, 30(1), 191-234.
Davidson, O. G. (2009). Renewable energy pie. The Phoenix Sun. Retrieved from thephoenixsun.com/archives/6954
Energy Department, ?U.S. Energy Information Administration (2011).Annual Energy Outlook 2011: With Projections to 2035. Washington, D.C.: Government Printing Office.
Fox, M. H. (2007). Why We Need Nuclear Power: The Environmental Case. Oxford, UK: Oxford University Press.
Rossetti, P. (2017). Changes to Energy Tax Credits.American Action Forum. Retrieved from https://www.americanactionforum.org/insight/primer-tax-reform-changes-energy-tax-credits/
Solar Energy Industries Association (2017).Commence Construction Modification. Retrieved from https://www.seia.org/initiatives/commence-construction-modification
U.S. Energy Information Administration (2015).Fossil fuels have made up at least 80% of U.S. fuel mix since 1900. Retrieved from https://www.eia.gov/todayinenergy/detail.php?id=21912
U.S. Environment Protection Agency (2017). Sources of Greenhouse Gas Emissions. EPA. Retrieved from https://www.epa.gov/ghgemissions/sources-greenhouse-gas-emissions
Wiser, R., Bolinger, M., &Barbose, G. (2007).Using the federal production tax credit to build a durable market for wind power in the United States. The Electricity Journal, 20(9), 77-88.