Congress may soon face a matter that has the potential to divide people across Maine and the country: whether to renew a federal tax credit that helps wind power compete with other sources of electricity. The tax break costs about $1 billion per year and is set to expire Dec. 31. Though it has historically been renewed with support from both parties, the credit this year became a point of political division in the presidential race and Maine’s U.S. Senate race.
Whether the tax credit is extended should come down to financial and societal considerations: whether the country can pay for it without going into debt and whether making the wind energy industry more competitive is worth the upfront costs.
Particular communities understandably feel strongly about the credit — which subsidizes wind power by 2.2 cents per kilowatt-hour — because they see it as helping developers to disrupt the environment and the aesthetics of their surroundings. But when discussing the credit it’s important to separate out its real effect. The credit may make it more affordable for a developer to install turbines, but state laws and local ordinances determine where a wind farm is located.
Here are some questions Congress should answer before deciding whether to extend the credit:
Should wind be a growing part of the country’s renewable energy mix? It already plays a significant role. In 2011 wind power represented 32 percent of all newly developed electric capacity. It’s estimated that the average wind farm worldwide will be fully competitive by 2016, according to Bloomberg New Energy Finance. In some cases, electricity generated by wind is already competitive with electricity produced by fossil fuels. The operations and maintenance of wind farms is becoming cheaper, and they are becoming more efficient in terms of their electricity output.
Has the tax credit been effective? The Renewable Energy Production Tax Credit’s goal is to keep electricity rates low and spur development of renewable energy projects. The credit has helped the wind energy industry lower costs; and 60 percent of a wind turbine’s value is now produced in the United States, compared with 25 percent prior to 2005, according to the American Wind Energy Association. The link between the credit and wind power development is clear: In the years it was allowed to expire, installations fell between 73 and 93 percent.
Is the tax credit still needed? It’s essential that the credit not become permanent. It was designed to be an incentive, not a reward. But there is great debate about when, exactly, it should end. Many people do not support having the credit end abruptly, however, and the idea of a phase-out schedule has been raised. If Congress decides to extend the credit in the coming weeks, its ultimate end date will likely depend on what happens with other government policies, such as renewable energy portfolio standards, which generate a market for renewable energy.
The wind industry as a whole is lobbying for the credit’s extension, but fiscal conservatives have opposed it, saying taxpayers’ investment so far has resulted in inadequate return. But several Republican governors and lawmakers from wind-rich states support it. The American Wind Energy Association reported that 81 percent of wind turbines are in districts represented by the GOP.
How should the credit be paid for? If the country is trying to seriously reduce the deficit but maintain some of the Bush-era tax cuts, this is not the time to go into debt to pay for the tax credit. It’s possible a carbon tax could pay for it. Or Congress could cut back on fossil fuel subsidies. Though it would be politically difficult to accomplish, the Obama administration has committed to phasing out inefficient fossil fuel subsidies, as discussed at the G20 meeting in Pittsburgh in 2009.
A decision about the credit’s extension should be made with consideration of how it’s paid for and to what extent it’s worth investing money. It’s a difficult topic, as an entire industry lies in the balance. Having the right questions, though, is a good place to start.