Air out the tax code
One of the oldest federal policies to combat climate change just expired. Good riddance.
On Jan. 1, Congress allowed a collection of special tax breaks to lapse. Among them was the wind production tax credit. With a cockroach-like resilience, the supposedly temporary tax credit has handed money to wind-farm operators since its 1992 passage, deriving support from a powerful coalition of renewable-energy Democrats and wind-state Republicans. Some of these supporters are pressing for yet another one-year extension, along with other clean-energy subsidies. Instead, they should replace it with something better.
As often happens in Washington, this boondoggle started with a worthy goal, in this case cutting carbon-dioxide emissions. But also as often happens, politicians didn’t want to acknowledge the true cost of achieving their goal or make the cost visible to taxpayers. The honest and efficient approach to reducing these emissions would be to tax polluting fuels. Consumers would conserve and demand cleaner energy, other taxes could be lowered and market forces, not lawmakers’ whims, would determine which technologies won out.
Instead, Congress has approved tax breaks for favored technologies, such as wind energy and electric cars. Industries develop to chase federal handouts. As time passes, anyone who wants to get rid of a payout is accused of wanting to kill jobs. This is how the federal tax code ended up with 42 special breaks for various energy-related activities in 2012, according to a count from Senate Finance Committee Chairman Max Baucus, D-Mont.
Doing nothing on climate change is not acceptable. But if lawmakers can’t stomach a tax on carbon, they should at least support alternatives in less wasteful ways: Treat all green technologies the same and let the best win. As part of his broader effort to simplify the tax code, Baucus has put out a policy discussion draft that would clear the federal books of nearly all of the 42 energy carve-outs and replace them with support that’s available on an equal basis for any kind of clean energy. He figures that extending last year’s energy tax breaks for 10 years would cost $150 billion, while his plan would cost about half that. Not all of the savings come from policy efficiency; he would let some tax breaks — for example, ones that benefit oil drillers — expire.
This system would be a notable improvement but hardly ideal. It would be easier for energy companies to leverage their federal support into more private capital if the government paid them, rather than offering them a tax break of equal size. Support should be conditioned on how well clean-energy generators integrate with and respond to the needs of the power grid, rather than just handing them money for every kilowatt-hour they produce, needed or not.
The best policy, meanwhile, remains a simple, transparent tax on carbon emissions.