Study: Tax Code Punishes Efficient Energy Sources

Published April 1, 2009

The U.S. tax code is heavily weighted in favor of renewable power sources over conventional sources such as coal and oil, Tufts University economics professor Gilbert Metcalf reports in a new study released by the Manhattan Institute.

Solar, Wind Largest Beneficiaries

“Under current law, solar thermal and wind capital are subsidized to the greatest extent, with effective subsidy rates of 245 and 164 percent, respectively,” Metcalf reports in the study.

While renewable power sources receive substantial subsidies, more efficient conventional power sources are heavily punished by the tax code.

According to Metcalf, data from the U.S. Energy Information Administration (EIA) reveals the federal subsidy in fiscal year 2007 for nuclear energy totaled $24 per billion British thermal units (BTUs), while renewables took in $584. Coal and natural gas/petroleum liquids received $113 and $63, respectively.

The tax code’s favoritism toward renewable energies is even greater when considering electricity generation sold to consumers. According to EIA, in 2007 wind energy and solar energy received per-megawatt-hour subsidies of $23.37 and $24.34, respectively, while the per-MWh subsidies for nuclear energy, coal, and natural gas/petroleum liquids were $1.59, $0.44, and $0.25, respectively.

Efficient Energy Production Punished

These numbers paint a clear picture: Renewable energy receives substantial federal subsidies while generating very small amounts of energy and usable electricity. In 2007, less than 1 percent of U.S. electricity was generated by wind energy, while coal contributed almost half the nation’s electricity that year.

“The tax code is biased toward politically correct energies at the expense of the energies consumers want most—oil, natural gas, and coal,” said Robert Bradley, CEO and founder of the Institute for Energy Research. “To this extent, tax policy is anti-consumer.”

Sterling Burnett, a senior fellow at the National Center for Policy Analysis, agrees federal policy punishes the most efficient energy sources.

“In a time of economic crisis, it is reprehensible that politicians continue to throw good money after bad and foist high-cost, low-output energy sources on consumers,” Burnett said.

Negative Tax Rates

In the study, released in January, Metcalf considers effective tax rates, which are used to calculate what energy-related investments will return after taxes, taking into account the subsidies for such investments. The more an energy investment is subsidized, the lower the effective tax rate for that investment.

According to Metcalf’s estimates, effective tax rates under current law range from a positive tax of 38.9 percent for pulverized coal to negative 244.7 percent for solar energy.

After solar energy, wind energy is the most heavily subsidized, with an effective tax rate of negative 163.8 percent. Accelerated depreciation of capital assets and production tax credits are the main reasons wind energy has such a favorable effective tax rate.

“The effective tax rate for wind,” writes Metcalf, “rises from -164 percent to -14 percent if economic depreciation replaces accelerated depreciation, while it rises to +13 percent if the production tax credit is eliminated. With economic depreciation and no production or investment tax credits, the effective tax rate in all cases equals the statutory tax rate of 39.3 percent.”

Metcalf concludes, “[T]he recent boom in wind and solar renewable investment, especially in wind, is consistent with the large negative rates for wind and solar.”

Picking Winners, Losers

Jerry Taylor, director of natural resources studies at the Cato Institute, said, “The federal government is in no position to intelligently dictate capital flows in energy markets. This exercise of ‘picking winners’ has never before yielded anything positive and probably never will.”

According to Taylor, if investments in certain technologies make economic sense, there is no need for federal subsidies or mandates. “If they are not economically viable on their own merits, then no amount of subsidy or mandate will make the investment worthwhile from an economic perspective,” Taylor said

“Because energy is the economy’s lifeblood, a critical step to improving economic performance is to reduce the overall cost of energy. On this basis, renewables should receive fewer, rather than more, subsidies,” Burnett summarized.

Drew Thornley ([email protected]) writes from Texas.

For more information …

Gilbert Metcalf, “Taxing Energy in the United States: Which Fuels Does the Tax Code Favor?” January 2009: