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By Robert Rapier on Sep 5, 2008 with no responses

Extend Renewable Energy Tax Credits

A big pet peeve of mine is the way we have gone about handling tax credits for renewable electricity. I believe renewable alternatives warrant tax credits, because we simply do not pay the “true cost” of our fossil fuel usage. For instance, regardless of your position on global warming, we certainly dump carbon dioxide into the atmosphere by burning fossil fuels. There is a cost – or if you don’t believe in global warming, you at least have to admit that there is a potential cost – from doing so that is not reflected in the $3.50 a gallon that we pay for gasoline. There are all sorts of additional costs. One that is of great concern to me is extending our dependence on non-renewable resources. That imposes a cost to future generations.

For these reasons, I favor giving renewable energy sources some help. While I would prefer that we do this by raising fossil fuel taxes and letting the alternatives compete on equal footing, that isn’t going to happen because politicians consider such taxes political suicide. So what we have instead are various tax credits and subsidies to give alternatives a helping hand. Some of these, like subsidies for corn ethanol, I oppose because they also have significant costs that aren’t being factored in. But the tax credits for renewable electricity have been a good investment, in my opinion. They have helped boost investments in wind and solar power.

However, the impact of these tax credits has been limited because they have only been renewed for one or two years at a time. If you are evaluating the economics of a new solar plant – and the tax credit may disappear in two years – you are going to be very cautious about deploying your capital.

CNN Money provides some background on the situation:

Renewable energy’s biggest wish

NEW YORK (CNNMoney.com) — While politicians off all stripes are vying to be seen as saviors in the energy crisis, Congress isn’t giving renewable energy investors the one thing they say would help the most – long-term tax credits. Lawmakers from both sides of the aisle want the nation to move away from fossil fuels and become more energy independent.

The tax credits are substantial. They currently give wind, geothermal and biofuels projects 2 cents for every kilowatt hour produced. The current market price for electricity is about 5 cents per kilowatt hour, so it works out to a subsidy of about 40%, according to the Energy Information Administration.

For solar, businesses and individuals can get 30% of the cost of a solar plant or home installation refunded by the government.

These tax credits have been around in some form since the early 1990s, but since the late 1990 have only been renewed on a yearly basis. That’s a problem for anyone trying to develop large sources of renewable energy.

This is just another example, in my opinion, of the government being very short-sighted over energy policy. If the tax credits were extended for 10 years, it would be a huge shot in the arm for the renewable energy industry. Pay for those tax credits with a nickel a gallon gas tax, and it will be a win-win for energy policy.