Blog Post

Why the Wind Tax Credit is a Bad Way to Cut Carbon

Dec 17, 2012 | Joshua Linn

Eligibility for the wind energy production tax credit (PTC), established by Congress in 1992, is set to expire at the end of this month, causing calls for action and inaction. Is this policy change a big deal for carbon emissions? Let’s take a closer look.

Currently,  the PTC provides renewable power projects with a corporate tax credit of 2.2 cents for each kilowatt-hour of electricity produced over the first ten years of operation. Eligibility for a PTC for renewables other than wind expires at the end of 2013, but the debate has focused on the wind PTC because wind power projects have claimed over two-thirds of total credit value to date.

Besides the environmental benefits of wind power, proponents point to jobs, arguing that allowing the PTC to expire will cause the loss of 37,000 jobs in the wind industry. A recent proposal from the American Wind Energy Association urges a six-year extension of the PTC, phasing it out over time.

Opponents’ objections focus on costs. Senator Lamar Alexander simply says “we can’t afford it.” The estimated fiscal costs of an extension are as high as $60 billion. Others have more nuanced arguments—like Eli Lehrer, President of free-market think tank R Street, who argues that the PTC is a potentially well-intended but ultimately ineffective way to encourage the deployment of wind technology.

In a new RFF discussion paper, we ask a question seemingly absent from the debate: is the PTC effective at reducing greenhouse gas emissions?

To answer this question, we construct an investment model of Texas’s electricity grid that accounts for the intermittency of wind and solar energy. Then, we measured the cost of achieving an 8% reduction in greenhouse gas emissions using five renewable electricity policies. We found that the PTC is the least cost-effective policy, achieving greenhouse gas reductions at nearly $67 per ton.

Why does the PTC perform so poorly in our model? It reduces electricity prices by expanding the supply of generation in the electricity grid. This may sound good for electricity consumers, but one of the PTC’s main goals is to reduce greenhouse gas emissions. Lower electricity prices make the policy less effective. That’s because lower electricity prices cause more electricity consumption, increasing the amount of fuel consumed at fossil fuel-fired generators, and offsetting some of the environmental benefits of the PTC.

Fixing this problem is conceptually simple: finance the subsidy from a charge to consumers rather than out of general tax revenue. This prevents electricity prices from falling, and it would be much cheaper to reduce emissions than the current PTC. Of course, even this policy would be far inferior to a significant price on greenhouse gas emissions. Our analysis shows that a PTC achieves emissions reductions at seven times the cost of a price on greenhouse gas emissions, which is similar to numerous other studies demonstrating the advantages of an emissions price.