When the government wants to prop up a certain type of energy source, they use tax incentives and subsidies. It's been that way for ages. But is it possible that this tried and true practice is actually setting new energy innovation back?
Some believe so. Tax policy has a significant impact on the energy markets. From fossil fuels to relatively new industries like wind and solar, subsidies have helped fuel growth. But critics say that subsidies, in their current form, ultimately distort price signals and undermine the efficiency of energy markets.
One such critic is Governor Bill Ritter, Jr., the founder and director of the Center for the New Energy Economy (CNEE) at Colorado State University. Ritter was elected as Colorado's 41st governor in 2006 and served his office through 2011, building consensus to tackle some of the state's biggest challenges.
In his four-year term, Ritter established Colorado as a national and international leader in clean energy by building a new energy economy. He signed 57 new energy bills into law, including a 30 percent Renewable Portfolio Standard and a Clean Air Clean Jobs Act that replaced nearly a gigawatt of coal-fired generation with natural gas. Now at the Center for the New Energy Economy, which launched in 2011, he employs an assistant director, five senior policy advisors, an executive assistant, and a team of student researchers.
We recently sat down to discuss the topic and he told me that, even though legislators know they shouldn't, those in our nation's capital peg certain industries for success with subsidies before they even get off the ground.
"In Washington D.C., we shouldn't be picking winners, but we do," Governor Ritter told me. "We've been using the tax code to incentivize energy production for a very long time, and we don't really stop and ask ourselves is it still necessary and is it still doing the job we want it to do. And to top it off, there really is very little meaningful oversight."
Ritter says subsidies basically drag on with little-to-no scrutiny, rolling from one year to the next in perpetuity without anyone checking on their performance. As a result, many true innovations are kept on the sidelines, with the prices in target markets being artificially inflated.
"People talk about subsidies for fossil fuels, but I would argue even wind subsidies drove up the price of wind," he said. "The false starts, the starting and stopping of investment, that's what inflates the cost. Companies say, 'I don't want to be the fool building that wind farm when the tax credit ends,' so by stopping, they constrain the markets and drive up the price."
As an alternative to subsidies, Governor Ritter suggests that the government stimulate investments in a wide variety of energy resources, providing tax incentives for private capital to flow into the energy resources that investors believe offer the highest returns or the greatest potential. That way, investment is done with rational thought, and an energy source can be evaluated based on its true cost to the environment and the public at large.
"We've seen expansion in a variety of industries, some of which had subsidies and some that did not, and we need to find a way to fit that together into this framework," he said. "For example, we don't tax carbon according to its real-world impact relative to climate change, and we need to change that. Otherwise, it doesn't fit within the way we make rational decisions."
So with many arguing that the climate is in crisis, making the need for more affordable, sustainable energy sources all the more dire, are we any closer to reform that could make subsidies work better? Not quite, especially with the political climate of this country.
"I think it's helpful to have people on both sides of the aisle that would be willing to look at this, but I'm not optimistic anything is close," Ritter concluded. "Tax reform is a very difficult thing to accomplish in a world that isn't politically sensitized. This current climate is politics on steroids. Tax reform, pricing carbon, and using the revenue in a neutral way that will move this conversation into the mainstream will happen at some point, but it won't be in 2016."