There is a lot of speculation on how clean energy and alternative energy programs are going to get off the ground under the new administration and under the current economic environment.  Today’s Environmental Capital blog at the WSJ includes an article by Keith Johnson on how the Obama administration could promote the development and adoption of new clean-energy technologies. Johnson reviews tax credits (including refundable credits), feed-in tariffs, and renewable portfolio standards. He finds all fall short in one way or another.

Johnson overlooks a couple of other obvious incentives: a carbon taxand a cap-and-trade system. Either of these is more likely to have amore significant impact on US clean energy programs than any of theincentives he discusses. However, both would be more difficult toenact, and both would have a far more direct impact on consumers(voters) than any of the programs Johnson does discuss.

Obama comes from a farm and coal state. He has supported thedevelopment of corn-based ethanol and clean coal technology. TomVilsack, the incoming agriculture secretary, hails anothercorn-producing state, and he, too, is on record supporting increasedproduction of corn-based ethanol. Whatever benefit that accrues to thecountry from ethanol, one certain benefit is higher prices forproducers. In many ways, support for ethanol is equal to support foranother farm subsidy program.

Tax credits, both refundable and not, show exactly the effects thatJohnson outlines. Feed-in tariffs, which force power companies to buyelectricity at higher than market rates, have worked well in Germany,where the federal government owns the grid. In the US, where the gridis mostly privately owned and operated by a number of independentsystems operators (ISOs), implementing a feed-in tariff complicates analready complicated and shaky system.

Renewable energy standards get a lot of support, but, as Johnson says,a national standard faces tough opposition from states lacking wind andsolar resources.

And carbon taxes? In the first place, a new tax is hardly the way forthe new administration to win friends. Low pump prices function as atax cut for consumers, and adding a substantial tax to gasoline to payfor carbon emissions is probably a non-starter as long as the economyis in the doldrums.

A cap-and-trade system is essentially a market-based tax. Again, theObama administration may be reluctant to push hard for the higherenergy prices that a cap-and-trade system will bring with it.

Johnson has hit a salient point in the discussion of clean energy. Thebusiness-as-usual solution is tax credits, and there is sure to be alot of pressure to continue and expand these. The other end of thespectrum is a significant carbon tax. It is equally certain thatsupport for this solution will be nearly invisible.

A well-designed cap-and-trade system for carbon would be the bestoutcome given the choices available. But don’t look for that until thenew administration believes that it has stopped the bleeding in theoverall economy. Until then, subsidies and tax credits will carry theday.

Paul Ausick
January 21, 2009

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