The Joint Committee on Taxation (JCT) on September 16 published a report analyzing federal energy tax incentives. The report is available here. The report is generally insightful; however, it has a misguided job-creation discussion. 

With respect to the issue of job creation, the report provides: “Commensurate with its relatively small contribution to the overall U.S. energy portfolio, the renewable electricity sector is not a major source of employment in the United States.” A footnote provides the statistics behind the report’s conclusion:

The Bureau of Labor Statistics estimates that, for 2011, there were 3,780 private-sector green goods and services jobs in hydroelectric power generation, 2,724 in wind power generation, 1,166 in biomass power generation, 1,017 in geothermal power generation and 522 in solar power generation. Bureau of Labor Statistics, News Release: Employment in Green Goods and Services - 2011, USDL-13-0476, March 19, 2013.

These statistics grossly understate the number of American jobs that exist due to green energy.  Even the president said on May 9, “We generate more renewable energy than ever, with tens of thousands of good American jobs to show for it.”1  There is public data to support the president’s assertion and demonstrate the inaccuracy of the JCT’s conclusion about jobs.

With respect to solar, The Solar Foundation, in conjunction with the U.S. Department of Energy, the National Renewable Energy Laboratory and the GW Solar Institute of the George Washington University, estimated that solar provided more than 140,000 American jobs.  This was based on a survey of 15,437 employers using a methodology reviewed by Cornell University.2  The jobs estimate for solar cited by the JCT, 527, was .3 percent as many.  If the JCT were concerned about the accuracy of statistics not provided by the Department of Labor, surely, the JCT could have cited a report to which federal agencies contributed. 

In addition, the American Wind Energy Association (AWEA) estimates that 50,500 American jobs are attributable to the wind industry as of the end of 2013.  The jobs were in “fields such as development, siting, construction, transportation, manufacturing, operations, [and] services.”3

Further, AWEA estimates that at the end of 2013, there were 560 “wind-related manufacturing facilities” in the United States.4 Clearly, 560 manufacturing facilities alone would create far more jobs than the 2,724 cited by the JCT.

The production tax credit (PTC) has enabled the wind industry to grow exponentially in the United States. Installed capacity at the end of the first quarter of 2014 is 61,327 MW, which is more than double what it was at the end of 20085.  That growth has brought manufacturing jobs from Europe and Asia to the United States due to the high cost of shipping wind turbine components.  Those jobs are likely to flow from the United States if the growth of wind continues to decline.  Such a decline appears likely if the PTC is not extended.  For instance, after the PTC lapsed in 2013, only 217 MW of wind was installed in the United States in the first quarter of 2014, which suggests an annual pace not seen in the United States since 2004.6

The JCT did not serve Congress well by so grossly understating the jobs created by the solar and wind industries.  Nonetheless, the report makes other interesting points about policy and economics.  Below are some key excerpts:

Social Theory of Tax Subsidies

  • Tax preferences that encourage investment in specific areas increase economic efficiency only when market-based pricing signals have led to a lower level of investment in a good than is socially optimal.  In general, this can occur in a market-based economy when private investors do not capture the full value of an investment−that is, when there are positive externalities to the investment that accrue to third parties who did not bear any of the costs of the investments.
  • For example, if an individual or corporation can borrow funds at 10 percent and make an investment that will return 15 percent, it generally makes that investment. However, if the return were 15 percent, but only 8 percent of that return went to the investor and 7 percent to society at large, the investment generally will not take place, even though the social return (the sum of the return to the investor and other parties) would indicate that the investment should be made.  In such a situation, it may be desirable to subsidize the return to the investor through tax credits or other mechanisms so that the investor’s return is sufficient to cause the socially desirable investment to be made. In this example, a credit that raises the return to the investor to at least 10 percent would be necessary. Even if the cost of the credit were paid through general tax increases for others, society, as a whole, would presumably be better off because of the 7 percent return to society from the investment.

Merits of a Carbon Tax

  • Economists generally agree that the most efficient means of addressing pollution would be through a direct tax on the pollution-causing activities, rather than through the indirect approach of targeted tax credits for certain technologies.
  • The imposition of a direct tax on the pollution-causing activity would indirectly lead to the adoption of the types of technologies favored in the tax code, but only if these technologies were, in fact, the most efficient technologies.
  • For example, the optimal behavioral responses to a broad-based tax on fossil fuels may lead to installation of greater amounts of home insulation, but it may also lead to individuals turning down the thermostat or switching off unnecessary lighting.  It would be difficult or impractical to design tax subsidies to directly incentivize the turning down of thermostats, the switching off of lights or other similar forms of optimizing behavior.
  • To be technologically neutral and economically efficient, the government should set policy parameters so that the implicit price it pays for the same objective, say fossil fuel displacement (typically measured in millions of British thermal units, or MMBtu), is the same under each tax provision that has the same purpose.
  • [T]he government in practice cannot administratively identify and set up programs to subsidize every conceivable energy-saving practice. Additionally, it is not possible to identify meritorious technologies not yet invented.  The government must continue to expand the class of credit-eligible activities if it wishes to minimize the economic distortions that come from favoring certain technologies through tax subsidies over other technologies that prove equally capable of achieving reductions in fossil fuel consumption. Furthermore, the investment in research to develop such new technologies might be constrained by the existence of tax subsidies for current technologies.

Efficiency of Existing Production Tax Credits

  • Table 1 compares selected tax incentives to illustrate the varying implicit prices that the government is willing to pay per MMBtu of fossil fuel displacement. The differing amounts show that, at the margin, the government pays more to displace Btus from certain activities over others, which is not economically efficient. See table.

Solar is missing from this analysis.  However, since the analysis considers the “production tax credits” whereby a tax credit is generated by producing energy, the solar investment tax credit that is based generally on the cost of the project is outside the methodology of the analysis. 

  • [I]t cannot be known from this information alone what the total budget cost is for the aggregate incremental renewable production that occurs as a result of the credits, due to renewable production that would have occurred in the absence of the credits.  If, as an example, half of the wind energy production would have occurred in any event, then the total federal revenue cost of achieving the incremental wind energy produced is twice that stated in the table, if one assumes that all wind energy produced receives the credit.
  • This discussion assumes that the benefits across all types of alternative energy are equivalent and that fossil fuels are being displaced (rather than, for example, nuclear power). In reality, different alternative energy sources might displace different types of fossil fuels, whose negative externalities may vary. Also, the production of certain renewables, such as solar or wind energy, may be more benign than the production of others, such as ethanol.  Thus, depending on these other factors, varying credit rates could be economically efficient if there are differences across the renewables in the net benefits from each renewable and the fossil fuel it displaces.

Economic Inefficiencies of the AMT Rules for Tax Credits

  • Many tax credits have stipulated dollar limitations, are nonrefundable or cannot be used to offset tax liability determined under the alternative minimum tax (AMT). If a credit designed to overcome an externality is capped, then, after the cap is reached, the marginal cost of further investment becomes equal to the market price again, which is presumed to be inefficient because of the externality. The impact of these limitations is to make the credit less valuable to those without sufficient tax liability to claim the full credit, for those subject to the AMT or those who have reached any cap on the credit. Given the arguments outlined above as to the rationale for targeted tax credits, it is not economically efficient to limit their availability based on the tax status of a possible user of the credit. It can be argued that, if such social benefits exist and are best achieved through the tax system, the credit should be both refundable and available to AMT taxpayers.
  • With respect to the AMT, the rationale for the limitation is to protect the objective of the AMT, which is to ensure that all taxpayers pay a minimum (determined by the AMT) amount of tax. Two differing policy goals thus come in conflict in this instance. Similarly, caps on the aggregate amount of a credit that a taxpayer may claim are presumably designed to limit the credit’s use out of some sense of fairness, but, again, this conflicts with the goal of pollution reduction.

Fossil Fuels and Tax Policy

  • The principal argument in favor of the tax incentives for fossil fuel production is that a healthy domestic fossil fuels production base serves national security goals by reducing our dependence on foreign sources of oil. However, it can be argued that minimizing such reliance would be more effectively achieved through a direct tax on imported oil or an import fee, which could encourage less consumption and promote the use of lower-emission, renewable energy alternatives.  

It is not explained as to how the proposal to tax imported oil would fair comply with the General Agreement on Tariffs and Trade or other free trade agreements entered into by the United States. 

  • Other observers have argued that current prices and expected future demand for fossil fuels provide sufficient market-based incentives for domestic exploration and production, and have argued that the present law subsidies are unnecessary to secure a viable domestic fossil fuels production industry.