Let Wind Power Tax Credit Expire

September 26, 2012

The production tax credit for wind power is set to expire on December 31, but may be renewed by Congress for the seventh time.  The subsidy is meant to give an uncompetitive industry an edge in the energy market but does so at great costs, say Lamar Alexander (R-Tenn.) and Mike Pompeo (R-Kan.).

  • The provision provides a credit against taxes of $22 per megawatt hour of energy generated.
  • From 2009 to 2013, federal revenues lost to wind-power developers are estimated to be $14 billion -- $6 billion from the production tax credit, plus $8 billion courtesy of an alternative-energy subsidy in the stimulus package.
  • If the tax credit gets extended, it would mean an additional $12 billion in costs over the next 10 years.

The subsidy for wind power creates an economic distortion called negative pricing. That is, while coal and nuclear plants generate low levels of energy when demand is low and a lot of energy when demand is high, the same is not true for wind power. Instead, windmills are constantly working and generating electricity whether utilities need the electricity or not, allowing wind producers to collect the tax credit for every kilowatt hour they generate.

Wind producers can even sell power when demand is low and still collect a profit because the pretax subsidy is higher than the average price for electricity. While this decreases energy prices in the short-run, there are severe consequences for other industries. The nuclear and coal industries, for example, will be driven out to be replaced by wind power.

But the main problem is that wind producers rely on the hand of the government to help them along the way. Without a subsidy, coal and nuclear power would thrive. This is important in a world where the United States provides 20 percent to 25 percent of electricity to the world.

Proponents of the subsidy argue that it sustains American jobs. However, the private sector would do better in creating jobs in another type of industry that is not wind with the added bonus of making it cheap and efficient.

Source: Lamar Alexander and Mike Pompeo, "Puff, the Magic Drag on the Economy," Wall Street Journal, September 18, 2012.

 

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