National Resources Defense Council makes flawed case for PTC

The Natural Resources Defense Council (NRDC) is touting two new studies that allegedly show the benefits of the Production Tax Credit (PTC) for the U.S. economy. Yet their arguments are flawed, and if anything simply show the superiority of removing federal obstacles to profitable energy sources such as coal, oil, and natural gas.

The NRDC’s Case for Renewing the PTC

The NRDC press release describes the results of two new studies (here and here). The following excerpt captures their main arguments:

A new 250-megawatt wind farm will create 1,079 jobs throughout the many steps of building that wind farm, according to the NRDC report “American Wind Farms: Breaking Down the Benefits from Planning to Production.”

…

Wind farms also are helping revitalize communities across the country by generating new taxes, lease payments to landowners and economic development revenues, in addition to creating new job opportunities, the NRDC report “At Wind Speed: How the U.S. Wind Industry is Rapidly Growing Our Local Economies,” shows.

Today, wind farms generate about 50,000 megawatts of clean, renewable energy… and the wind industry employs about 75,000 Americans.  Wind energy production has increased by more than 170 percent in the past four years alone.

Yet the industry’s growth and promise is now facing potential disaster, because Congress has not renewed the 2.2-cent per kilowatt-hour Production Tax Credit (PTC) that’s set to expire at the end of the year….

NRDC policy advocate Cai Steger, co-author of the report, said:  “Every time a wind farm gets built, America jobs are created. These reports show what the PTC has done for the wind industry – and why it’s essential that it is extended.”

Taken at face value, the NRDC arguments are flawed and don’t make sense economically. Yet even if we are generous and interpret the claims in the most sympathetic light, the NRDC unwittingly makes a very strong case for the removal of federal obstacles to the development of oil, coal, and natural gas development.

Review of the PTC

Before diving into the specifics of the NRDC arguments, we should be clear on the context of their arguments. The PTC is currently scheduled to expire at the end of this year, which is why its proponents are launching a full-court press on this issue. In a previous post, we provided a full summary of the history—and failures—of the PTC. But for our purposes here, a quick review:

The federal government gave an advantage to wind power through an Investment Tax Credit (ITC) as far back as The Energy Tax Act of 1978. The modern Production Tax Credit (PTC) was established in the Energy Policy Act of 1992. The PTC “provided an inflation-adjusted tax credit of 1.5 cents per kilowatt-hour for generation sold from qualifying facilities during the first 10 years of operation.” Currently the PTC is 2.2 cents per kWh. In addition to wind, over the years Congress has extended eligibility to geothermal, certain hydroelectric, “open-loop” biomass, landfill gas, and even marine energy resources.

The status of the PTC was most recently amended by the American Recovery and Reinvestment Act (ARRA) of 2009, more commonly known as the Obama stimulus package. In this legislation the PTC for wind was extended through December 31, 2012 (and through 2013 for other renewables). Alternatively, the ARRA gave project owners the option of receiving a 30% Investment Tax Credit (ITC) rather than (not in addition to) the PTC. Developers can receive the 30% ITC as a cash payment from the Treasury, for projects where construction started before the end of 2011 and that are placed in service before 2013. ARRA also created the section 1603 program which allowed developers to elect to receive cash rebates in lieu of tax credits, but only if construction had begun before the end of 2011.

In simple terms, under the PTC the government reduces the tax bills of wind producers dollar-for-dollar whenever they produce power, and whether the wind-produced power is needed or not. This is unlike deductions with which most Americans are familiar. In other words, the tax credit is not simply exempting portions of income from tax, but actually reduces the final tax bill by the stated amount. Compared to typical margins in the industry, a 2.2-cent per kWh implicit subsidy is enormous, translating to an even greater pre-tax advantage. The PTC is an obvious example of the government levying large taxes on an industry (in this case, energy), and then using targeted loopholes to reduce the pain on favored members (in this case, wind).

Permanent Jobs vs. Temp Jobs, and Energy Independence Whopper

Even if we take the NRDC studies at face value, they contain problems. For example, the “magic number” that will no doubt be trumpeted by proponents is that a 250 megawatt wind farm creates “1,079 jobs.” But look at how the NRDC press release itself breaks down this number:

Non-construction businesses account for an estimated 557 jobs. They include 432 workers in manufacturing, 80 in planning and development, 18 in sales and distribution and 27 in operations and maintenance.

Construction jobs add another 522 jobs to a typical wind farm.  These workers are spread between three categories, with 273 working on on-site civil works, such as roads, and foundations; 202 working on the installation of the wind turbines and 47 working on on-site electrical work, such as grid connection.

Of the job descriptions above, we have put in bold the only two categories that could possibly be long-term. In other words, of the 1,079 jobs for a 250 MW wind farm, at best 35 of them would be permanent. The rest would simply be associated with the initial construction of the facility.

Another major problem is that the NRDC keeps touting these results as good for American workers, yet they write: “The wind industry now employs 75,000 Americans. U.S. companies and their workers produce approximately 65 percent of every wind turbine part.” In other words, some 35 percent of every wind turbine part is not produced in the United States. We have no problem with foreign trade; we’re just pointing out the odd case the NRDC is trying to make here.

But when it comes to foreign trade, an even worse problem is NRDC’s suggestion that expanding wind power will somehow change America’s consumption of oil. [1] This is simply nonsense. Electricity is primarily produced by coal, natural gas and nuclear power, not oil. Oil produces much less than 1% of our electricity. If the federal government wants to reduce the importation of oil from hostile regimes, it should expand access to domestic fossil fuels and stop hobbling trade with Canada. Given oil’s role in electrical generation, the only way NRDC could be right about America’s consumption of oil is if, via their policies pushing expensive and unreliable green energy, U.S. consumers are spending so much on their utility and tax bills that they have less money to buy gasoline.

Jobs Are Not the Ultimate Measure of Economic Success

If we step back and look at the big picture, the fundamental problem with the NRDC studies is that they confuse means and ends. The goal of an economic system isn’t to “create jobs” per se. An economic system should produce the most goods that people desire at the most efficient price possible and in so doing, create jobs where workers are most effectively contributing to the final product. Toil by itself isn’t the goal; we have to work in order to create goods and services that consumers value more then the leisure thereby sacrificed. In the famous illustration: The government could of course take billions in tax dollars and pay a million workers to dig holes and another million to fill them back up. This would “create two million jobs” all right, but it would be a colossal waste of taxpayer resources and the workers’ labor.

Unfortunately, not just the recent NRDC reports but the entire green jobs movement seems to think that simply showing “job creation” (or retention) is the same thing as economically justifying a given federal policy. This is wrong. The correct approach—at least as far as an economist is concerned—is to look at the (properly measured) costs and benefits of a proposed policy. In this calculus, the fact that more labor hours would be tied up in a particular project compared to a similar project making the same end product is prima facie a cost. Farmers use tractors rather than employees with hoes in their fields, because they produce more food more economically. The fact that modern agricultural techniques use less manpower than farms from 1850 is a good thing, because it frees up American labor power to produce other goods and services.

To see this in the context of energy, suppose there were a radical new discovery that allowed for the creation of limitless, virtually free energy simply by snapping one’s fingers. This would “destroy jobs” in the energy sector by the hundreds of thousands or perhaps millions. Yet obviously the new discovery would be one of the greatest in human history, showering untold prosperity on the planet. The workers previously employed in the energy sector would be temporarily unemployed, it is true, but they would eventually find jobs elsewhere, and if there had initially been unemployed people, they’d be able to find useful roles to help in other businesses that were expanding because of the new source of free energy. In this fanciful scenario, the total amount of output would now be much higher, because humans would get more energy than before, and they would get whatever the former energy-sector workers were now producing instead. This type of commonsense economic analysis is lost in the typical “green jobs” studies, as Robert Michaels and I documented in a review of the literature a few years back.

NRDC Unwittingly Makes the Case for Oil, Coal, and Natural Gas

Now in fairness, one could be generous with the NRDC analysis along these lines: “Yes,” their defender could argue, “the real goal isn’t simply to ‘create jobs’ per se. But in context, the NRDC analysts were assuming the backdrop of a U.S. economy with high unemployment and the need for more energy, as well as governments at all levels starving for more tax revenue. So although they skipped some steps in the argument, they are still making a case for extending the PTC as being beneficial to workers and fiscal health.”

Yet even if we go down this route, we don’t end up where the NRDC wants: That is, we don’t end up concluding that extending the PTC is an economically efficient policy move. In terms of promoting job growth and economic recovery, and bringing in more tax revenue to governments at all levels, a far more sensible plan would be to reduce existing obstacles to the development of domestic resources.

In terms of job creation and economic recovery, the case is simple: The wind sector needs government advantages, or else it will substantially shrink. In other words, the PTC creates an unsustainable bubble. The NRDC itself admits as much, when it says just how devastating removal of the PTC will be. (The American Wind Energy Alliance [AWEA] also has put out similar “fact sheets” that unwittingly admit how artificial and non-market-based the current capacity in the wind sector is.)

I have seen some advocates for wind energy try to claim the standard free-market argument of lowering taxes in order to spur economic growth. Yet the analogy doesn’t work here: The only reason the PTC spurs job growth in the wind sector is that other taxes are maintained on the competitors of wind. If the federal government extended the PTC for wind, but also gave a comparable tax credit for electricity produced by coal- or natural-gas fired plants, then we would also hear howls of protest about the impending doom of the wind sector.

It is true that the federal government subsidizes conventional energy sources as well. However, in terms of total energy produced, the comparisons aren’t even close: As we explained in a previous IER post, for every megawatt-hour of wind energy produced, the taxpayer subsidizes the sector some $56. In contrast, the taxpayer subsidizes coal- and natural gas-fired generation by 64 cents for every megawatt-hour. Furthermore, as a consistent critic of federal government intervention in the energy sector, IER calls for the end of all government subsidies to all energy sources. The tax code (let alone explicit payments of government funds) shouldn’t be used to pick winners and losers in the energy sector. If the wind sector really is the wave of the future, then the NRDC and AWEA should echo IER’s call. We won’t hold our breath.

Government interventions will potentially destroy far more jobs in the coal-mining sector than what the NRDC warns could happen to wind. Again, this is not to say that the goal of federal policies should be “job creation,” but merely to turn the NRDC arguments on their head.

A similar thing happens with government revenues: It is odd for the NRDC to cite government tax receipts as a benefit of extending a tax credit. In contrast, it wouldn’t take a tax expenditure to generate more tax revenue (at various levels of government) in the fossil fuel sectors. Indeed, the federal government need merely remove obstacles for private firms to develop resources sitting under American lands, and not only job growth but hundreds of billions of new tax receipts will flow in.

Wind Power Has Been the Wave of the Future…For Decades

In response to our claims that the PTC creates a bubble in unsustainable wind sector jobs, the advocate will no doubt respond that wind really will be efficient and self-reliant—just give it a little more time. In a previous IER post, we showed that this has been the wind sector’s refrain going back decades.

For example, in 1983, Booz, Allen & Hamilton did a study for the Solar Energy Industries Association, American Wind Energy Association, and Renewable Energy Institute. It stated: “The private sector can be expected to develop improved solar and wind technologies which will begin to become competitive and self-supporting on a national level by the end of the decade [i.e. by 1990] if assisted by tax credits and augmented by federally sponsored R&D.”[i]

In 1986, Amory Lovins of the Rocky Mountain Institute lamented the untimely scale-back of tax breaks for renewable energy, since the competitive viability of wind and solar technologies was “one to three years away.”[ii]

In 1990, two energy analysts at the Worldwatch Institute predicted an almost complete displacement of fossil fuels in the electric generation market within a couple decades [i.e. 2010]:

Within a few decades, a geographically diverse country such as the United States might get 30 percent of its electricity from sunshine, 20 percent from hydropower, 20 percent from wind power, 10 percent from biomass, 10 percent from geothermal energy, and 10 percent from natural-gas-fired cogeneration.[iii]

In 1986, a representative of the American Wind Energy Association testified:

The U.S. wind industry has … demonstrated reliability and performance levels that make them very competitive. It has come to the point that the California Energy Commission has predicted windpower will be that State’s lowest cost source of energy in the 1990s, beating out even large-scale hydro.

…

We are not quite there. We have hopes.[iv]

More recent, and perhaps relevant to the current NRDC studies, is the statement made by Senator Chuck Grassley (R-Iowa) in 2002:

I’d say we’re going to have to do it [the PTC] for at least another five years, maybe for 10 years.  Sometime we’re going to reach that point where it’s competitive [with other forms of energy]. I think the argument for any tax credit is to make the new source of energy economically competitive. [Emphasis added.]

We agree with Senator Grassley that a tax credit that doesn’t yield an economically competitive form of energy within ten years is a dud. Grassley said that in 2002, it is now 2012, so the conclusion is clear: The PTC should be allowed to expire. Wind has had its helping hand from the government, and then some.

Conclusion

The NRDC’s two new reports touting the benefits of the PTC confuse the ultimate goal of economic activity. Rather than “create jobs,” the true purpose of an economic system is to deploy workers’ valuable labor in ways that best satisfy the consumers. The PTC only “works” because it provides an artificial advantage to one energy source by effectively paying them each time they produce a kilowatt-hour of electricity.

On a level playing field, coal- and natural gas-fired power plants would continue to dominate the electricity sector for the foreseeable future. If this situation should suddenly change, IER would welcome the rapid increase in wind power: so long as it were genuinely driven by market fundamentals, and not by government favoritism. IER is neither “for” nor “against” wind, coal, natural gas, or other energy sources, but rather believes Americans are best served by leaving these outcomes to the free market.

If policy wonks want to recommend policies that boost job growth, lower energy prices, and provide greater tax revenues, then removing federal obstacles to conventional energy development makes more sense than extending the PTC.