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Do Obama's Energy Tax Proposals Make Sense?

It's been a thin trickle so far, but more details about the energy provisions in Obama's stimulus proposal are finally dribbling out. Remember folks, he's promised to double alternative-energy production over the next three years, and we still don't know quite how he'll do it. But over the weekend, The Washington Post's Steven Mufson reported that the Obama team was considering, among other things, a two-year, $8.6 billion extension of the production tax credit for renewable energy. Sounds good—except hey, wait a minute, didn't Congress already pass an extension of the production tax credit last year, as part of the big Wall Street bailout package? Sort of. The twist here is that the Obama team now wants to make the credits refundable, which could actually matter a great deal.

One of the biggest headaches facing the clean-energy sector right now (aside from the plunge in oil and coal prices) is that the existing production tax credits aren't working like they're supposed to. For one, the credits are non-refundable, which means that they can reduce a renewable energy producer's tax liability—but only if the company is actually making a profit and has taxable income in the first place. In the current slump, that doesn't describe many energy producers. And, as Josie Garthwaite of Earth2Tech points out, it especially doesn't apply to many wind and solar startup firms, who are often doing innovative work, but may not turn a profit for years.

This hasn't always been a problem. As recently as 2007, when Wall Street still looked hale and there were plenty of investment banks puttering around, investors like Lehman Brothers or Morgan Stanley could buy up tax benefits from solar and wind producers, giving the renewable industry a steady source of income. But many of the big banks no longer have an appetite for these credits, either because they're not profitable anymore or, in the case of Lehman, because they've been vaporized. Moreover, as Mufson explained in a smart Post piece last week, a little-noticed tax provision in last fall's bailout bill essentially gave those banks that are still profitable incentive to buy up renewable tax credits from other, struggling banks, rather than from solar and wind producers.

A refundable production credit, by contrast would let solar and wind firms benefit directly—in essence, they'd receive a check from the Treasury if the credit reduced their tax liability below zero—even if they're not yet profitable and can't pawn their tax credits off on outside investors. It's a small tweak, but a smart one. That said, Obama could make this proposal better still. There's no reason to limit the extension to two years. Right now, the game works like this: Congress extends the production tax credit for one or two years, and then, once the expiration date rolls around, there's a big theatrical display (lots of rending of the garments) over whether or not to renew them yet again. Inevitably, the credits do get renewed, but the theatrics create an unstable investment climate. So why not just abandon the charade and extend the credit for, say, ten years? It's going to happen anyway; the only question is whether it will be done cleanly or in a haphazard fashion.

Meanwhile, the Obama team is also ruminating over a separate proposal from House Democrats Chris Van Hollen and Zach Wamp to create a new National Clean Energy Lending Authority that would provide loan guarantees and other financing to "credit-worthy projects that have attracted some equity capital and can meet private-sector lending criteria." Here's E&E Daily:

The new bank, which would have its own board and be independent from other agencies, should receive an initial authorization of $20 billion in two annual installments of $10 billion, the lawmakers said, enough to have a “major impact on the viability of many existing renewable energy projects.”

Other lawmakers have also called for some form of new federal corporation to help finance renewable energy projects and other types of facilities.

Bingaman introduced a bill last year calling for a 21st Century Energy Deployment Corporation, a quasi-independent corporation with Energy Department oversight. It would employ various techniques to provide and back up financing secured on the private market, in order to help developers get capital for projects in areas such as clean power generation, fuels and vehicles.

Admittedly, I haven't seen much written about this idea—I'll try to dig around—but it's another stab at addressing the fact that alternative-energy producers are having trouble getting financing in the ongoing credit crunch.

--Bradford Plumer