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How the Tax Deal Could Throttle the Green Economy

There have been all sorts of drastic proclamations about the tax deal Obama struck with congressional Republicans earlier this week. Here's another to chuck on the pile: The agreement might end up killing what little momentum the U.S. clean-energy industry has picked up over the past two years.

Some background. Back in 2008, Congress extended (yet again) tax credits for solar and wind producers, which now cover 30 percent of upfront costs. But when the recession made it tougher for firms to get financing, the credits were no longer working as advertised. So, in last year's stimulus bill, Congress converted the credits to flat grants. That seemed to do the trick: According to the Financial Times, two-thirds of all new solar projects and 85 percent of all new wind projects in the United States now rely on these grants. Trouble is, the grant program is going to expire at the end of the year. This frequently happens with tax support for renewables, and Congress usually just extends the program after a brief period of dithering.

But not this time. The tax breaks weren't included anywhere in the Obama deal. And so the solar and wind industries are now freaking out, warning that their companies are about to tumble off a cliff, shed thousands of jobs, etc. What's particularly galling is that the ethanol industry is getting its tax breaks renewed. As a clean-energy source, ethanol is highly dubious: Studies have found that the whole process can produce more heat-trapping CO2 emissions than regular old gasoline. But ethanol has a powerful farm-state constituency, and those subsidies have long been sacrosanct. (That may change in the years ahead, as Tea Party types like Jim DeMint have begun denouncing government support for ethanol, but, until anything actually comes of that, corn is still king.)

Granted, wind and solar aren't doomed yet. In the House, Earl Blumenauer has been calling attention to the situation, and it's possible that all those liberal Democrats who find the broader tax deal so repugnant could end up wheedling this small concession. (A one-year extension would cost $1.3 billion, or about 0.1 percent of the overall tax bill.) And it's not like Republicans are implacably opposed to the renewable tax credit; they've generally been on board ever since the program was first enacted in 1992.

That said, there's a deeper problem here. The renewable industry will have a tough time gaining a firm footing in the market if, every year or two, there's glaring uncertainty about whether Congress will continue to offer support. Wind and solar companies are having a difficult time making investment decisions, which may help explain why wind generation dropped this year, after a boom in 2009. (Oddly enough, this is one "economic uncertainty" argument you rarely hear Republicans make.) An alternative approach would be to extend the tax program for a longer period of time—or go further and pass a bill that requires utilities to get a certain percentage of their power from sources like wind, solar, or biomass. But the latter idea died in the Senate this year, so clean-energy producers are back to fighting for scraps—and now they may not get even that.

Update: Looks like all that pressure may have worked. After 81 House Democrats demanded that the program be extended, two senators have reportedly agreed with the White House on a deal to keep them for an additional year. But it's still unclear whether this new provision will cause any Republicans to bail. And, again, even a temporary extension doesn't address the uncertainty worry—it just means this game of chicken will pick up again at around this time next year.

(Flickr photo credit: Wayne National Forest)