Economic Dynamism and Renewable Energy

By Ed Jewell, Energy Fellow

Photo Credit: whitehouse.gov

On October 8, 2016, President Barack Obama published an article in The Economist titled "The Way Ahead," in which he laid out four "major structural challenges" to the U.S. economy that must be addressed in order to restore faith in the nation’s economic (and by extension, political) system. The four major structural challenges identified by the President include: 1) boosting productivity, 2) reducing inequality, 3) reducing unemployment, and 4) building a resilient economy that will continue to grow.

President Obama has demonstrated—by leading the U.S. out of the worst economic crisis in over eighty years, saving the auto industry, and establishing an economy which gained 15 million private-sector jobs since 2010—that he has the requisite understanding of how a functioning economy works. President Obama’s strategies for creating economic dynamism promote the role of government in providing a stable landscape for investment, as well as a direct role in stimulating and guiding specific economic sectors that are crucial for overall societal functioning.

The history of federal involvement in the renewable energy industry demonstrates that direct federal spending is greatly beneficial to fledgling industries for at least three purposes: 1) researching and developing new technologies, 2) providing the early investment necessary to allow the new technologies to mature to a point in which they can stand on their own in a competitive market without federal subsidies, and 3) stepping in when economic conditions deteriorate.

Further, the history between the federal government and the renewable energy industry illustrates that when the federal government tries to substitute tax credits for direct federal spending, the major beneficiaries are the largest and wealthiest banks and mutual funds in the country, a result that does not encourage economic stability or promote the general welfare.

In sum, direct federal investment in renewable energy technologies should be increased under the next administration, and industry reliance on tax credits should be gradually reduced—as currently planned—in order to maximize societal and economic benefits of renewable energy development. 

I.             Boosting Productivity 

Strong public investment in renewable energy—much of which came as a response to the financial crisis—has benefited the renewable energy industry in multiple ways, and the renewable energy industry has returned the benefits to the American people through technological innovations, reduced carbon emissions, and living-wage jobs. The successes of these federal investments demonstrate that the federal government should continue and enhance these investments in emerging renewable energy and energy storage technologies.

A handful of provisions in the American Recovery and Reinvestment Act of 2009 (the stimulus package) were critical to enabling the fledgling renewable energy industry to survive and even grow through the financial crisis.

Section 1603 Treasury grants, provided for in the stimulus package, funded 30% of project costs for renewable energy projects from 2010 to 2014. In the wake of the financial crisis, nearly $25 billion of stimulus money was paid out through the program. These federal grants helped fund 105,178 renewable energy projects that brought 21,633 MW of wind power capacity and 8,283 MW of solar power capacity online in the U.S., creating 75,000 construction jobs and 5,000 long-term jobs in the process.

The stimulus package also established the Section 1705 loan guarantee program, which provided loan guarantees for renewable energy projects that employed "new or significantly improved" technologies that were not yet in commercial use. The loan guarantee program effectively launched the utility-scale solar industry in the United States. As Energy Secretary Ernest Moniz recently noted, the federal loan program helped spur the deployment of 1.5 GW of utility-scale solar capacity in the U.S.

Aside from the financial stimulus package, the federal government has historically been a major funder of research and development in the renewable energy field, such as through the SunShot Initiative and the various other R&D projects undertaken through the National Renewable Energy Laboratory. However, more funding is necessary to adequately mitigate the threat of climate change. From 1978 to 2014, federal funding for renewable energy research and development (R&D) accounted for only 17% of total federal energy-related R&D funding. The Executive Director of the International Energy Agency recently called on world leaders to triple the amount of funding for renewable energy R&D.

In addition to funding research and development, the government should play a major role in infrastructure development—an idea that, as President Obama pointed out in his article—used to share wide bipartisan acceptance. The President noted the need for bridge and airport upgrades, to which I would add the need to make major investments in the electricity transmission system to facilitate a transition to a renewables-based grid.

The federal programs created by President Obama’s stimulus package, as well as his administration’s enhanced investment in R&D, have successfully boosted productivity in the renewable energy sector. The incoming administration should continue to invest in emerging renewable energy technologies.   

   

II.            Reducing Economic Inequality

  

The tax incentives authorized by Congress for renewable energy projects have been a main driver of the renewable energy industry for years, and therefore are responsible for a great amount of societal good through lower carbon emissions, living-wage jobs, and technological development. However, a decent argument can be made that this incentive structure furthers economic inequality—at least to a small degree—by allowing a small group of the largest financial institutions in the country to capture an economic benefit from nearly every renewable energy project developed.

While there are numerous drivers of economic inequality throughout the economy, and the tax credits for renewables play a small and perhaps insignificant role in the overall level of economic inequality, it is worth noting that the tax incentive structure—which has been a primary driver of the renewable energy industry—is perhaps less than ideal from an overall economic health perspective.

In order to realize the financial benefits of the Investment Tax Credit (ITC) or Production Tax Credit (PTC), project developers must find investors who have a large enough tax appetite to take advantage of the tax credits. Because large-scale solar and wind farms cost tens to hundreds of millions of dollars, and the ITC and PTC can only be used to offset “passive” income, there are only a handful of large banks and hedge funds that are capable of monetizing the benefits of the tax credits.

Renewable energy development—even with the tax credit incentive structure—creates broad-based economic gains that combat economic inequality. Installation of renewable energy technologies cannot be outsourced, and installation jobs pay living wages for skilled workers in local communities. Additionally, farmers and ranchers can receive royalty payments for the use of their land while continuing to produce their primary products, and overall, entrepreneurship is encouraged in the dynamic renewable energy industry. However, other forms of incentives that do not depend on financing from only the largest financial institutions and instead rely on financing structures that do not limit the pool of investors to only those with outrageous levels of “passive” income, are certainly possible.

The ITC and PTC are scheduled to gradually phase down in the coming years, mitigating the influence of the credits and reducing the contribution of renewable energy to income inequality. The next administration should ensure that there are adequate incentives for renewable energy development, and explore options that reduce economic inequality as well as encourage renewable energy development.

III.            Reducing Unemployment 

Renewable energy development helps reduce unemployment by creating new jobs in a growing industry. In addition to job creation, renewable energy development has the potential to provide secondary employment benefits as well.  As long as tax incentives are not over-utilized, the placement of high capital technologies in local jurisdictions can increase the tax base. An increased tax base generates revenue for the local government, allowing it to provide greater social services that in turn fight societal ills that sap lives and workforces.

As President Obama pointed out, social problems, such as opioid abuse and entry and recidivism in the criminal justice system, negatively affect unemployment rates as well as overall societal health. A renewable energy-based economy can help combat these problems by creating more living-wage jobs and expanding the tax base. Further, job training programs and other social opportunities could be made available because of the benefits created by renewable energy development. 

The solar industry already employs 77% more Americans than the coal industry, and these jobs are spread across communities throughout the country. While certainly the transition from fossil fuels to renewable energy will hit specific communities hard, the economic benefits, including a reduction in unemployment rates on a national scale, will be shared widely.

IV.            A More Resilient Economy 

President Obama specifically addressed the need to align the national economy with ecological limits. “[S]ustainable economic growth requires addressing climate change. Over the past five years, the notion of a trade-off between increasing growth and reducing emissions has been put to rest.”  

The decoupling of emissions from economic growth is absolutely critical if both the capitalist system and the ecological systems of the planet are to continue to co-exist. The International Energy Agency estimates that on the global level, “the annual rate of reduction in global energy intensity needs to more than double – from 1.1% per year today to 2.6% by 2050.” Thus, while our gains in decoupling are important, they must be increased. Our society is locked in to a capitalist system, and as the President points out, “it is important to remember that capitalism has been the greatest driver of prosperity and opportunity the world has ever known.” Therefore, decoupling emissions from growth has to be a bedrock principle for growing the economy.

The President writes of an economy that "grows sustainably without plundering the future at the service of the present." There is no better single way to make a massive stride toward achieving such an economy than through the development of renewable energy.

In sum, President Obama effectively advocates for a strong role for the federal government in creating a structurally sound economy. The example of renewable energy development provides a good case study of President Obama’s principles being applied—e.g., stimulus package investments, R&D, and infrastructure—but also show that the renewable energy industry could make a greater overall contribution to the health of the economy if the incentive structure was adjusted to depend less on tax credits and more on direct federal spending.

Whether moving away from a dependency on tax credits in the renewable energy industry is politically possible is another question altogether. A reliance on direct federal spending carries with it its own perils, but renewable energy cannot prosper at the expense of the greater economy. Likewise, the overall economy cannot continue to grow without rapidly adopting renewable energy technology. The relationship is reciprocal and important to get right and will largely fall to the next administration. Be sure to vote.