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  • Another Free-Money Report

    Because the concept of opportunity cost is fundamental to all of economics, it is covered in the first chapter of every principles-of-economics textbook. Opportunity cost tells us what we give up when make decisions on consumption and production. There are no free lunches. In spite of the universal agreement on the importance of opportunity cost, there is nearly universal omission of the concept in studies purporting to show job creation from regulation, subsidies, and mandates.

    The recent study for the American Wind Energy Association (AWEA) follows this disturbing pattern. Hoping to keep the wind-energy industry on artificial life support—via a production tax credit that gives wind-farm operators a tax subsidy equivalent to nearly half the cost of the wholesale electricity they sell—AWEA promotes a study whose job projections are based on a survey of the 20 largest wind-turbine/component manufacturers and whose methodology completely ignores opportunity cost.

    That is, the survey asks these hardly disinterested agents whether they would reduce employment without the tax credit and then ignores the impact of the tax subsidy on other parts of the economy. Because giving resources to the wind-energy industry means that the resources have to be taxed from some other part of the economy, the AWEA study does not estimate the overall employment impact.

    The lost economic activity and jobs caused by the transfer of resources to the wind-energy industry is the opportunity cost of the production tax credit. Aand it is ignored in the AWEA report.

    Beyond the production tax credit, the wind-energy industry benefits from other mandates and regulations that require utilities to buy renewable energy, even at non-competitive prices. Starting with data from the U.S. Energy Information Administration, we estimated that the cost of wind energy will be 80 percent to 113 percent more costly than conventionally generated electricity.

    Driving up energy costs is not a job-creating policy. According to the AWEA study, wind-energy installation will drop 75 percent without the production tax credit. If this is true, it simply proves that wind energy is too expensive compared to conventional energy. A study that looks at only one side of the equation may hide this excess cost, but no amount of subsidies, mandates, or other schemes can erase it.

    Posted in Featured [slideshow_deploy]

    4 Responses to Another Free-Money Report

    1. Leon Lundquist says:

      Isn't it sad how many Invisible things there are, things that really exist but cannot be believed like Opportunity Cost. I sympathize, David, I can't get any traction how Income Tax vanishes Capital. It is the most obvious invisible thing destroying our nation, but nobody can see it. I think of the losses that can't be seen from workable programs that can't get funding because it is all gobbled up by bad programs. You can't count it because it didn't happen, like what if we had School Vouchers? I don't think we would have these massive failures in public education. Maybe the people would be smart enough to not be fooled by the likes of Obama.

    2. Tom@AWEA says:

      Why is the Heritage Foundation, in these difficult economic times, standing staunchly in support of a job-killing targeted tax increase on an emerging, job-creating industry that is a recognized source of new American manufacturing jobs? Does that square with its other positions on taxes? Keeping taxes low on wind power makes sense: past experience tells us that when taxes are low, development increases; when taxes increase, development drops at least temporarily by 70-90 percent. That is something that would be disruptive to any industry, let alone one that has been expanding rapidly.

      Moving on to the issue of opportunity cost, it's definitely an important part of economic theory, but like all other parts of economic theory, it shouldn't be considered in a vacuum. Why, for example, are there such things as anti-dumping lawsuits, and unfair trade practices? Because manufacturers sometimes accept the (literal) opportunity cost of selling products at a loss in order to gain market share and drive manufacturers in other countries out of business. There is nothing magical (or heretical) about opportunity cost–it's a cost like other costs of doing business, and should be considered and balanced against other benefits and detriments of a proposed course of action.

      Here, the proposed course of action is a four-year extension of the wind energy production tax credit (PTC). The benefits are clear:

      - Wind turbine installations in the U.S. increased more than tenfold over the past decade, from a total of 2,650 megawatts (MW) at the end of 2000 to 40,181 MW (enough to power the equivalent of 10 million homes) 10 years later.

      - Even as domestic installations of wind turbines were expanding dramatically, the domestic content of those turbines grew even faster–from 25 percent prior to 2005 to 60 percent today. As the nonpartisan Congressional Research Service (CRS) recently found, American wind manufacturing facilities have kept pace, growing from as few as 30 in 2004 to nearly 400 in 2010. At the same time, the PTC has leveraged an average of $17 billion a year in private investment over the last four years.

      - In recent years, wind has muscled its way into the electric power mainstream. Wind energy’s cost has been reduced over 90% since 1980, driven by a continuing stream of game-changing technology advances. A recent report from Lawrence Berkeley National Laboratory (LBNL), found that wind turbine prices have dropped sharply in recent years, due largely to the scaling up of turbine size to reduce cost of energy (COE) and the growth of a domestic supply chain as the U.S. dollar has declined against other major currencies. Utilities are increasingly choosing to rely on wind, recognizing its ability to guarantee low electricity rates for the long term. In fact, wind power has provided 35 percent of all new electric capacity installed in America over the past four years, more than coal and nuclear combined.

      - Wind power provides badly-needed support for hard-pressed rural economies, and rural economic development. Farmers and ranchers can receive lease payments of up to $120,000 over 20 years for each turbine on their property, and rural counties are seeing substantial increases in property tax revenues.

      The key to this progress is building a domestic market–if wind farms are being installed here, the turbines and the vast majority of their 8,000 parts will be built here, and the associated construction, transportation, and operations and maintenance paychecks will go to American workers and support American families.

      Finally, it is reasonable to expect that new wind farm installations will drop sharply if the PTC is allowed to expire. But that is not because wind cannot be competitive–it is because businesses need certainty, and stable tax policy, to be able to make plans, invest money, build factories, and hire workers. Throughout the past decade, even as the wind industry has grown, the PTC's effectiveness as an incentive has been undermined by a steady series of expirations and short-term extensions. Building a new, major manufacturing industry in the face of global competition is a marathon, not a 100-yard dash, and we need a tax policy that recognizes this basic fact.

      • Tony Facade says:

        There are enough holes in Tom's reply to drive a wind facility through. First, the "rural economies" phrase doesn't address the problem of towns being split asunder by secret political deals with local elected officials. Second, why is it the wind industry's job to "rescue" these rural economies? Much of the reason farms are failing is due to low milk prices, another function of failed government policy. The subsidies shoule be directed toward the dairy farmers, not to wind developers.But milk is passe; "green" projects have the cachet now. The property taxes often don't rise. I realize that all installations aren't the same, but what do they do, besides redirect tax dollars to foreign companies while raising the consumer cost of electricity? Will future projects be installed without the subsidies? when wind-to-electricity was proposed on an industrial scale, much hoo hah was made about saving the planet, reducing dependence on foreign oil, "green, renewable, non-polluting" energy. Has one singe conventional generation source been permanently taken off-line since wind development reared its ugly head?

      • Ken says:

        You really think we're going to swallow this tripe. The people are suffering from this transfer of taxpayer dollars to useless energy projects. We're fed up AWEA!

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