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Will We Bet on a Clean Energy Economy?

The Chips Are Down. It’s Time for Congress to Ante Up

SOURCE: iStockphoto

Will Congress place a solid bet on the future or continue to gamble with an economy that runs on fossil fuel?

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A moment of truth is upon us. The fate of U.S. leadership on clean energy hangs in the balance as Congress takes up debate on the current “tax extenders” bill.

Americans face a stark choice with the BP oil disaster continuing to bleed fossil fuel from the ocean floor, destroying the ecology and the economy of the entire Gulf of Mexico region. Are we going to support some of the most effective policy that has yet been deployed for transitioning American business and industry to a clean energy future and away from the dangers of fossil fuel, or will we walk away from the green shoots of this economic recovery to let other nations lead in the coming low-carbon economy?

This threat to U.S. economic leadership is not some abstract long-term concern. It is an immediate challenge in the next fiscal quarter, which will determine whether billions of dollars in private capital will be invested into real clean energy projects and new manufacturing supply chains—into bricks, mortar, steel, and jobs. The debate on tax extenders will determine whether we pull the plug on two key policies for the U.S. clean energy industry—the Treasury Grant Program for clean energy project finance; and the Advanced Energy Manufacturing Tax Credit, or 48C tax credit—just as clean technology is on the brink of leading our economic recovery.

American politicians in Congress, the White House, and on the campaign trail have for years talked of building a clean energy economy. Phrases such as “creating green jobs that can’t be outsourced” and “retooling American industry to compete in a low-carbon economy” have become familiar staples in our political lexicon. This rhetoric has been matched by historic investments in clean energy solutions. The American Recovery and Reinvestment Act alone committed $80 billion in public investment into clean technology deployment and advanced infrastructure, leveraging far more private capital investment in jobs and innovative businesses.

ARRA made important strategic investments in clean energy, but this funding will soon expire, just as it is poised for major impact. Even as wasteful subsidies continue to flow unabated into the pockets of Big Oil, and special interests block Congress from passing comprehensive climate and clean energy legislation.The Treasury Grant Program and Manufacturing Tax Credit have served as the lifeline of clean energy projects during this economic downturn. Congress must place a priority on economic progress and extend funding for these short-term financing programs, which are proving their worth by jump-starting the development and construction of clean energy projects.

The Section 1603 Treasury Grant Program is the first program that must be defended. Section 1603 of the American Recovery and Reinvestment Act authorizes the Department of the Treasury to issue grants, in lieu of issuing clean energy production tax credits or investment tax credits, to investors in clean energy facilities that became operational or commenced construction in 2009 and 2010.

Clean energy PTCs and ITCs have incentivized investment in clean energy since they were established in 1992 and 2008, respectively. Yet their effectiveness was limited by Congress’s reluctance to provide a predictable incentive lasting several years. Investment in clean energy decreased dramatically each time Congress was slow to reauthorize funding as tax equity investors, who receive a return on their investments in clean energy projects through the tax code, walked away and put their money elsewhere. The wind energy sector, for example, experienced dramatic decreases in project development, with drops of more than 75 percent in 1999, 2001, and 2003 due to uncertainty of PTC extension.

tax credits power wind power

These investors made approximately $3.1 billion in investments in wind energy development in 2006 and predicted that demand for tax equity for wind projects in 2008 and 2009 would increase to $8 billion and $10 billion, respectively. But appetite for tax credits dried up after the 2008 financial crisis along with profits in the financial industry, causing tax equity markets to collapse right alongside Lehman Brothers and AIG. Only two or three of the 22 investors who had previously participated in wind tax equity transactions remained active by the end of 2008.

The market finished the year with $2.5 billion in tax equity transactions—less than a third of what had been predicted only a year before. This newest threat to renewable energy project development isn’t just theoretical. It is already visible in the market. The first quarter of 2010 saw the least new wind power brought online of any quarter since 2007, largely because of uncertainty about extending the 1603 program. Without quick action, many renewable energy businesses face serious threats to their survival. 

The need to incentivize private capital flow into clean energy development is greater than ever and will become more urgent with time. Financing mechanisms and incentives will evolve as the market demand for clean energy evolves. Yet the 1603 Grant Program has proven to be the most effective financing mechanism right now for filling this critical gap as the economic recovery sets in. Exchanging investment risk for upfront cash grants to cover 30 percent of the clean energy project costs makes investing in the development of clean energy projects attractive to investors and is the right boost for the nascent clean energy industry. Further, because it is delivered by Treasury and not through the tax code, the Section 1603 cash grant also provides greater transparency and accountability making it even more effective government spending than most other energy subsidies.

A two- to five-year extension of the 1603 Grant Program, which will otherwise end on December 31, 2010, must be included in any tax extender package or other suitable legislative vehicle that Congress considers this year in order for the U.S. renewable energy industry to weather this storm.

These short-term financing mechanisms that encourage private capital flow into clean energy must be complemented by policy to enhance domestic manufacturing capacity and productivity. Building a clean energy industry in the United States does not only mean more electricity from clean, renewable sources. It also means more high-paying jobs in every region of the country, because clean energy will require us to get to work producing and assembling new technologies on a mass scale.

A two- to five-year extension of another ARRA established program, the Advanced Energy Manufacturing Tax Credit, known by its tax code section number 48C, would also provide the boost necessary to put workers back on American assembly lines, ensuring continued U.S. competitiveness. The United States is still a strong competitor in the invention and installation of clean energy technology, but we are falling behind Asia and Europe when it comes to their manufacture and production. Fully 70 percent of all the component parts that make up our wind, solar, biomass, and other installed clean energy systems are imported from other countries today, at the same time that American manufacturing plans continue to bleed jobs.

ARRA funded $2.3 billion in 48C credits, which provide a 30 percent tax credit for investments in new, expanded, or re-equipped U.S.-based advanced energy manufacturing facilities. The 48C program has proved to be an effective and successful tool to reinvigorate our domestic manufacturing base for clean energy. It is so successful, in fact, that the program was oversubscribed by a ratio of 3-to-1. Increasing the size and duration of the 48C program, as proposed in the newly introduced Security in Energy and Manufacturing Act, will provide incentives for more companies to make the transition to clean energy production.

The 1603 Grant Program and the 48C program are providing a necessary boost to the clean energy industry in the United States in the absence of a national renewable energy standard and comprehensive climate and clean energy legislation. Without an extension of the 1603 and 48C programs, we run the risk of standing on the sidelines as other countries produce and deploy the technologies that are the basis of our clean energy future. When the United States finally does pass comprehensive climate and energy legislation, we will be forced to buy all our technologies from these countries while our own factories and workers stand idle. That is not the future we want or deserve.

Building a robust clean energy economy that makes America more secure will require policy that interacts effectively with current market and financial conditions. Pragmatic federal leadership will create jobs and increase America’s competitive edge in the global economy, which is steadily acquiring a green hue.

The chips are down for American clean energy jobs in a very real sense in the current debate in Congress. We know the cost of our current oil dependence. Just ask any fisherman on the Gulf Coast of Mississippi. The real question is whether we will place a solid bet on the future or continue to gamble with an economy that runs on fossil fuel.

To speak with our experts on this topic, please contact:

Print: Katie Peters (economy, education, poverty, Half in Ten Education Fund, women's issues)
202.741.6285 or kpeters@americanprogress.org

Print: Tom Caiazza (foreign policy, health care, LGBT issues, gun-violence prevention, the National Security Agency)
202.481.7141 or tcaiazza@americanprogress.org

Print: Chelsea Kiene (energy and environment, Legal Progress, higher education)
202.478.5328 or ckiene@americanprogress.org

Spanish-language and ethnic media: Tanya Arditi
202.741.6258 or tarditi@americanprogress.org

TV: Rachel Rosen
202.483.2675 or rrosen@americanprogress.org

Radio: Chelsea Kiene
202.478.5328 or ckiene@americanprogress.org