Congress has rescinded $1.5 billion in Recovery Act clean energy loan guarantee funds to help pay for recently approved legislation for the federal medical assistance percentage or FMAP, which would increase federal funding for state Medicaid costs. This is a significant blow to the United States’s capacity to meet its clean energy goals and confront volatile global warming.
FMAP is worthy legislation. But its funding shouldn’t be taken from the Department of Energy’s clean energy loan guarantee program. The future deployment of over $20 billion in commercial clean energy technology and corresponding jobs is now placed in doubt by removing $1.5 billion from the program. This most recent raid on clean energy funding is particularly unfortunate because it comes during the same week that DOE announced further opportunities for loan guarantees for commercial clean energy projects that now may never be built.
The American Recovery and Reinvestment Act, or ARRA, made a noteworthy commitment to deploying U.S. commercial clean energy technology by appropriating $6 billion for loan guarantees for renewable energy, clean energy manufacturing, and upgrades to our nation’s transmission system. The ARRA funding helps innovative, cutting-edge clean energy companies pay the credit subsidy costs (sometimes referred to as the “costs of the loan”) when borrowing private sector capital to build commercially viable clean energy projects, create jobs, and leverage as much as $60 billion in private sector financing.
Taking $1.5 billion out of the Department of Energy’s loan guarantee program can ultimately prevent as much as $24 billion in clean energy investments. This program allows the Department of Energy to guarantee the debt of privately owned clean energy developers. This means that if a project developer is not able to pay back a loan to a private lender the government will step in and repay the outstanding balance. The government accounts for this risk by estimating how much they’ll likely have to pay out for the guarantee in the future and putting that much money in a special account to cover pay-outs. These expected pay-outs are known as the “credit subsidy cost,” which is often stated as a percentage of the size of the loan that’s guaranteed.
DOE has estimated that the credit subsidy cost on loan guarantees issued in 2011 will be 6.16 percent of the total value of the guarantees. At that rate, the $1.5 billion that is now being used for FMAP could enable clean energy investments of $24.35 billion. (For more on credit subsidy costs and loan guarantees, see “Protection Taxpayers from a Financial Meltdown”.)
This is not the first time Congress has inappropriately singled out the DOE loan guarantee program for cuts. It removed $2 billion of the original $6 billion in July 2009 to help extend the “Cash for Clunkers” program. The further removal of another $1.5 billion this week will leave the loan guarantee program with less than $2.5 billion in funds.
The overall removal of $3.5 billion from the program represents a potential loss of $35 billion in private sector clean energy investment. The result? Clean energy projects will not be built, jobs will not be filled, and innovative U.S. technology will be left on the sidelines in a competitive global economy increasingly driven by clean energy.
Congress has other options besides removing money from activities that create jobs, cut pollution, and advance a clean energy economy. Instead, it should end the senseless practice of providing wasteful tax breaks to big oil companies and the fossil fuel industry. In the face of staggering oil company profits these outdated handouts to big oil weaken our national security, hurt our environment, and bring us higher energy prices.
The Center for American Progress has identified nine tax breaks for oil companies that will cost taxpayers $45 billion over the next 10 years. To give one example, the “percentage depletion allowance,” described in the report “America’s Hidden Power Bill,” is worth $10 billion over the next 10 years.
Congress should end harmful tax breaks before raiding beneficial programs. The Department of Energy’s loan guarantee program to encourage the investment and construction of commercially viable clean energy technology should be replenished immediately. Ending needless and expensive tax breaks to the oil industry is a far better solution to meeting legislative funding needs than shortchanging our clean energy future and the fight against global warming.
Jake Caldwell is the Director of Policy for Agriculture, Trade and Energy and Richard W. Caperton is a Policy Analyst at American Progress.
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Richard W. Caperton
Managing Director, Energy