Governing confusion: how statutes, fiscal policy, and regulations impede clean energy technologies.

• Author: Brown, Marilyn A.
• Position: Symposium: Creating a Legal Framework for Sustainable Energy

INTRODUCTION

The United States shares with many other countries the goal of the United Nations Framework Convention on Climate Change "to achieve ... stabilization of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system." (l) The critical role of new technologies in achieving this goal is underscored by the fact that most anthropogenic greenhouse gases (GHGs) emitted over the next century will come from equipment and infrastructure that has not yet been built. As a result, new technologies and fuels have the potential to transform the nation's energy system while meeting climate change as well as energy security and other goals.

Many believe that advancing clean energy technologies (2) could allow both climate stabilization and economic development. (3) Further, if many technologies are successfully developed in parallel with early action to promote deployment, the cost of stabilization could be significantly reduced. The assumed availability of future technologies is a strong driver of stabilization costs in most climate change models. (4) Edmonds et al. studied stabilization of atmospheric C[O.sub.2] concentration at 550 parts per million by volume (ppmv) and showed that the accelerated pace of technology improvements and deployment could produce a reduction in costs of a factor of 2.5 in 2100 relative to a baseline incorporating the "business as usual" rate of technical change. (5)

Given the need for large-scale GHG emission reductions, the challenge is to move toward actions that go beyond technology research and development to strategies that target the rapid and large-scale absorption of GHG-reducing technologies into the economy. Most technological innovations do not survive the transition from invention to marketplace success. While they may be technically feasible, various obstacles prevent them from gaining market share. In addition, best practices representing already proven cost-effective approaches to GHG mitigation are significantly under-utilized. The longevity of much of the energy infrastructure from power plants to the building stock prolongs the operation of obsolete technologies and other impediments cause suboptimal choices to be made when technologies do finally turn over.

While there are many barriers to the commercialization and deployment of clean energy technologies, those that are imposed by legislatures and regulators are particularly of interest as they operate at cross-purposes with government-stated intentions of GHG reductions. This article focuses on the legal barriers to the deployment of clean energy technologies that come from fiscal policy, regulation, and statutes. For each policy realm--fiscal, regulatory, and statutory--distortionary policies are discussed. In some cases, these policies are unfavorable because they place clean energy technologies at a disadvantage, sometimes by favoring competing technologies. In other cases, they are ineffective because their intended outcome is undermined by policy design flaws, loopholes, and burdensome procedures that circumvent the policy goal. Still in other instances, policies are uncertain because of state and local variability, fluctuating short-term policies, and extended debates about alternative future policy scenarios that can forestall commitments to clean energy or accelerate investments in carbon-intensive energy options. In the aggregate, these barriers act to confuse investors, consumers, inventors, and producers in their decisions relative to clean energy technologies.

This assessment of distortionary policies relies on a review of the literature on barriers to clean energy technologies and twenty-seven expert interviews. These interviews with experts from government, national laboratories, industry, universities, and consulting firms provided an up-to-date overview of market and technology conditions and associated barriers, along with substantial detail on the nature of the market imperfections as well as illustrative deployment failures and successes.

1. FISCAL BARRIERS

   Fiscal barriers are impediments related to taxation and public revenue and debt policies promulgated by governments that impact markets in which a clean energy technology is expected to compete. They can take many forms such as tax incentives and penalties, liability insurance, leases, land rights-of-way, waste disposal, and guarantees to mitigate project financing or fuel price risk. While fiscal policies are imposed in pursuit of the public good, they can become impediments to innovation and competition, and they can be unfavorable to clean energy technologies. In addition, fluctuating and variable tax incentives as well as the possibility of future tax penalties related to GHG emissions all contribute to fiscal uncertainty, which can undermine marketplace efficiency.

   1. Unfavorable Fiscal Policies

      Fiscal policies can be used to encourage investment in a particular technology area or to overcome market failures. However, technologies and goals can change quicker than fiscal policy, leading to outdated fiscal instruments, which then incentivize undesired behaviors or technologies. A variety of tax subsidies, differential taxation across capital and operating expenses, unfavorable tariffs, and utility pricing policies illustrate this phenomenon.

      1. Tax Subsidies

         Existing tax subsidies can act as barriers to the commercialization and deployment of GHG-reducing technologies. For example, subsidies for conventional fuels, both implicit and explicit, can significantly lower final energy prices, putting alternative energy options at a competitive disadvantage unless they enjoy an equally large tax assistance.

         The transportation sector offers examples of policies that provide tax advantages for conventional energy sources and encourage high levels of energy consumption:

         * The IRS provides business deductions for the purchase of large light trucks (> 6000 lbs) (6) that amount to a tax break--encouraging the purchase of large light trucks when they may not be needed. (7) Originally established as a form of tax relief for small business owners, large light trucks (especially, sports utility vehicles (SUVs) which are considered light trucks) are increasingly purchased by families for personal use. This particular issue made waves in the print media in 2003 when the popular luxury vehicle, the Hummer H2, was made an example. (8) In October 2004, the allowable first-year tax deduction under IRS [section] 179 was reduced dramatically (from $105,000 to $25,000), but this smaller incentive is still available for large light trucks. (9)

         * The gas-guzzler tax on cars (but not on light trucks) has discouraged the purchase of gas-guzzling luxury cars while providing no discouragement for the purchase of gas-guzzling trucks. (10) This tax was created with the Energy Tax Act of 1978; (11) current taxes, which have been in effect since 1991, range from $1000 to $7700 per vehicle depending on the fuel economy of the car beginning at 22.5 mpg. (12) By taxing fuel-inefficient cars, this tax policy has effectively eliminated the mass production of gas-guzzling cars, but it has not reduced energy consumption. Because gas-guzzler taxes have not been applied to trucks, they have not created a similar disincentive to produce gas-guzzler vehicles as "trucks." (13)

         Examples in the realm of energy resource development include oil depletion allowances which allow owners to claim a depletion deduction for loss of their reserves. Specifically, oil and gas wells can claim cost depletion and in some cases, percentage depletion. (14) Also, government support for research on the production of liquid fuels from coal and the production of petroleum from shale oil and tar sands can appear as barriers to low-carbon alternative fuels. If successful, this research would promote the continued use of high-GHG transportation fuels. These fiscal incentives exemplify the problem of conflicting social goals. They exist because of the public desire to promote U.S. oil independence and energy security, but they conflict with the goal of stabilizing greenhouse gas concentrations in the atmosphere.

      2. Unequal Taxation of Capital and Operating Expenses

         Tax policies that encourage operating expenses and penalize capital expenses serve to slow capital stock turnover, preclude technological change, and result in the over-consumption of energy products and the over-production of GHG emissions. Examples of this issue are evident in industry, buildings, and energy supply.

         In American industry, the current federal tax code discourages capital investments in general, as opposed to direct expensing of energy costs. In addition, the federal tax code forces firms to depreciate energy efficiency investments over a longer period of time than many other investments (e.g., only five years for a new data center). This is partly because energy-efficient products have long depreciable lives, such as fifteen years for a new motor or a new industrial boiler. Interestingly, a new back-up generator would be depreciated over three years while a new combined heat and power (CHP) system would be depreciated over twenty years. (15) The CHP system would provide both reliability and energy efficiency while the back-up generator provides reliability at the expense of energy efficiency and clean air. This is another case of legislation lagging behind (and inhibiting) technological progress. Federal depreciation schedules were put into place more than two decades ago as part of the IRS Tax Reform Act of 1986, and they have not kept up with technological innovations. (16) Modification of depreciation schedules would remove a significant barrier to industrial efficiency investments, but it would require legislative action. (17)

         Similarly, as buildings are capital expenses, these fiscal policies retard buildings turnover in all sectors...