Time For A Real Win-Win

The Senate is stalemated over climate policy for an obvious reason. The policies on offer – cap-and-trade, renewable electricity standards, “clean energy” subsidies – would inflict potentially high levels of economic pain for no measurable environmental gain. Few Senators can get excited about such policies – especially in an election year, especially in the midst of a recession.

Instead of trying to fool the public by rebranding cap-and-tax as “comprehensive energy legislation,” they should try a different approach – one that improves environmental performance by getting government out of the way.

A popular phrase among climate advocates is “win-win.” They claim that by forcing us to use less energy, their policies will save us money. The catch, of course, is that their strategy is to make energy more costly. If carbon taxes increase gasoline prices to $7-9 a gallon, as Harvard University’s Belfer Center advocates, people will drive less and ‘save’ money. Most consumers, however, will not feel better off!

President Obama says that putting a price on carbon will “drive investment” into the “clean energy technologies of the future.” This is the central planner’s fallacy – what F.A. Hayek called the “fatal conceit.” How does Mr. Obama know which technologies are destined to dominate tomorrow’s market place? If “clean energy” technologies are the next big thing, profit-seeking investors will plow capital into them without policy privileges. On the other hand, if such technologies are not commercially viable, mandating and subsidizing them will only suck capital away from more profitable enterprises.

The “win-win” crowd has been working the problem from the wrong end. The surest way to foster sustainable innovation in the energy sector is to remove political impediments to market-driven investment. The Senate should therefore should consider how expensing could enhance firms’ environmental performance while, and by, making them more productive, profitable, and competitive.

Newer facilities and equipment are almost always cleaner and more energy efficient than older capital stock. That is widely understood. So is the fact that advanced technologies face market barriers due to their higher cost. What is not as well understood is that America’s plodding depreciation schedules penalize investment in new energy assets, such as combined heat and power systems, pollution control equipment, and smart meters.

The American Council on Capital Formation (ACCF) commissioned Ernst & Young to compare the tax depreciation rules for eleven types of energy investments in twelve countries. Ernest & Young found that, in every investment category, U.S. depreciation rates are the slowest, or among the slowest, of the countries studied.

For example, after five years, U.S. firms recover 29.5% of their investment in combined heat and power systems compared to 49.7% for Japanese firms, 79.6% for Canadian firms, and 100% for Malaysian firms.

Ernst & Young also note that, “Because the United States has the second highest statutory corporate marginal tax rate among OECD countries combined with generally less favorable tax depreciation rules, the differences in effective tax rates are even greater.”

The policymaker’s Hippocratic Oath applies here: ‘First, Do No Harm.’ Freeing up investors to improve both the productivity and environmental performance of U.S. firms should be at the top of Congress’s energy agenda.