Subsidy Reform to Power U.S. Clean Tech

Clean tech in the United States has been on the rise in recent years— even through the recession and other challenges. Increasing wind power, falling solar costs, expanding electric vehicle markets, government stimulus and other investments have built a global clean tech sector that topped $263 billion last year.

In the first quarter of 2012, however, global clean energy investment dropped to its lowest level since 2008. Good news stories are being replaced with headlines about closing factories, bankruptcies, and cancelled projects. Clean tech appears to be at a crucial inflection point. Against this backdrop, I co-authored a report on clean energy, with colleagues at the Breakthrough Institute and the Brookings Institution Metropolitan Policy Program. The report, “Beyond Boom and Bust: Putting Clean Tech on a Path to Subsidy Independence,” finds that U.S. federal spending on clean tech will drop 50 percent between 2011 and 2012, and a whopping 75 percent between 2009 and 2014. Deployment support, in particular, will fall by nearly 80 percent, nearly wiping out U.S. support for clean tech.

This trend is being repeated in the clean tech sector from Germany to India. In Germany, subsidy adjustments, like those in the feed-in-tariff program for residential solar, are a smart way to catch up with falling technology costs and let the air out of a bubble that is growing at ratepayers expense. Other countries are taking far more drastic steps toward austerity rather than adjustments, as in Spain. In the United States, multiple subsidies have been wiped out and the Production Tax Credit for wind is likely to expire at the end of 2012, unless Congress acts. The cuts to U.S. subsidies extend far beyond the maturing renewables technologies, also hitting next-generation biofuels, electric vehicles, and advanced batteries—sectors with important futures, but some distance to go in reaching cost competitiveness.

Now is not the moment for the U.S. to walk away from the clean tech industry. The global market for clean tech will be worth trillions of dollars over the next 25 years. The United States should be in the game.

In order to carve out a place in that global marketplace, as well as deliver low-carbon power in the U.S., our paper calls for policy reforms that puts clean tech on a path to subsidy independence, makes efficient use of scarce public dollars, and drives constant improvement in these crucial technologies.

What would smart reform look like?

Smart reform would include adjusting public subsidies to increase demand and reward innovation. It would provide sufficient certainty for investment decisions, but also set expectations that subsidy levels will decline over time. It would promote a diverse energy portfolio and maximize the impact of taxpayer resources by limiting transaction costs and ensuring clean tech pioneers can efficiently access affordable private capital. It would also reward innovators who deliver better prices or performance to clean tech users.

But deployment policy that drives cost improvements alone will not ensure a robust domestic industry. Renewed federal investment in research, development and demonstration (RD&D) is critical. Similarly, investments in America’s advanced manufacturers, state and regional clusters, and workforce are needed to bolster its competitive edge. America needs both innovation investment and deployment support to secure its leadership in the global marketplace. Take, for example, shale gas where government subsidies and investment in RD&D helped drive technological innovation and create a new multi-billion dollar market.

Fossil fuels, too, are in desperate need of subsidy reform. Fossil fuels have had a century to drive down costs and reach scale. It is a mature market that benefits from an energy system built to its specifications. Reforming and reducing subsidies in the fossil fuel sector is an essential step to build a low-carbon future and reduce greenhouse gas pollution that drives climate change and endangers the planet.

Looking ahead at clean tech subsidies in the U.S.

Election year politics are leaving many to feel that the only option to avoid the coming subsidy cliff is by extending existing programs. But lurching from extension to extension leaves the impression that clean tech is not making progress. This is a myth as the falling costs in solar and wind clearly demonstrate. While not there yet, the clean tech industry may soon be able to stand on its own. We hope this report opens a productive conversation about how policymakers and industry can work together to reach that goal.

Allowing current tax credits, like the PTC, to simply expire risks the U.S. leadership position in a tough international market that is still up for grabs. It would also put American clean energy jobs at risk today. Sustained investment in these sectors is crucial, which is why we argue to extend and reform federal support for clean tech.

Doing so can help strengthen the American clean tech industry as it moves toward a globally competitive and fully mature future. By then, clean tech will truly be ready to stand on its own.

Read the full paper, posted by the Breakthrough Institute or the Brookings Institution.

Note: The working paper, “Beyond Boom and Bust,” was co-authored by Letha Tawney, with independent scholars Jesse Jenkins and Alex Trembath at the Breakthrough Institute, and Mark Muro of the Brookings Institution. The working paper is not an official WRI publication.