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Bend Bulletin: Energy credit is under fire

Thursday, November 12th, 2009

578-dynamo-9393img_0236The following is based on and excerpted from the Bend Bulletin.

A number of Oregon companies, nonprofits and government agencies in Oregon have benefited from the Business Energy Tax Credit, known as BETC, or “Betsy.”

Critics of the BETC say that program is too generous and that it does not deliver on its promises of economic development.

Oregon Governor Kulongoski’s spokeswoman Anna Richter Taylor said the governor is focused on improving the program, as evidenced by new rules governing the program. “The governor agrees that it’s time to review the program and its economic benefit to the state,” she said.

For proof of that benefit, BETC supporters point to a February 2009 study done for the energy department by the Portland consulting firm ECONorthwest. Among its conclusions: that $73 million of tax credits in 2007 created 900 more jobs than if the money had been spent on other state-funded programs.

But Eric Fruits, a conservative economist who teaches at Portland State University, is not impressed. Using Oregon’s public records law earlier this year, he obtained an earlier draft of the report that did not paint the same picture of unblemished success.

Instead, the draft ECONorthwest report showed that for some types of BETC spending, the money would have produced more jobs if invested in other state programs.

Fruits also obtained a Jan. 16 e-mail from the study’s author, Stephen Grover, noting the mixed results, and asking the Energy Department’s then-assistant director whether he should change the report. He offered to combine categories in the final draft, thus making the negative results go away.

In the end, that’s what happened. The final report showed only positive impacts of the program.

Asked about the e-mail, Grover said the changes were intended to correct for potential inaccuracies. He said that such changes are common in presenting a report.

But when directed to Fruits’ blog, which details the changes to the draft, Sen. Chris Telfer, R-Bend, called it “disappointing.” “You’ve got my blood boiling now,” she said.

Read the full story in the Bend Bulletin (registration required).

Posted in Economic Impacts, Energy, Government, Press | Comments Off

Oregon officials get caught fudging the costs of energy tax credits

Monday, November 2nd, 2009

bucketofmoneyThe Oregonian reports that Oregon state officials deliberately underestimated the cost the governor’s tax credit scheme to attract  “green” companies and to encourage “green” projects.  The Business Energy Tax Credits (BETC) are huge give-aways: Enterprises that don’t pay taxes (like nonprofits and government entities) can sell the credits to tax-paying companies to reduce their tax bills. The only way to get the legislature to extend the credits was to fudge the estimated costs of the program.

However, the state officials made a big batch of fudge: The tax credit program program that cost 40 times more than unsuspecting lawmakers were told it would cost.

None of this is news.  Throughout the year, this blog has been reporting on BETC’s budget busting and number fudging.

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Posted in Energy, Government | 1 Comment »

Portland’s bus pass giveaway will cost the State of Oregon as much as $3.64 million

Wednesday, August 26th, 2009

trimet_youthThe Portland mayor announced that the City Council has entered into an agreement with TriMet in which the City provides free bus passes to 14,000 students in Portland Public Schools.

According to the agreement (pdf), the estimated cost of the program will be $3.64 million and will take advantage of the state’s large and growing subsidies for “green” projects to fund the giveaway.

Oregon’s green subsidies come in the form of tax credits.  Corporation that use the credits can reduce their tax bills. Organizations that do not pay taxes—such as local governments and nonprofits—can sell the credits to corporations that have a tax obligation, thereby reducing state income tax revenues.  This means that local initiatives like the Portland’s bus pass program reduce the amount of corporate tax revenues the state government collects. This puts pressure on the state to increase personal and corporate income taxes and diverts funding from other state programs, such as K-12 classroom instruction.

A study commissioned by Oregon’s Department of Energy found that bus pass projects that qualify for the tax giveaways actually have a net negative impact on employment and income. In other words, the projects take away more jobs than they create.

Posted in Energy, Government, Transportation | 1 Comment »

Oregon’s large and growing “green” tax credits are busting the state budget

Wednesday, August 26th, 2009

Economics International - Oregon's Business Energy Tax Credits (BETC)

While other portions of the state budget are facing the axe, Oregon’s tax subsidies for alternative energy and energy conservation a going through the roof.

The state estimates that the subsidies will cost the state $167 million in 2009-11. That’s more than $20 million higher than the state’s prediction earlier this year and more than double the amount given away 2007-09. In early 2008, when the economy was still in fairly good shape and the tax credits cost only half as much, the Oregonian declared that the program was “going bonkers.”

When the program began, the subsidies accounted for only 2 percent of corporate tax receipts. In 2009-11, the state predicts it will account for 22 percent. The projected subsidies are more than three times larger than the projected state budget gap.

A study commissioned by Oregon’s Department of Energy found that some of the projects that qualify for the tax giveaways actually reduce employment and income. Commercial renewables projects such as wind and solar projects were associated with fewer jobs and lower income than if the tax credit money were spent on other state funded programs. Industrial conservation projects—ranging from bus passes to energy efficiency equipment—also had a net negative impact on employment and incomes.

Even with the large subsidies, some of the companies that have been drawn to Oregon by tax credits are scaling back or slowing their plans. REpower USA Corp., the sales and project management arm of a German wind turbine manufacturer, announced this month that it would relocate its U.S. headquarters from Portland to Denver because Colorado’s subsidies were better. Despite more than $30 million in government incentives, Vestas, a Danish wind turbine manufacturer, has slowed its plans to build a new headquarters in Portland.

Posted in Energy, Government | 1 Comment »

Costs of cap-and-trade in Oregon: Testimony to the Oregon Senate

Thursday, April 9th, 2009

If passed, Oregon SB 80 would establish a greenhouse gas cap-and-trade scheme for the State of Oregon. The Oregon Senate Committee on Environment and Natural Resources will have a public hearing on SB 80 on Thursday April 9, 2009 at 3:00 P.M. in Hearing Room C.

The following is the written testimony submitted by Eric Fruits regarding the costs of Oregon SB 80.

In September 2008, I co-authored a comprehensive analysis of the economic and fiscal impacts on Oregon of meeting the ambitious greenhouse gas reduction goals outlined in the proposed amendments to SB 80. In February 2009, I submitted testimony on the economic and fiscal impacts associated with the cap-and-trade scheme introduced in SB 80. I have attached my past testimony and the report I co-authored.

This letter summarizes my earlier testimony and presents new evidence of the substantial costs associated with trying to meet Oregon’s aggressive greenhouse gas emissions reduction goals.

  • Oregon’s economic output would be $48.3 billion lower; 90,000 fewer people would be employed; and state and local government revenues would be $4.4 billion lower (Pozdena & Fruits, 2008).
  • Subsequent independent research supports our findings: a 1 percent decline in carbon dioxide emissions is associated with a 0.74 percent decline in GDP (Annicchiarico, et al., 2009).
  • Recent research calculates that for every “green” job created via subsidies and tax breaks, 2.2 jobs elsewhere in the economy are destroyed (Álvarez, 2009).

There is no avoiding the substantial costs of SB 80. Households, businesses, and the public sector will have steeper power bills and will pay more to engage in nearly every activity.

Today, businesses are shrinking, closing shop, or exiting the state. Oregon now has its highest unemployment in 25 years and one of the worst unemployment rates in the country. Higher energy prices under SB 80 will worsen an already dire economic situation.

It is now evident that hopes of creating new “green” jobs funded with tax credits and subsidies paid by existing Oregon businesses and consumers is a losing proposition where more jobs are lost than created. Projections of increased employment under SB 80 are built on unrealistic assumptions and flawed models that produce counterintuitive results that have been refuted by real world observations.

Sources cited:

Álvarez, G. C. (2009). Study of the effects on employment of public aid to renewable energy sources. King Juan Carlos University, Madrid, Spain.

Annicchiarico, B., Bennato, A. R., and Costa, A. (2009). Economic growth and carbon dioxide emissions in Italy, 1861-2003. MPRA Paper No. 12817.

Fruits, E. and Pozdena, R. J. (2008). Oregon Greenhouse Gas Reduction Policies: The Economic and Fiscal Impact Challenges. Cascade Policy Institute. Portland, OR.

Posted in Economic Impacts, Energy, Environment, Uncategorized | Comments Off

BETC: Do Oregon’s energy tax credits help or hurt the economy?

Monday, February 23rd, 2009

Just a Picture of a Bike RackTomorrow morning, Oregon’s House Revenue Committee will be taking public input on a bill to limit the state’s business energy tax credits.

Oregon’s Business Energy Tax Credit program (BETC) gives a tax credit to businesses, nonprofits, and other organizations to spend money on projects intended to reduce energy consumption. If a business has no tax obligation, it can sell its credits to another business to help reduce the buyer’s tax obligation. As a result, businesses, governments, and nonprofits have an incentive to label standard business practices as energy conservation projects. For example, an employer that puts in bike racks or subsidizes its employees’ bus passes can qualify for the credit.

A recent study by ECONorthwest (PDF) released by the Oregon Department of Energy concluded that BETC’s tax credits produced more economic output and employment than spending on other state funded programs, such as K-12 education. While the BETC program may be associated with increased employment, the jobs associated with 2007-08 tax credit projects have wages that are approximately 11 percent lower than if the money were spent on other state funded programs.

Everyone lines up for a trough full of money

As reported earlier, the State of Oregon projects that the BETC program will cost the state $144 million in tax revenues in 2009-11 fiscal years (approximately $72 million a year), and climb to more than $80 million a year after that.

The ECONorthwest study, however, shows that these projections may be too low. In the first 10 months of 2008, more than $156 million in tax credits were given away, or more than twice the state’s projections for the upcoming two years.

It’s not all good news: Some tax credits hurt employment

The final draft of the ECONorthwest study would give the impression that all BETC projects boost economic activity.  However, an earlier draft of the report obtained by a public records request found that some categories of projects reduced economic output and employment. The earlier draft showed:

  • Commercial renewables projects such as wind and solar projects were associated with 29 fewer jobs and $420,000 less in wage income than if the tax credit money were spent on other state funded programs.
  • Industrial conservation projects—ranging from bus passes to energy efficiency equipment—produced 6 fewer jobs and $1.8 million less in wages than if the tax credit money were spent on other state funded programs.  The annual incomes of jobs associated with industrial conservation projects were approximately 6 percent less than if the tax credit money were spent on other state funded programs.

How to make the bad news go away

To help support the Oregon Department of Energy’s contention that the BETC program produces economic benefits to the state, the author of the ECONorthwest study offered to bury his more bothersome findings by combining them with programs that had net benefits.  In an email obtained by a public records request, the study’s author writes to the Department of Energy:

“Here is the draft economic impact report for the 2007-08 BETC/RETC programs. Note that in the commercial and industrial sections, sometimes the impacts are slightly negative. Let us know if you want us to combine categories and not show this additional detail separating commercial and industrial (when commercial and industrial are combined, the net impacts are positive).”

In the end, the final draft did combine the categories, and no negative economic impacts are reported. Instead, the final draft only hints at the possibility:

In some cases, certain sectors in the economy might show a negative net impact as employment or economic output decreases relative to the Base Case.

Some trivia

Note that the firm that wrote the study also employs the Revenue Committee vice-chairman as a policy analyst and the author of the report is, in effect, one of the committee vice-chairman’s bosses.

A solution: Broad based tax breaks

As noted earlier, targeted tax breaks such as BETC are ineffective as a tool of economic growth. Spending and investing will occur only if households and firms face low, but stable, tax rates.  Rather than a targeted tax break in which approval is based on the whims of the Oregon Department of Energy, the BETC should be replaced with broad based permanent reductions in state personal and business income tax rates.

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Posted in Economic Impacts, Energy, Government | 1 Comment »

What is the cost of cutting carbon?

Monday, February 2nd, 2009

Cost of Cutting Carbon - Range of EstimatesA panel of economics experts surveyed by the U.S. Government Accountability Office concluded that estimates of the costs of climate change programs is more useful to policy makers than estimates of the potential benefits.  This is because policy costs would occur immediately, but the benefits–if any–would occur decades in the future.

In the past year, a variety of studies by organizations supportive of aggressive climate change policies have attempted to calculate the additional annual expenditures in renewable energy generation and energy efficiency necessary to meet greenhouse gas reduction goals.

One problem: No one knows how much spending is needed

And the guesses are all over the place.

In the past year, four separate studies came up with a wide range of cost estimates for climate policies. Most recently, a report issued by the World Economic Forum in Davos, Switzerland summarizes three studies. The Forum says between $150 billion and $313 billion in additional spending is needed each year between now and 2030 too reduce carbon emissions to levels deemed sustainable by the Intergovernmental Panel on Climate Change (IPCC).

Earlier this month McKinsey & Company said the additional costs would range begin at $475 billion a year and rise to $1.2 trillion a year through 2030, with an average additional cost of $846 billion a year.

A range as big as the Dutch economy

No wonder policy makers are confused. The additional costs across four studies range from $150 billion a year to $846 billion a year.  That is a $696 billion range.  That is a swing that is bigger than the economy of the Netherlands ($650 billion). It is impossible to design effective policies when the cost estimates have a margin of error that is as big as the 20th largest economy in world.

Citations:

Dinkel, J., Enkvist, P.-A., Nauclér, T., and Pestiaux, J. (2009). Pathways to a low-carbon economy: Version 2 of the global greenhouse gas abatement cost curve. McKinsey & Company.

Liebreich, M., Greenwood, C., von Bismarck, M., and Gurung, A. (2009). Green investing: Towards a clean energy infrastructure. World Economic Forum and New Energy Finance.

United States Government Accountability Office (2008). Climate change: Expert opinion on the economics of policy options to address climate change. GAO-08-605.

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The high costs of cutting carbon emissions: McKinsey & Co.

Tuesday, January 27th, 2009

McKinsey: High Costs of Cutting CarbonAccording to a report by consulting firm McKinsey & Co., the world can keep global warming in check if nations spend trillions of dollars on energy efficiency, clean power and forestry projects over the next 20+ years.

In addition to typical annual capital investments, the report concludes that beginning in 2011, additional investments of $475 billion a year would be required to keep global temperatures 2 degrees Celsius below pre-Industrial temperatures. By 2026, the cost would rise to $1.2 trillion a year.

The net present value today of the additional expenditures between 2011 and 2030 would be approximately $7.3 trillion. That is bigger than China’s economy today and equivalent to the economies of Japan and India combined.

Citation:
Dinkel, J., Enkvist, P.-A., Nauclér, T., and Pestiaux, J. (2009). Pathways to a low-carbon economy: Version 2 of the global greenhouse gas abatement cost curve. McKinsey & Company.

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The economic growth-carbon emissions connection: New evidence

Monday, January 26th, 2009

co2_and_gdpResearch by Eric Fruits and Randall Pozdena found that economic output, energy use, and carbon dioxide emissions have been tightly cointegrated historically. They calculated that a 1 percent decline in carbon dioxide emissions would be associated with a 0.71 percent decline in gross domestic product (GDP), a widely used measure of national income.

A recent working paper using a time series covering more than 140 years found almost exactly the same relationship. The authors conclude that changes in carbon dioxide emissions and changes in GDP are cointegrated. They calculate that over the long run, a 1 percent decline in carbon dioxide emissions would be associated with a 0.74 percent decline in GDP.

Citation:
Annicchiarico, B., Bennato, A. R., and Costa, A. (2009). Economic growth and carbon dioxide emissions in Italy, 1861-2003. MPRA Paper No. 12817.

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The high costs of climate change policies: Oregonian

Saturday, January 24th, 2009

OregonianEric Fruits has an op-ed in the Oregonian on the economic and fiscal costs associated with Oregon’s proposed policies to halt climate change.

Oregon is a leader in climate change legislation. The state has adopted one of the most ambitious greenhouse gas emissions reduction goals in the world. Although Oregon is big in leadership status, it is small in size. Even if all Oregonians dropped their energy consumption to zero–or doubled it–the Earth’s climate would never know it. Thus, policies to substantially reduce greenhouse gas emissions in the state run the risk of being virtually “all pain, no gain.”

There is no getting around it: both carbon taxes and cap-and-trade programs raise energy prices. If either program is put into effect, households, businesses, and the public sector will have steeper power bills and will pay more to drive their vehicles. Meeting the goals would mean Oregon’s economic growth would be cut almost in half. In turn, state and local governments would collect $4.4 billion less in revenues.

Numerous businesses are shrinking, closing shop, or exiting the state, leaving Oregon with almost double digit unemployment. Higher energy prices under a carbon tax or cap-and-trade program will only make things worse.

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