This post is part of a symposium on Sandeep Vaheesan’s Democracy in Power: A History of Electrification in the United States. Read the rest of the posts here.
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Tax policy has become a key battleground for federal climate policy in the United States, a fact that is especially evident as the Trump administration and its allies in Congress work to terminate much of President Biden’s signature climate initiative, the Inflation Reduction Act (IRA). In many ways, this is symptomatic of a larger trend over the last half-century of using the tax code, and various kinds of tax expenditures, to pursue a vast range of policy goals. From housing to social welfare, R&D, and clean energy, the tax code has become an important site of political struggle among different groups and classes seeking to advance their interests.
None of this is new, but the consequences are significant. As Joseph Schumpeter observed more than a century ago, tax and fiscal policy have the capacity to create and destroy whole industries, thereby shaping fundamental aspects of the economy. Given the stakes, it is hardly surprising that so much political conflict gets channeled into fights over budgets and taxes. One is reminded of the remark, sometimes attributed to Marx, that “the tax struggle is the oldest form of class struggle.”
While the larger class politics of taxes and government spending are especially prominent in the current moment (as made abundantly clear in Melinda Cooper’s important new book and the LPE symposium on it), a significant aspect of the contemporary tax struggle involves competition between interest groups and various segments of the business community to secure and defend favorable tax provisions. This has been particularly evident in the energy sector since at least the middle decades of the twentieth century, as the federal government has used the tax code to support a range of policy priorities related to fossil fuels, nuclear power, conservation, and clean energy. But tax policy has arguably been more fundamental to renewable energy than any other aspect of the energy sector, largely in the form of tax credits and generous allowances for accelerated depreciation for renewable energy projects. Taken together, these tax expenditures have worked to channel an increasing amount of private capital into renewable energy, leading to substantial growth in both wind and solar over the last two decades. The IRA continued and amplified these trends, while also adding some important new provisions that seek to bolster the role of regulated and government-owned utilities in renewables and diminish the overwhelming role of large financial institutions.
In all of this, it seems, we need both a renewed political economy of public finance that puts power and conflict at its center and an explicitly normative project for public finance that shows how tax policy and the instruments of public finance can be used to promote a just and sustainable future.
One of the many virtues of Sandeep Vaheesan’s excellent new book, Democracy in Power, is that it advances both elements of this project. In the historical sections of his book, Vaheesan focuses on the significant public expenditures that built the massive federal hydroelectric projects of the New Deal era, the creative forms of debt financing and the (all too limited) use of grants to electrify rural America, and, more recently, the use of tax credits to spur the growth of renewable energy. Vaheesan’s vision for the future—“Public Power for the Entire Country”—also depends fundamentally on a veritable revolution in fiscal policy and federal spending that would enable taxpayer-funded public buyouts of investor-owned utilities and the creation of regional public power authorities across the country (a realization of George Norris’s “seven little TVAs” for the rest of the country).
While the IRA falls far short of this vision, Vaheesan is pragmatic and measured in his appraisal of the legislation. He recognizes that it marks an important break with the past through its direct pay provisions, which provide cash grants in lieu of tax credits to government entities and non-profits that had previously been barred from using tax credits for renewable energy. To date, the direct pay provisions have been important for a wide array of actors, but on a quite limited scale. Most of the benefits of the IRA have so far gone to private actors, especially large financial institutions.
Indeed, as Vaheesan suggests, the use of tax credits to support renewable energy has effectively barred government-owned utilities and non-profits from using public money (in the form of tax expenditures) to support clean public power. Similarly, although not a focus of Vaheesan’s story, regulated utilities have also been largely precluded from using these tax expenditures to build and operate clean energy projects. All of which has left us with a thoroughly privatized and financialized model of renewable energy ownership. This post, which draws on a forthcoming article, seeks to fill out this broader history of how we ended up with this particular model of ownership and how we might advance a more robust public stake in the clean energy future consistent with Vaheesan’s arguments.
Neoliberal Fiscal Policy and Renewable Energy
As part of a broader neoliberal fiscal regime that moved into high gear during the 1980s, renewable energy tax credits have focused since their inception on promoting a privatized and financialized model of renewable energy ownership. Indeed, the first federal tax credit for “alternative energy” (a 10% investment tax credit), which was adopted in 1978 as part of President Carter’s package of energy legislation responding to the 1970s energy crisis, expressly excluded both government-owned utilities and regulated investor-owned utilities, a decision that one study from the Harvard Business School characterized as a “major blunder” given the fundamental role that these utilities (public and private) played in the sector. Several states also adopted generous tax credits for renewable energy during this time, which also excluded government-owned and regulated utilities.
Over time, the federal investment tax credit (ITC) became the primary tool for promoting solar energy, with a significant enhancement of the credit from 10% to 30% in 2005. In 2008, thirty years after the creation of the tax credit, Congress allowed regulated investor-owned utilities to take advantage of these credits for the first time. But because of the way that these credits had to be accounted for in cost-of-service ratemaking (a practice known as “normalization accounting”), the benefits of the credits to regulated utilities (and their customers) had to be spread out over the life of the assets, which rendered them far less valuable than they were for private unregulated entities.
Now, I will admit that few topics make the eyes glaze over more than the intersection of tax and accounting rules with rate regulation, but the details matter here, as it is all too often precisely on this more technical terrain where key battles over economic power are being fought (you can read more about it here if you are interested). The upshot was that even after 2008, regulated investor-owned utilities were quite limited in their ability to use the investment tax credit for solar energy, leaving them to buy power from independent renewables projects through long-term power purchase agreements. For their part, government-owned utilities remained entirely excluded from using the investment tax credit for solar and other forms of renewable energy until the IRA’s direct pay provisions were enacted.
The story with wind energy is slightly different, but the overall result is similar. Since 1992, the production tax credit (PTC) has been the dominant federal tax credit used to support wind energy. In contrast to its approach to the ITC, however, Congress did not prohibit regulated investor-owned utilities from using the credits, and normalization accounting did not apply because the PTC pays out over time depending on the amount of electricity produced (again the details are here if you are interested). In the mid-1990s, some regulated utilities did begin to invest in wind projects, taking advantage of the tax credits and using cost-of-service ratemaking to recover the costs of these projects. Several early studies suggested that these projects were significantly cheaper than those being financed through third-party project finance arrangements. But these investments occurred just at the moment when the industry was being restructured, with a move to unbundle generation, transmission and distribution and introduce market-based competition for the generation sector. It’s a long and messy story (details here), but the bottom line for regulated utilities was that by the second half of the 1990s they (and their regulators) were far less keen to invest in new generation (alternative or otherwise) given the uncertain regulatory climate. Interestingly, for government-owned utilities, the 1992 legislation that established the PTC also included a limited direct pay provision for government utilities and non-profits, but that provision was effectively stillborn because it was subject to annual appropriations that never materialized.
The rules governing these tax credits led directly to the financialization of the renewable energy sector. Because only the owners of the projects could use the tax credits and because the independent project developers had very little (if any) tax liability, they had little choice but to enter into specific partnership structures with a new class of so-called tax equity investors (mainly banks and other large financial institutions) who had sufficient tax liability (i.e., profits) to use the credits. In effect, renewable energy projects were transformed into vehicles for financial institutions to harvest tax benefits.
The key takeaway here is that for more than forty years, the dominant federal policy supports for renewable energy have been structured in a way to promote a privatized and financialized model of renewable energy ownership—a fact that has provided much of the basis for the de-risking critique of the use of tax credits to promote private investment. But it is important to be precise here about which factions of private capital have been favored by these strategies and what the implications are for industry structure and ownership of key assets. Because both government-owned and regulated utilities have been precluded from using these tax benefits, their ability to build renewables has been limited, which is why non-regulated private entities currently own the vast majority of wind and solar generation in the United States. But as the IRA itself demonstrates (and as the longer history of the use of tax credits to promote capital formation in American industry makes clear), these instruments could have been (and still could be) structured differently to promote different patterns of ownership and control. They need not only be used to de-risk private investment.
More generally, this history also makes clear the importance of understanding how the instruments of public finance operate as switching devices for channeling capital into different sectors, creating different kinds of assets and ownership patterns. Put another way, we need to recognize that the fiscal history of industries such as renewable energy and electric power provides a much-needed complement and, in some cases, corrective to the more well-known regulatory history of these industries.
The Current Tax Struggle
So where does this all leave us in the current moment? President Trump’s strong support for fossil fuels, matched by his visceral hostility to clean energy (what is his deal with windmills?), suggests that the forty-year project of using tax credits to support renewable energy may be coming to an end. While this can be seen on one level as an obvious rebalancing of government regulation and fiscal policy in favor of the fossil fuel industry that backed Trump, the IRA tax credits are also now caught up in the larger effort to extend the 2017 tax cuts through budget reconciliation, which will require substantial spending offsets. As this post goes to press, it looks like the IRA credits for clean energy generation will be phased out in short order, notwithstanding the hopes expressed by some that the IRA’s significant investments in red states will generate sufficient congressional resistance to salvage these and other aspects of the IRA.
Whatever the outcome of the latest round in the energy tax struggle, however, it is clear that the growth of renewable energy will continue (albeit more slowly than before), given ongoing cost declines and the very large expected growth in electricity demand from increasing electrification and the rush to build new data centers. Simply put, the electricity industry will need all the power it can get to meet rising demand and renewables projects continue to offer some of the fastest and cheapest ways to add new capacity. While Trump may want to make coal great again and is pushing for more natural gas generation, it seems highly unlikely that the Administration will be able to stop coal’s ongoing decline or significantly accelerate the development of new natural gas plants.
More importantly, while the battle rages over whether and how much the government should continue spending to support renewable energy or fossil fuels or nuclear power, the critical question that all too often gets ignored is who will own and control these assets. Today, the vast majority of solar and wind energy assets are owned by large financial institutions acting as tax equity investors together with a rising class of new clean energy supermajors and other unregulated private actors. Very few of these assets have been subject to traditional cost-of-service ratemaking under either government or regulated utility ownership.
Without significant changes in policy, moreover, key trends in the power sector will likely work to entrench this pattern of private ownership and control. One of the most important trends in this respect, as Brett Christophers has highlighted, is the ongoing acquisition of clean energy and other power sector assets by large asset managers and private equity groups. These large asset managers are interested in owning these assets over the long term because they can effectively charge rent for them as long as they remain in operation—well after all the costs of construction and financing have been recovered. In many ways, these asset managers are the new “rentiers of the low carbon economy,” to use Sarah Knuth’s evocative phrase, as they work to turn productive infrastructure into assets for perpetual rent extraction.
The other big trend here, of course, is the growing energy appetite of the large technology companies to feed the massive electricity demand of their data centers. Indeed, these technology companies seem intent on sweeping up as many power sector assets as they can to fuel their data centers. Their interests are directly contrary to those of ordinary consumers, and they appear ready to do whatever needs to be done to succeed in what is shaping up to be a zero-sum contest for clean electricity.
Renewable Power
And so the great looming question in all of this really does come down to ownership and control—a question that too many in the mainstream climate and clean energy community have ignored, focusing instead on the scale and pace of the decarbonization challenge and the need to build as many clean energy assets as fast as possible. While one can be sympathetic to such views as emblematic of a sort of clean energy realism (and one can see a version of this in the emerging abundance agenda), we ignore ownership at our peril.
There are, of course, obvious alternatives to unregulated private-sector control. Public power is a big one, as Vaheesan makes clear in his book. But another is the regulated public utility model, which (despite its challenges) Vaheesan seems too quick to discount. Both of these models have proven to be effective vehicles for promoting capital formation, as evidenced by the massive investments in the electric power grid and other key infrastructures over the course of the twentieth century. Unlike a system of unregulated private sector ownership, moreover, both of these models work to recover the costs of investment (that is, the cost-of-service), but no more. In both cases, the fact of guaranteed cost recovery also means that the financing of these investments should be able to secure a lower cost of capital, which, in the absence of tax credits for private entities, would add to the overall cost advantages of regulated utility or public ownership. Thus, under any scenario involving regulated or government-owned utilities, once the costs of building the assets are recovered through rates, they will keep producing power but customers would only be charged for the short-run marginal costs of operating the projects. For wind and solar, that means that the electricity produced would be essentially free. Aside from some modest, ongoing operations and maintenance costs, solar and wind projects have no marginal costs. No labor, no fuel; just free energy from the wind and sun.
While there may well be considerable advantages that come with full government ownership when compared to the regulated utility model, as Vaheesan and others have long argued, the corollary argument that public utility regulation is irredeemable leaves us with a rather stark choice between a system dominated by unregulated private actors on the one hand or full public ownership on the other. Given the current prospects for full public ownership (and, frankly, the problems and challenges that have attended “actually existing” government utilities of all sorts, which Vaheesan catalogues), it seems that there may still be some value—perhaps considerable value—in reviving and rebuilding public utility regulation as a complement to public ownership.
The great irony (and the great tragedy) here with respect to the privatized approach to renewable energy is that the assets themselves were paid for in part by the public through tax expenditures. Why then should we the public not be demanding some stake in these assets? While such a question might be dismissed by the proponents of neoliberal public finance as nonsensical, it is important to remember that perhaps the most damaging legacy of neoliberalism, as Melinda Cooper suggests, is the way that it has foreclosed our ability to even ask such questions and diminished our capacity to imagine alternatives.
To that end, in addition to pushing for new ways to mobilize public finance that will result in more ownership of renewable energy assets by regulated and government-owned utilities, we should also be looking at ways to leverage the current system of tax expenditures to increase public control over this vital infrastructure. This could involve, for example, creating conditions or convertible options bundled with the tax credits that are used by private actors that would then give public authorities and even regulated utilities, (all entities that have a statutory duty to act in the public interest) as well as non-profit and member-owned cooperatives the option to acquire these assets for a fair price after the tax credits have been used—not unlike the public purchase option that attends federal hydropower licenses that Vaheesan highlights in his book. After all, these tax credits are fundamentally instruments of public finance. One of the tasks for a revitalized political economy of public finance, therefore, must involve thinking not only about new modalities and instruments but also how we might repurpose and redeploy existing instruments in ways that can advance and protect public claims on these resources.
Put another way, and following Vaheesan’s lead, what new forms of public capital can we imagine that are worthy of the incredible productive forces that have been unleashed through solar and wind technologies, battery storage, and (perhaps in the not-too-distant future) fusion energy— machines that can turn the free gifts of nature into abundant electricity. While it is too soon to say if we are witnessing the emergence of a new fiscal regime, much less what a new “made in America” industrial and energy policy might bring, we can say with confidence that much of the battle over the clean energy future depends on how the instruments of public finance will be deployed and, in the process, whether the public will be left to pay user fees to the private actors who seek to own our energy infrastructures, or whether we can craft new approaches to public finance that secure a meaningful public stake in the future of renewable power.
