Sunday, October 7, 2012

Countervailing Calamity: US Green Subsidy Policy - The Ultimate Boondoggle

Given Mitt Romney's recent debate-zinger about President Obama's serious affinity for green energy and this Wednesday's big Department of Commerce announcement regarding final antidumping and anti-subsidy duties on Chinese solar panels, American green energy policy - and green subsidies in particular - have been (and likely will continue to be) in the news.  Thus, now's a perfect time to preview probably my favorite sections of my forthcoming Cato Institute paper, "Countervailing Calamity: How to Stop the Global Subsidies Race," on the United States' incoherent and painful green subsidy policies.

First, despite the fact that the Obama administration loves to complain about foreign (especially Chinese) subsidies hurting America's green companies and workers, the fact is that federal, state and local governments here annually throw tens of billions of taxpayer dollars at alternative energy companies and consumers:
Since the 1950s, the U.S. government has subsidized the search for, and production of, energy alternatives to fossil fuels, but such funds have expanded dramatically in recent years. The Congressional Budget Office (CBO) estimates that government subsidies to support the production of fuels and energy technologies totaled approximately $24 billion in 2011: $20.5 billion in various tax preferences (special deductions, special tax rates, tax credits, and grants in lieu of tax credits) and $3.5 billion in Department of Energy spending programs (direct investments, primarily for research and development, loans and loan guarantees). The CBO found that 78% of all tax subsidies and 54% of all DOE subsidies went to alternative energy projects (renewable energy and energy efficiency). Based on DOE’s figures, the Institute for Energy Research calculated that fossil fuels (oil, natural gas, and coal) received $0.64 in taxpayer dollars for every megawatt-hour of energy produced, while hydropower received $0.82, nuclear $3.14, wind $56.29, and solar an astonishing $775.64.

Three of the most prominent DOE programs are the Advanced Technology Vehicle Manufacturing (ATVM) program, which aims to improve the energy efficiency of automobiles; the Section 1705 loan-guarantee program, which supports loans for some renewable energy systems, electric power transmission, and biofuel projects; and the Section 1703 loan guarantee program, which aims to increase investment in “clean energy” facilities (primarily nuclear energy). The CBO estimates that the subsidy costs for the ATVM and Section 1705 loan programs between 2009 and 2012 were approximately $4 billion on about $25 billion in loans, although those costs could be higher depending on the economic success or failure of the subsidized firms. 
The federal government has also provided a vast array of tax subsidies and other grants to producers and consumers of biofuels such as ethanol, biodiesel, and cellulosic biofuel. According to the U.S. Department of Energy, 538 different federal and state subsidies—grants, tax incentives, loans and leases, rebates, exemptions, and other programs—are currently available to producers or consumers of alternative fuels in the United States. Forty-one of these are federal government programs. The CBO estimates that federal excise tax credits for alcohol fuels and for biodiesel alone cost $6.9 billion in 2011. Although some of these subsidies expired in December 2011, many other federal and state subsidy programs continue to funnel billions of taxpayer dollars to U.S. biofuels producers.

Despite some pushback from fiscal conservatives, targeted alternative-energy subsidies continue to have broad bipartisan support. For example, in August 2012 the Senate Finance Committee approved, by a strong bipartisan vote of 19–5, tax extenders legislation containing over $18 billion worth of rebates, credits, and other tax subsidies for alternative energy. A one-year extension of the 2.2-cents-per-kilowatt-hour production tax credit for wind energy alone will cost over $12 billion.
So much for those stalwart fiscal conservatives in the GOP, huh?  Sigh.

Second, all this subsidizing is - unsurprisingly - causing major problems here in the United States:
There is ample evidence that the problems caused by subsidies are both real and widespread in the United States. First, U.S. programs have caused significant economic damage. A recent review of the economic literature on federal loan guarantees found that “every loan guarantee program (a) transfers the risk from lenders to taxpayers, (b) is likely to inhibit innovation, and (c) increases the overall cost of borrowing.” The paper concluded that, at best, the “guarantees distort crucial market signals that determine where capital should be invested, resulting in lower interest rates that are unmerited and a reduction of capital for more worthy projects. … At their worst, these guarantees introduce political incentives into business decisions, creating the conditions for … cronyism." The study found that the three main DOE loan programs in particular “fall short of their stated goals of developing clean energy and creating jobs” and cause indirect damage to the nation’s economy through “distortion of market signals, cronyism, and mal-investment.” Thus, the very public bankruptcies of DOE loan recipients Solyndra, Beacon Power, Ener1, and Abound are more aptly described as a feature, not a bug, of American “green energy” policies. And more green energy failures appear to be on the horizon.

Similar economic harms are caused by other U.S. programs, such as agriculture subsidies, the auto bailouts, and biofuels subsidies. In each case, the costs—via economic distortions, cost overruns, unintended consequences, and cronyism—were found to outweigh any identified benefits. For example, the Cash for Clunkers program was found to cost taxpayers $24,000 per vehicle sold, and the auto bailouts, beyond the financial outlays, were found to constitute a direct and unnecessary payout to the United Autoworkers Union at the expense of taxpayers and investors. U.S. biofuels policies, particularly for corn ethanol, have actually been found to harm the environment, and federal farm subsidies are routinely found to benefit large agribusiness interests at the expense of taxpayers, consumers, and small farmers.

[Furthermore], U.S. subsidy policies have created stark political problems, as corruption—or at least the appearance of corruption—is routinely tied to these federal programs. The most famous recent example is the case of U.S. solar firm Solyndra, wherein major contributors to the Obama campaign lobbied for, and received, approximately $500 million in DOE loan guarantees for the soon-to-be-bankrupt company, despite strong evidence of the company’s unviability. Solyndra, unfortunately, is not alone: in the recent book, Throw Them All Out, author Peter Schweitzer chronicles myriad examples of cronyism and political corruption tied to ever-expanding U.S. subsidy programs. With respect to alternative energy, Schweitzer explains that “the game of funneling taxpayer money to friends has exploded to astonishing levels in recent years.” He notes that 71 percent of the Obama Energy Department’s grants and loans went to “individuals who were bundlers, members of Obama’s National Finance Committee, or large donors to the Democratic Party.” These donors together raised $457,834 for President Obama’s 2008 campaign, and were subsequently approved for over $11 billion in federal grants or loans. Most recently, Illinois-based energy producer—and Section 1705 loan guarantee recipient—Exelon has been found to have profited handsomely from its cozy relationship with the Obama administration. Such revelations and others led the book’s author to conclude that “the Department of Energy loan and grant program might be the greatest—and most expensive—example of crony capitalism in American history.”
Such a devastating conclusion.  (By the way, if you're interested in this stuff I highly recommend reading Schweitzer's book - an amazingly depressing read.)

Third, US green energy (and other) subsidies are a breeding ground for international trade disputes, as other countries use global anti-subsidy rules to defend their industries and workers from trade-distorting US subsidies:
The U.S. government’s subsidization of specific companies and enterprises subjects U.S. exports—and U.S. trade and subsidy policy more broadly—to scrutiny and potential retaliation by other WTO members in the form of CVDs or suspended concessions via a WTO dispute. Such responses undermine U.S. efforts to promote trade and to discourage other countries’ use of trade-distorting subsidies on the national, bilateral (Free Trade Agreement [FTA]), and multilateral (WTO/G20) levels. They also inject uncertainty into U.S. and global markets, while wasting finite government resources on long legal battles and tit-for-tat trade disputes.... 
[other subsections on disputes re: US automobile and cotton subsidies] 
Green energy and technology. Perhaps no issue is more indicative of the broader U.S. subsidy debate than federal government support for alternative-energy products. For example, in 2009–2010, subsidized U.S. biodiesel imports became subject to CVD orders in Australia, Peru, and the European Union, while U.S. ethanol subsidies have led to the initiation of trade remedies investigations against U.S. exports in both the EU and China. The Chinese government also has launched two investigations of green-energy subsidies. The first has resulted in a final report showing several instances of “prohibited subsidies” granted by U.S. states, and the Chinese government is now considering whether to bring formal charges to the WTO or take other necessary action. China also has initiated an AD/CVD investigation of U.S. imports of polysilicon—a key component in solar panel manufacturing—alleging that several state and federal subsidies to U.S. renewable-energy producers have injured their Chinese competitors. U.S. producers exported over $397 million worth of polysilicon to China in the first five months of 2012.

Other green subsidy programs also leave U.S. manufacturers vulnerable to future anti-subsidy measures. For example, as explained above, a large majority of all federal loan guarantees under the Section 1705 program have gone to U.S. solar manufacturers. Loan guarantees are expressly listed as a type of “financial contribution” under the SCM Agreement, and a “benefit” will exist to the extent that the amount that the loan recipient pays on the guaranteed loan is less than the “amount that the firm would pay on a comparable commercial loan absent the government guarantee.” Given the extremely risky nature of solar lending—a fact highlighted by the CRS and the high-profile failures of government-subsidized firms like Solyndra and Abound Solar —it is all but certain that the Section 1705 loan guarantees have conferred a benefit on U.S. solar producers, and the specificity of this subsidy program to these firms is clear. Thus, the Section 1705 program is very likely a countervailable subsidy. Ironically, the only thing likely preventing a CVD case against U.S. solar panel exports is the green subsidy programs’ failure—significant export volumes are needed to cause “injury” in another foreign market, and U.S. solar panel companies remain uncompetitive. U.S. biofuels and polysilicon producers, however, have met with more success, and thus more backlash.

Meanwhile, the U.S. government has launched high-profile CVD investigations of Chinese solar panels and wind turbines, as well as a Section 301 investigation, which allows the president, on his own or via a petition from a private U.S. party, to seek the removal of foreign measures that harm U.S. commerce. The Section 301 investigation of these products led to a WTO complaint against Chinese subsidies to wind-power equipment manufacturers. The solar case alone affects over $3 billion worth of 2011 merchandise trade, and DOC has already announced preliminary affirmative CVD and antidumping determinations. In response to these actions, the Chinese government—no saint when it comes to subsidies and protectionism—immediately deflected criticism by pointing out rampant U.S. subsidies on the same types of products and, as mentioned, by launching its own investigations of U.S. renewable-energy subsidies.
China is also challenging various methodological aspects of the US solar panels and wind turbines investigations (and many others) in not one, but two, new WTO disputes - adding yet another layer of uncertainty over the US and global markets for green goods.  And, of course, there are two US court cases challenging the constitutionality of the March 2012 law applying the US Countervailing Duty Law to imports from "non-market economies" like China, so the solar and wind cases are also tied up in that.

What a mess.

Since the solar panels determination is coming out Wednesday, let me try to summarize all of the above craziness for that specific product:

The United States - a rampant subsidizer of domestic solar panel manufacturers - will very likely impose final anti-subsidy (and antidumping) duties on Chinese solar panel manufacturers.  China is challenging those duties (and others) in two WTO disputes and in US courts.  The federal government and many US states also subsidize domestic consumers of solar panels (to encourage their use), yet the aforementioned duties will raise US prices of that product (thus discouraging their use).  Meanwhile, US subsidies of polysilicon - the primary component in solar panels - have led to Chinese AD/CVD investigations of US imports of that product.  If that investigation is successful, input prices for Chinese solar panels (which Beijing subsidizes) will go up, and - if form holds - the United States will challenge those duties at the WTO.  So, to recap: we subsidize the input, which they then tax; then they subsidize the downstream product, which we then tax (and subsidize!).  And, of course, everybody's suing everybody.

And this is from governments who claim to support the use of green energy?  Gimme a break.

And oh by the way, China's solar and wind industries are on the brink of collapse due to subsidy-driven overcapacity, weak global demand and, of course, the threat of anti-dumping and anti-subsidy duties in not only the United States, but also the EU and India.  This of course, is the result of China's export-focused, subsidy-laden industrial policy - a strategy that President Obama has repeatedly expressed a desire to emulate.

So do you think maybe - possibly - it's time to rethink US green energy policy?

Crazy thought, I know.

(More paper excerpts are available here.)

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