US Green Energy Subsidies ‘Unfair and Ineffective’, Study Finds

A University of California study has slammed the fairness, efficiency and effectiveness of billions of dollars of so-called green energy subsidies provided by the US government.

The US federal government has paid $US18.1 billion in tax credits since 2006 aimed at encouraging American households to install energy-efficient windows, air conditioning schemes, rooftop solar in their homes and buy electric and other hybrid vehicles.

The study has found the bottom 60 per cent US households by income received about 10 per cent of the value of the four main ‘green energy’ tax credits available, while the top 20 per cent (those with annual incomes above $US75,000) extracted 60 per cent of the benefit.

“The most extreme [example] is the program aimed at electric vehicles, where the top income quintile received about 90 per cent of all credits,” concluded Severin Borenstien and Lucas Davis, from the University of California, Berkeley.

The biggest credit, the Non-Business Energy Property Credit, permits non-refundable tax credits of up to $US1500 and has cost $US13.7 billion since 2006.

“While there may well be political or other rationales to prefer this approach, it would seem to be difficult argue for these policies on distributional grounds,” the professors said.

The Alternative Motor Vehicle Credit permits tax credits up to $US4000 for purchase of eligible hybrid vehicles has cost $550 million since introduced in 2006. Households earning more than $US200,000 a year enjoyed 11 per cent of this credit and 35 per cent of the benefit of a similar Electric and Plug-In Hybrid Vehicles credit, which has cost $US346 million.

“We were struck by the horizontal inequity of these programs,” the study said, referring to the inability of people without tax liabilities to enjoy any benefit.

Their study The Distributional Effects of US Clean Energy Tax Credits found installations of energy efficient household items had soared but couldn’t conclude the credits were responsible. “If credits do no induce additional sales, then the primary effect is just to transfer rents to participants in transactions that would have taken place anyway,” they said.

“A growing body of evidence has shown that these policies are considerably less efficient than first-best policies,” they said. “There is wide agreement among economists that the best policy to reduce greenhouse gas emissions and other negative externalities from energy use would be to use a tax or cap-and-trade program,” the Berkeley economists said, noting that 65 per cent of global CO2-equivalent emissions came not from households but from business use of power.

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The Distributional Effects of US. Clean Energy Tax Credits

Severin Borenstein and Lucas W. Davis, University of California

Abstract

Since 2006, U.S. households have received more than $18 billion in federal income tax credits for weatherizing their homes, installing solar panels, buying hybrid and electric vehicles, and other \clean energy” investments. We use taxreturn data to examine the socioeconomic characteristics of program recipients. We nd that these tax expenditures have gone predominantly to higher-income Americans. The bottom three income quintiles have received about 10% of all credits, while the top quintile has received about 60%. The most extreme is the program aimed at electric vehicles, where we nd that the top income quintile has received about 90% of all credits. By comparing to previous work on the distributional consequences of pricing greenhouse gas emissions, we conclude that tax credits are likely to be much less attractive on distributional grounds than market mechanisms to reduce GHGs.

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