Are the Energy Efficiency Tax Credits Worth it

The government is currently offering federal tax credits for energy-efficient or renewable energy systems for your home. Some of the tax credits available in 2009 can be claimed on your 2010 return, but are the tax credits truly beneficial?

According to the IRS, the following products are eligible for a credit of 30% of their cost, with no upper limit. The sole stipulation is that they be placed in service by December 31, 2016: Geothermal heat pump, solar energy systems, wind energy systems and fuel cells. Additionally, credits are available for certain vehicles such as hybrids or plug-in electric vehicles. The credits are based on a formula for hybrid, battery powered, advanced lean burn, fuel cell or alternative fuel vehicles determined by the technology, vehicle weight and fuel economy as compared to base year models. This credit is limited to the first 60,000 vehicles per manufacturer, when a phase-out period will kick in, For plug-in electric vehicles, $2500-$7500 is credited based on the battery’s capacity. This will also phase out after the first 200,000 have been sold.

The “phase-out” clauses of the vehicle credits exemplify the issue many libertarians and small government conservatives have with the tax credit program. The incentive of beating the phase out puts further focus on the social engineering aspect of the plan. Rather than allowing the natural flow of market forces, i.e., people desiring to save money on fuel costs or to use less energy, to generate a demand for these vehicles, the government has forced a false demand by artificially inducing the purchase of these devices. Once the incentives have phased out, if the demand doesn’t remain steady, the vehicles may soon go off the market leaving purchasers with vehicles that have little or no replacement part availability and thus driving up the operating cost of the vehicle and robbing it of almost all resale value.

To state it differently, if the technology offers such great savings to the consumers, why does it have to be subsidized by tax credits or incentives.?  Take wind power, for instance. The environmental community has placed a great deal of trust in the promise that wind power will drastically reduce the dependency on fossil fuels. Even in small scale, single residency usage wind power proves noisy, land intensive, hazardous to birds and an eyesore. Add to that the fact that wind energy has not shown any great promise, despite massive investment, and the government’s tax credit is inducing citizens to purchase unproven and possibly unreliable technology. Solar energy shares many of the same issues with wind energy, specifically cost versus benefit and the limited geographical applications.

According the the Cato Institute, the tax credits make up part of a $30 to $40 billion dollar expenditure by the government (mostly under the auspices of the Department of Energy).  The “eco-energy” strategy of the DOE is based on the necessity of government intervention to overcome the imperfections in  the energy market, mainly predicated on the assumption that the current pricing system doesn’t reflect the environmental costs associated with energy production. Energy environmentalists who take a market-based approach reject that notion, relying primarily on tort redress, private property and market incentives to deal with degradation of the environment. They also see the focus on reduced energy consumption or alternative energy sources as inefficient and unnecessary. They base this on three major obstacles to the eco-energy strategists:

–  the overwhelming environmental drawbacks to renewable energy options.

– unfavorable economics and the existence of surplus capacity make mandatory energy conservation economically unfeasible.

– the fossil fuels industry’s advances in such areas as the use of natural gas have reduced the environmental costs of fossil-fuel consumption. In other words, the industry has come up with a free-market idea.

The prohibitive costs and functional uncertainty associated with the technology promoted by the government’s tax credit plan just don’t seem to make fiscal sense, especially in tough economic times.