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July 25, 2010

The End of the Age of Incentives

The Vermont Clean Energy Development Fund, of which I'm a board member, is meeting next week to approve the allocation of reservations for the last helping of Vermont Business Solar Tax Credit money available; when this money is gone, it doesn't look like there'll be any more. Nationwide, most but not all Stimulus grants have been awarded (although much of the money has not yet been spent).

But this is just the tip of the iceberg. State and federal budgets are larded with tax credit, grants, and low income loans aimed at getting individuals and businesses to do things they presumably wouldn't do without incentives. States are desperately short of money because they can't print it; even the federal government, which does print money, is taken aback by the size of its debt and acting relatively restrained.

There are plenty of incentives left but there won't be as many new ones – at least for a while; existing incentives will wither away as funds run out. Whether you think government incentives are essential to guiding private choices, think that they are a complete waste of time and often misguided, or are somewhere in the middle, it's time to consider life with less incentives. Without government incentives, people and businesses are probably just going to do what makes economic sense to them. That won't be all bad.

We've lived with government incentives for so long under both Republicans and Democrats that we will need to consciously change both the way we do business and the way we do government to prosper in the post-incentive economy. A recent meeting made this very clear to me.

I met with some people who are interested in growing the use of ground-source heat pumps (also known as geothermal heating) in Vermont. Some of these people were in the geothermal business – that's fair enough; others were just interested in helping Vermont reduce its dependence on fossil fuels. Many buildings including homes can be heated much more cheaply with a ground-source heat pump (which uses electricity to pump heat from the ground) than with an oil or propane furnace; payback on the capital expense required to install the heat pump at current oil and electricity rates is from six to ten years without any government incentives (I have one of these so I can vouch for the numbers). There are some incentives available but less than for solar photovoltaic (electricity from the sun) systems, for example.

Naturally the discussion turned to incentives – we're used to living in an economy where the government puts its fingers on the scale. New incentives, I said, are pretty much not going to happen; in fact, incentives for competing energy projects are going to be running out. It didn't take the businessmen in the room long to point out to me that this is good news for heat pumps, which have a solid business case; the business case for solar photovoltaic (which I also have) is non-existent in Vermont with current technologies and without incentives. If you assume that you have to pay interest on the money you spend to install solar electric panels and you don't get any help from the government, you never recoup your investment at current electric rates even with the regulatory subsidy called net-metering. Take away the uneven government incentives and more money will go into heat pumps.

A dollar spent on heat pumps in Vermont, where three-quarters of us heat with oil or propane, saves many more gallons of oil than a dollar spent on photovoltaic panels (solar hot water is a different story, however). If you're concerned about CO2 emissions, less gallons burned mean less tons emitted. In this case – although perhaps not in every case – removing the unequal subsidies, means better economics, energy independence, and environmental results.

When we were flush with government money, the solution would have been "add a subsidy for heat pumps". When more subsidies are no longer an option, removing competing subsidies may be an even better alternative.

But, proponents of solar electricity will point out, there is a lot of subsidy going to many other competing energy sources; they're right and these subsidies need to be removed as well. For example, oil drilling is subsidized through the tax code and concessionary leases (and perhaps through lax safety standards); corny ethanol is subsidized at fifty cents per gallon and an exclusionary tariff; compact fluorescent light bulbs are highly subsidized in Vermont, and the Obama Administration is offering low interest loans for nuclear plants. Are you ready to remove these "incentives"? All of them?

Life beyond incentives is going to be an interesting discussion for quite a while.

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