Sundown and You Better Take Care: Why Sunset Provisions Harm the Renewable Energy Industry and Violate Tax Principles

IntroductionIn the 2011 State of the Union Address, President Obama proposed "reinventing" the nation's economy by making America a leader in clean energy innovation.1 The President proposed government investment in clean energy innovation: "We're telling America's scientists and engineers that, if they assemble teams of the best minds in their fields and focus on the hardest problems in clean energy, we'll fund the Apollo Projects of our time."For supporters of renewable energy like President Obama, one major hurdle to the development of clean, renewable energy is funding.3 The U.S. government often uses the tax system to promote long-term investment in certain industries, one being renewable energy.4 Clean energy ameliorates climate change, lessens environmental derogation, and spurs economic growth, particularly in the manufacturing and construction sectors.5 Also, it reduces dependence on fossil fuels, which have become increasingly dangerous and controversial to extract from the earth.6 The high costs of developing the clean energy industry, however, detract from these social benefits.7 Siting, grid access, and permitting processes can be expensive and inhibiting.8 Most important high project risks chill such investment and raise the cost of capital.9 To close this price gap and incentivize investment, Congress crafted renewable energy incentives within the framework of the tax system, the most important of which is the Production Tax Credit (the "PTC").10 The PTC is necessary to the renewable energy industry because it makes renewable projects more cost competitive and provides incentives for third-party investors with taxable income to invest in such projects.11Despite this success, however, the PTC is not a permanent feature of the tax code.12 Instead, the PTC has been enacted subject to expiration, or sunsetting, that requires periodic extensions every one to three years, a period far shorter than the typical development cycle of a renewable energy project.13 This Note argues that the frequency of sunset provisions in the PTC damages the renewable energy industry in the United States.14 When the credit expires, added renewable capacity drops precipitously.15 Sunset dates lead to a "boom and bust" cycle, increasing demand before the sunset dates and increasing the cost of renewable energy in the manufacturing and construction sectors.16 Sunsetting also creates investment risk, as the availability of the credit upon completion of the project is seldom certain.17This Note argues that the PTC's sunset provisions frustrate the policy of creating an equitable, simple, and efficient tax system, as they lead to inequitable lobbying battles, complicated amendments, and increased transactional costs.18 These provisions also reduce the effectiveness of the incentivizing function credit to correct the positive externalities of renewable energy production.19 Additionally, scholarly commentary suggesting that sunset provisions promote long-term investment does not apply to the PTC and renewable energy.20The Low-Income Housing Credit (the "LIHTC") is an analogous credit that promotes affordable housing, and which this Note uses as a tool for comparison with the PTC.21 This credit, unlike the PTC, is a permanent feature of the tax code.22 Its permanency enhances its success, primarily because real estate developers and investors can rely on its continued existence.23This Note argues that promotion of the renewable energy industry requires a permanent extension of the PTC, similar to the extension of the LIHTC.24 This credit is necessary to make renewable projects cost competitive, and investors financing renewable projects need to be sure of the PTC's continued existence to minimize investment risks.25 Without the PTC, renewable energy production would drop significantly, and manufacturing and construction industries would suffer.26 Without its extension, the incentivizing function of the tax credits cannot reach its full potential. …