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Green Economics

If Wyoming taxes green energy, green energy can go elsewhere

By Matthew E. KahnGuest blogger / February 22, 2010

Wyoming is considering taxing 'green' energy, which could force windmills like these to relocate.

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Economists love to talk about time consistency and the dynamics of tax rates. The public does not share this love. Consider the case of Wyoming. Like all states, it is seeking out new sources of revenue. Returning to basic ideas from the economics of taxes, a state can tax (and raise revenue) from activities that cannot respond and "walk away". You can tax land because it can't migrate to Nevada. If Wyoming tries to tax high income earners, it will quickly lose these high flyers as they migrate elsewhere. If you tax the "golden goose" you risk losing your goose!

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Now, given this background, let's turn to wind turbines and solar panels. Right now a heck of lot of investment is taking place in this sector – investors are choosing where to site their irreversible sunk investment. After all, once you've built a billion dollar wind turbine farm --- you can't pick it up and carry it across state borders to another location.

A good business person will ask herself; "I know the upfront costs of installing this system but what is the flow of revenue from setting this up? The answer depends on how much power the wind turbines will generate on average each year and at what price (net of taxes) that the wind turbine output can be sold at.

Today's NY Times says that Wyoming is considering a $1 per MwH tax on wind output. This lowers the marginal revenue that wind turbine companies will earn. In truth, this is not a large tax but if it hints that the tax will go up even higher in the future --- then forward looking entrepreneurs in the green renewables game should think twice about going to Wyoming.

Note that this is a dynamic Laffer Curve; by keeping taxes low and credibly committing to keep them low --- Wyoming will attract more "green investment". The golden goose will thrive.

With a new technology where there is little installed capacity but a lot of capacity will soon be installed, locations that can credibly say "our taxes will remain low" – will be rewarded. This same issue arises over and over again in the capital gains tax literature.
From an Al Gore's point of view does any of this boring discussion matter? Suppose that a physical scientist who knows no economics declares that North Dakota and Wyoming are the objective best places to have wind turbines and are much better than Idaho or California.

In this case, Wyoming's myopic strategy of taxing now will be socially costly because it will displace green investment to areas (the lower tax ones) where the same wind turbine will generate less output.

So , assuming equal cost of installation of the turbine;

profit in Wyoming = Price_mWh*(Generation_wyoming)*(1- Tax_wyoming)

profit in Idaho = Price_mWh*(Generation_idaho)*(1-Tax_Idaho)

A benevolent planner would send the turbine to Wyoming if

Generation_wyoming > Generation_idaho --- while the for profit firm will choose the location with the higher after tax profit. The presence of the tax in wyoming could lead the self interested firms to go to the "wrong" location.

In this algebra – Generation_wyoming represents the power generation by the same wind turbine if it locates in Wyoming.

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