Guest commentator Jonathan Johns of ClimateChangeMatters writes ....
Given the controversy arising from the Chapter 11 bankruptcy of solar systems company Solyndra, shortly after receiving $535 million of US government loan guarantees, it's a brave politician who advocates yet more interventionist support for the renewables industry. It’s certainly not a topic to be raised at your local neighbourhood tea party. Yet, if we are to bring cleantech jobs to western economies given the competition from largely state planned investment in China, we do need to provide a spur to cleantech manufacturing investment.
Grants have always posed difficulties. They require the state to pick winners and losers and often impose conditions, which can mean that they can't be drawn down (witness past efforts in biomass and marine in the UK).
They also encourage an attitude to grant farming, which is incompatible with an emerging and dynamic market sector.
Guarantees are good for energy plant deployments, but equally problematic for manufacturing investments.
Far better as a stimulus to growth to offer 100 per cent capital allowances for new investment in cleantech manufacturing facilities allowing the market to decide where funds flow.
Even better, with capital allowances, costs to the taxpayer only occur when profits are earned and then only on the due date of corporation tax payment. That’s much later than the actual investment in capacity — i.e. stimulus now, taxpayer cost later — by which time treasury should already be benefitting from payroll and other taxes generated by the new enterprise.
Such an incentive attracts both new entrants to the market and helps existing players and those converting skills from related industries.
True, such benefits are less fun that the immediate announcement of a new grant award at an industry conference, but I'm sure politicians and others would be welcome enthusiastic attendees at the plant openings and factory extensions that would follow, enabling the country to harvest a greater proportion of the jobs arising from low carbon spend rather than exporting them abroad.
The brave policy maker could even allow an SME (small or medium sized enterprise) without taxable profits to sell tax losses back to treasury at a 10 to 15% discount — once a factory is up and running — providing security for start up loans.
In this way policy makers could support local manufacturing with little moral or financial hazard and markets decide where success best lies.
Even better, there would be fewer forms.
So where do bonds fit in? Bonds can be used to securitize the capital allowances or tax credits granted under the scheme. If guarantees were provided they would be restricted to the value of capital allowances that would normally be offset against a trade’s operations to the point an operation ceased.
So, if the manufacturing entity goes bust in a year or two, then only the capital allowances or tax credits to that year would be repaid. That ensures the taxpayer is protected against under-capitalisation or flaky business models.
Bonds with or without guarantees would be provided for demonstration or early commercialisation projects using new technologies, effectively providing research and development support. These could use 100 per cent (or higher) research and development tax credits as the vehicle for monetization again providing protection against grant culture.
The qualification criteria for such schemes could simply reference the Climate Bond Standards Scheme.
The issuance of bonds would be subject to commercial controls and criteria, exercised by bodies independent of government. This way, failures are part of the normal commercial equation rather than a function of a politicized process.
What do you think?
