Wind Rent 1 Wind Rent: PossibilitiesSusan SkalkaApril 2008Wind Rent 2 IntroductionThe idea of understanding certain assets as public and part of ‘The Commons’ in order tothen extract value for the public in terms of public revenue and conservation is gaining recognition in policy discussions, as the syllabus for PA 395/NR 385-Valuing Common Assets for Public Finance in Vermont states. Quantitative research on the value of common assets is needed to provide policy makers with the details needed for policy discussions. In my last paper, I described the current state of the wind industry and the existing and proposed wind facilities in the state of Vermont. I found that public revenue is generated primarily in the form of property tax payments based on the value of the land and equipment. A new bill has been signed that will change the way that taxes are calculated on the wind industry (for new facilities). Under the new model the tax is based on the Kilowatt hours produced. In this paper, I will explore alternative methods for capturing public revenue based on the economic rent earned by the wind industry. With the high startup costs typical of a new industry, with oil prices still relatively low, and with the existence of government price caps, there may not currently be a large profit margin in the wind industry. However, oil prices could quickly go up, laws, taxes, regulations and incentives could change to make wind energy more lucrative, or conceivably other types of events or disasters could occur which could lead to an increased demand and thus higher prices for energy produced bywind. Since there is a limited amount of oil, it is quite likely that at some point in the future, windWind Rent 3 energy will become more valuable. Therefore, Vermont should be prepared to be in a position to take advantage of that when the time comes.Philosophical JustificationBefore turning to possible approaches to collecting ‘rent’ from the wind industry, it is important to discuss the justification for such a proposal. First, ‘economic rent’ is defined as “the financial surplus created by the exploitation of natural resources, over and above the costs of exploitation (which include ‘normal’ profits).1 Under the democratic theory of rent, governments should maximize their collection of rent to benefit the public, who own the resources.2 However, under the liberal theory of rent, public resources should be made private and rent should remain in private hands. 3 Wind is a naturally produced asset, since no human can claim to have produced it. Likewise, ridgelines and viewscapes could be considered common assets to be shared by all, even ifnot owned publically. Wind flowing across or above land is comparable to water in a river or streamflowing across land, and surface water is already considered a public asset. Finally, wind is an assetthat can be used to produce energy, just like oil, and if Alaska can take royalties on oil profits, taking royalties on wind profits would be analogous. Finally, if we take the analogy to an extreme, if wind energy were the only source of energy for electricity production and thus the demand was very high and all the profits went to the wind-power producers, they would be in a similar position as the oil industry is now in, where they are able to make huge profits based on the usage of common resources, which seems rather unfair. In sum, conceptually the idea of capturing economic 1 Selling the Family Silver: Oil and Gas Royalties, Corporate Profits and the Disregarded Public.2 Ibid.3 Ibid.Wind Rent 4 rent from the wind industry seems to have solid justification, and there has been precedents for the similar capture of rent in other industries, namely the oil industry.Economic Rent in the Wind and Oil IndustriesEconomic rent in the wind industry could be defined as the profits that would be made over and above the ‘normal’ profit, that which results from price changes that have nothing to do with the amount of effort put into the production of wind energy. For example, scarcity of favorableland or scarcity of energy for electricity could push up the price of wind power and increase profits for a wind company, even if everything else remained constant. Note that wind companies can earnmoney from the sale not only of the power, but also from the sale of RACs- renewable energy credits, whose value can also vary for similar reasons. This is very similar to how economic rent is conceived of in the oil industry. This quote describes rent in the oil industry:In the context of the oil and gas industry, economic rent is the difference between thecost of exploration, field development and extraction, and the final market price.According to Mr. Warnock, "These costs include a normal rate of return oninvestment." In other words, oil and gas companies have already made their profitseven before the calculation of rents. The remaining economic rent is extremelyvaluable. It's up for grabs, and who gets it and in what proportions becomes a politicalcontest between public authorities and private interests.4Of course, there are differences between the oil and wind industries. First, wind energy is renewable and wind turbines do not deplete natural resources. Secondly, wind energy has few negative externalities unlike the oil industry. Thirdly, the wind industry is just getting started and has a lot of start-up costs right now while the oil industry has already paid off most of the big initial investments. For these reasons, Vermont and other governments may be hesitant to impose 4 Open Spaces. 11/29/2006. Downloaded March 28th, 2008 from http://opening-spaces.blogspot.com/2006/11/so-where-does-that-oil-and-gas-rent.htmlWind Rent 5 additional fees or royalty schemes on this industry which most agree should be encouraged. The new law which will tax energy production instead of profits arguably does not encourage increased production since it imposes a cost on production instead of taking royalties off of the top of profits. Vermont should encourage the production of this renewable source of energy that has few negative externalities. As this quote illustrates, we do not know exactly what the future might bring:One can guess (based on experience with other technologies) that the eventual push tofull commercialization and deployment of
View Full Document
Unlocking...