May 16, 2016

May 16, 2016 | Issue Brief on Energy and Environment

Congress Should Rescind Unused Qualified Energy Conservation Bond Funds

In an era of record deficits, Congress should explore every opportunity to save taxpayer money. One funding stream Congress should cut immediately is Qualified Energy Conservation Bonds (QECBs).

The federal government uses a number of policy tools to favor the production of one energy source over or another and subsidize or mandate energy efficiency. One such mechanism, Qualified Energy Conservation Bonds, were created by Congress in 2008. State and local governments issue taxable QECBs for green energy and conservation projects with rates that are subsidized by the U.S. Treasury.[1] States have used less than 40 percent of the issuance capacity.[2]

The federal government should not subsidize energy projects of state and local governments. Congress should immediately rescind the remaining funds, which could save taxpayers nearly $2 billion.

What Are Qualified Energy Conservation Bonds?

QECBs encourage state, local, and tribal governments to finance politically preferred energy projects. Eligible issuing entities include counties, higher education institutions, municipal agencies and governments, state agencies, school districts, utility companies, and private activity issuances where the state issues the QECB on behalf of the private company.[3]

Included in the list of qualified projects are green community programs, energy-efficient streetlights, energy consumption reduction in public buildings, mass commuting, certain renewable energy, and public education promotion for energy efficiency, among others.[4]

The federal government is artificially lowering the issuer’s (state, municipality, etc.) borrowing costs by subsidizing a portion of the interest payment. Initially structured as tax credit bonds, states can receive a cash rebate from the U.S. Treasury for their interest payments.

Congress initially authorized $800 million in funds for QECBs through the Energy Improvement and Extension Act of 2008.[5] In the American Recovery and Reinvestment Act, Congress expanded the issuance capacity to $3.2 billion. Congress allocated the issuance capacity based on state population and requires states to apportion its funds based on the populations of its municipalities. Municipalities that choose not to issue any bonds can return their funds back to the state. States can allocate up to 30 percent of the funds to private-sector projects and the rest must be for governmental purposes.[6] States have issued more than 200 QECBs totaling more than $1.24 billion. As of February 29, 2016, $1.96 billion, over 60 percent of the total issuance capacity authorized by Congress, remained unissued.[7] An October 2015 report on QECBs found that 14 states have yet to use any of their allocated funds.[8]

No Role for Government

The federal government should have no role subsidizing state-funded public and private energy projects. Municipalities have issued bonds for a wide range of projects, none of which require participation and subsidization from Washington and solely should be the responsibility of communities.

Many financed projects are an extension of the tried and failed federal government weatherization program,[9] such as installing new heaters, air conditioning units, windows, and insulation to improve the energy efficiency of local government buildings. Several cities have issued bonds to install more energy-efficient lights at sports complexes and parks.[10] In 2011, San Diego, California, used the $13.1 million in proceeds to replace the lighting in 39,000 of the city’s streetlights. The replacements will ostensibly have an energy savings of 40 percent per light.[11]

Other projects subsidized by the taxpayer include Spotsylvania County, Virginia, issuing bonds to build a parking lot for the Virginia Railway Express (VRE) rail line.[12] Los Angeles, California, issued $131 million in bonds for three renewable energy projects, two solar projects, and a wind turbine expansion.[13] South Carolina issued $2 million in bonds to assist in financing Randolph Trucking’s purchase of 10 compressed natural gas (CNG) vehicles to replace part of the private company’s diesel fleet. Western Wisconsin Technical College issued $1.5 million in bonds for a public education campaign on energy efficiency and conservation.[14]

The projects financed through QECB issuance may be worthwhile expenditures for state and local governments. They may very well save municipalities money by reducing their energy consumption. States, cities, counties, and other local government entities have the ability, however, to issue municipal bonds to fund these very projects. Just as local governments issue municipal bonds to build sewer systems, hospitals, and schools, they can do so for energy-efficiency upgrades for government buildings. The federal government should not be subsidizing that financing. Even though the federal government spread the issuance capacity among state populations proportionately, if state and local governments choose not to issue QECBs, then taxpayers in Oklahoma (which has yet to issue a QECB as of October 2015) are subsidizing a project in Pennsylvania.[15] Furthermore, there is no justification for public bonds assisting in the finance of private-sector investments.

Real Energy Efficiency Sells Itself

Whether it is at the federal, state, or local government level—and especially at the company or individual level—actual energy efficiency sells itself. If businesses or local municipalities can save on their energy bills through efficiency upgrades, they should not need the spending subsidized by the taxpayer.

Plenty of engineering analyses support the idea that an “efficiency gap” exists and that investments will yield substantial savings.[16] Proponents of energy-conservation subsidies contend that the federal government should use taxpayer-funded carrots to take advantage of the alleged unrealized energy savings. Further, failure to realize all possible energy savings is to waste local taxpayer money. There are several problems with these engineering analyses of energy investments. The most glaring issue is that many of them fail to take into account the costs of the paternalistic role of the federal government. That is, when the government forces efficiency measures on people, it takes away choices, or at the very least, overrides them. When families or even local municipalities are not spending money for the most energy-efficient technology, it is not that they are acting unreasonably; they simply have other preferences and budget constraints. A local government may know that insulating a public office building and installing new energy efficient windows will save energy in the long run, but they may choose to spend money on a higher priority in the community, such as building a new park. It is not the role of the federal government to skew the preferences of state and local governments with subsidies.

Congress Should Rescind Remaining QECB Issuance Capacity

No statutory deadline exists for states and the eligible public entities to issue QECBs. Congress should recognize that the federal government should not subsidize energy efficiency and green project spending at the public or private level. Congress should rescind all remaining QECB issuance capacity and permit only projects in the application process for a QECB to move forward. Doing so would save the taxpayers $2 billion and allow local entities across the country to determine the true value of these projects.

—Nicolas D. Loris is Herbert and Joyce Morgan Fellow in the Thomas A. Roe Institute for Economic Policy Studies, of the Institute for Economic Freedom and Opportunity, at The Heritage Foundation.

About the Author

Nicolas Loris Herbert and Joyce Morgan Fellow in Energy and Environmental Policy
Thomas A. Roe Institute for Economic Policy Studies

Show references in this report

[1] U.S. Department of Energy, Office of Energy Efficiency and Renewable Energy, “Qualified Energy Conservation Bonds,” http://energy.gov/eere/slsc/qualified-energy-conservation-bonds (accessed May 10, 2016).

[2] Energy Programs Consortium, Table 1A: Qualified Energy Conservation Bonds Known Issued by State (as of February 29, 2016) http://www.energyprograms.org/wp-content/uploads/2016/01/qecbupdate22916.pdf (accessed May 10, 2016).

[3] Energy Programs Consortium, “Qualified Energy Conservation Bonds (QECBS),” October 2015, http://www.energyprograms.org/wp-content/uploads/2015/11/QECBPaper102015.pdf (Accessed May 10, 2016).

[4] U.S. Department of Energy, Office of Energy Efficiency and Renewable Energy, “Qualified Energy Conservation Bonds.”

[5] U.S. Department of Energy, “Qualified Energy Conservation bonds: Program Info,” http://energy.gov/savings/qualified-energy-conservation-bonds-qecbs (accessed May 10, 2016).

[6] U.S. Department of Energy, Office of Energy Efficiency and Renewable Energy, “Qualified Energy Conservation Bonds (“QECBs”) & New Clean Renewable Energy Bonds (“New CREBs”),” http://energy.gov/sites/prod/files/2014/06/f16/qecb_creb_primer.pdf (accessed May 10, 2016).

[7] Energy Programs Consortium, “Table 1A: Qualified Energy Conservation Bonds Known Issued by State (as of February 29, 2016),” http://www.energyprograms.org/wp-content/uploads/2016/01/qecbupdate22916.pdf (accessed May 10, 2016).

[8] Energy Programs Consortium, “Qualified Energy Conservation Bonds (QECBS).”

[9] Meredith Fowlie, Michael Greenstone, and Catherine Wolfram, “Do Energy Efficiency Investments Deliver? Evidence from the Weatherization Assistance Program,” National Bureau of Economic Research Working Paper No. 21331, July 2015, http://www.nber.org/papers/w21331.pdf (accessed May 10, 2016).

[10] Energy Programs Consortium, “Table 1A: Qualified Energy Conservation Bonds Known Issued by State.”

[11] Ibid.

[12] Energy Programs Consortium, “Qualified Energy Conservation Bonds (QECBS).”

[13] Ibid.

[14] Energy Programs Consortium, “Table 1A: Qualified Energy Conservation Bonds Known Issued by State (as of February 29, 2016),” http://www.energyprograms.org/wp-content/uploads/2016/01/qecbupdate22916.pdf (accessed May 10, 2016).

[15] Ibid.

[16] McKinsey & Company, “Unlocking Energy Efficiency in the US Economy,” July 2009, http://www.mckinsey.com/client_service/electric_power_and_natural_gas/latest_thinking/unlocking_energy_efficiency_in_the_us_economy (accessed May 10, 2016).