WASHINGTON, April 4, 2017 - Who deserves the most credit for today’s increased U.S. energy production, lower energy costs, and lower greenhouse gas emissions? Has the principal driver been free market forces or prescriptive federal energy and tax policies?
Answering this question also answers whether it’s best to continue the federal programs favoring renewable energy launched by the George W. Bush and Barack Obama administrations – or rely instead on market forces as the Trump administration proposes. Signaling a major policy shift, Trump White House executive orders, bill signings, Cabinet appointments, and oil pipeline authorization all point to a new free-market focus on unleashing the production and use of coal, oil, and natural gas.
Asking the “who-deserves-credit” question, last week’s House Energy and Commerce subcommittee hearing on “Federal Energy-Related Tax Policy and its Effects on Markets, Prices, and Consumers” got very different answers from committee members.
Full Committee Chair Greg Walden, R-Ore., celebrated the new U.S. role as “the 21st century’s newest energy superpower.” He said that with the surge in U.S. energy production, “Old assumptions have been proven wrong and the future of energy production is brighter than it has ever been.”
Walden said that with hydraulic fracking and horizontal drilling unlocking vast reserves of otherwise unrecoverable oil and natural gas, “technological advances, combined with greater market competition have driven power sector emissions down below 2005 levels.”
Clearly crediting the free market and private industry, Walden insisted that “While some of these developments have been assisted by federal policy, the bulk of the changes are the result of market forces over the last decade.” He explained that a major remaining problem is that “so much of our federal energy policy is designed to address an antiquated marketplace that looks entirely different than the one we see emerging today.”
Walden specifically criticized federal policies favoring “everything from tax credits for renewable electricity production to incentives for installing energy-saving devices in our homes.”
Calling for congressional review of all energy-related policies at both federal and state levels, Walden considers energy policy a high-stakes issue because “Getting energy tax policy right can preserve millions of jobs in the energy and manufacturing sectors while potentially adding many more in emerging sectors in the years ahead.”
Energy Subcommittee Chair Fred Upton, R-Mich., added up the cost of federal support, explaining that “in 2016, energy-related tax preferences cost an estimated $18.4 billion, while relevant DOE (Department of Energy) spending programs cost $5.9 billion.”
“One of the primary motivations has been to bring down costs for alternative energy sources and other energy-related technologies that would have otherwise been uneconomic,” Upton said. He explained that some people rate the $24.3 billion in federal energy subsidies as successful because the cost for solar energy, according to DOE, has “declined by 6 to 12 percent per year on average over the last 20 years,” from about $12 per watt to less than $4 per watt.
Switching to present the free-markets case, Upton said, “Some critics might contend that solar costs would have come down anyway even without these tax measures, or that competing technologies were discouraged while solar was given an unfair advantage.” He said the same debate continues over wind generation and energy efficiency, noting that wind energy costs have dropped from over $500 per megawatt hour in 1980 to “around $50 per megawatt hour” today.
Next, Upton outlined the case for federal energy efficiency mandates: “In 2005, the country reached its highest level of per capita electricity consumption. Today, electricity consumption continues to decline thanks to the adoption of energy-efficient technologies that were subsidized through the tax code.”
Upton acknowledged that “a strong argument can be made that specialized energy tax treatments have played a major role in helping the United States achieve its energy goals.” But he then said that “given the lasting market and price distorting impacts that these policies place on effective price formation and bidding in competitive markets, some are questioning whether yesterday’s justifications for energy tax policies remain appropriate.”
Upton concluded that due to significant changes in energy production, electricity generation, technological innovation, and state policies, “Consumers should be driving energy markets from the bottom up, rather than having the federal government driving it from the top down.” He said that as part of its current push for tax reform, Congress should find new ways to “level the playing field and encourage competition . . . grow our economy and keep energy prices affordable and reliable.”
Full Committee ranking member Frank Pallone, D-N.J., responded with a cautionary note, pointing out that “It’s worth remembering that coal, oil and gas have benefitted from centuries of beneficial tax treatment.”
Pallone said preferential treatment began with giving “domestic coal an advantage right after we became a nation,” that during the 20th century “federal energy tax subsidies almost entirely benefitted oil and gas interests,” and that support for renewables only began in the 1990s. He added that “many of those fossil incentives are permanent, unlike the temporary nature of tax credits for renewable energy.”
Pallone listed multiple special provisions for oil and natural gas today such as “providing massive liability protection to one specific energy sector that is often a major source of contamination.” Rather than continue to subsidize fossil fuels that harm both human health and the environment, he said “The federal government should be incentivizing technologies that are cleaner, safer, and more protective of the health of all Americans.” Responding to free-market arguments, he added that renewable energy sources like wind and solar “provide societal benefits that cannot be effectively valued by the markets.”
Pallone concluded that as Congress tackles tax reform, “We must consider all subsidies: direct, indirect, and regulatory.” He said “tax policies should seek to limit the cost of pollution to society, including the costs that regulatory subsidies often effectively shift from companies onto the taxpayer and the environment.”
Representing the non-partisan Congressional Budget Office (CBO), Senior Adviser Terry Dinan explained that last year’s $24.3 billion in federal energy program tax breaks and spending was aimed at “increasing domestic energy production, reducing greenhouse gas emissions, and encouraging research that might benefit society but that would not be profitable for private firms to undertake without government funding.” She noted that this spending does not include other forms of support such as the fact that “the government’s leasing of federal lands for oil production boosts the supply of oil.”
The hearing included a very different perspective from American Enterprise Institute Resident Scholar Benjamin Zycher. He countered renewable energy arguments one by one, concluding that renewables are “highly unreliable” and “devastatingly expensive” due to the need for backup supply to offset the intermittency of wind and solar. He also said renewable energy advocates can’t have it both ways, first claiming that renewables have become cost competitive with fossil fuels but also seeking continued subsidies.