The
good news is that U.S. Senate leaders have drafted a scaled-back
energy bill: the Energy Policy Act of 2003 (S. 2095). The Senate
bill would slash about $17 billion from the conference report, the
Energy Policy Act of 2003 (H.R. 6), making the 10-year price tag
for this package around $14 billion instead of $31.1 billion.
The
bad news is that the new, leaner bill "achieves the same goals the
old bill did." In
other words, special interests would still receive substantial
taxpayer subsidies--just not as quickly and as much--due in part to
budget gimmicks that delay implementation of most of the provisions
until later in 2004.
For
example, large agribusinesses would still be enriched through an
ethanol mandate; the coal industry would still receive over $2
billion in subsidies; and uneconomical renewable resources would
still be given preferential tax treatment. Moreover, unnecessary
programs, studies, and grants would still be authorized--such as a
$6.2 million study on the feasibility of converting motor vehicle
trips to bicycle trips and $50 million to fund a five-year transit
bus demonstration program.
Likewise, under the new Senate energy
bill, federal spending would continue to increase, and Congress
would still interfere with the marketplace.
The
Senate has just replaced one misguided, billion-dollar, pork-laden
bill with another.
Regrettably, the new Senate bill still
fails to meet the nation's future energy needs. Total energy
consumption is expected to increase more rapidly than domestic
energy supply through 2025. As a result, net energy imports are
projected to increase from 26 percent of total U.S. consumption in
2002 to 36 percent in 2025. Yet the Senate proposal would do little
to narrow the growing gap between supply and demand.
Given the major policy flaws in both the
conference report and the Senate bill, Congress needs to scrap both
pork-laden proposals, go back to the drawing board, and draft a
sensible bill that would enhance the nation's energy security and
ensure adequate, reliable, and affordable supplies of energy to
consumers. A responsible plan would:
- Authorize access to domestic energy
supplies that are currently off-limits, such as the Rocky Mountains
and offshore;
- End
taxpayer handouts to special-interest groups representing a wide
array of large and small businesses, industries, and companies in
the energy sector;
- Strengthen the country's energy
infrastructure by:
- Enhancing the nation's
electric reliability standards to ensure transmission grid
reliability,
- Granting the Federal
Energy Regulatory Commission (FERC) limited "backstop" authority to
issue permits for interstate electricity lines in bottleneck
areas,
- Repealing the antiquated
Public Utility Holding Company Act,
- Reforming the convoluted
federal lands permitting process, and
- Delaying the FERC plan to
create a "standard market design" for the sale of electricity on
the wholesale market.
- Allow
Indian tribes, acting as sovereign nations, to set up their own
regulatory systems for energy projects;
- Privatize federal power and eliminate
the preferences that federal and municipal utilities and electric
cooperatives enjoy; and
- Allow
the market--not Congress--to determine the nation's energy winners
and losers.
Moreover, the Senate energy bill would set
back movements toward a reformed tax code. Not only does the bill
contain enough tax arcana to keep many tax lawyers fully
employed--thus, moving the Bush Administration away from its goal
of simplifying the tax code--but it would also stand as a monument
to using the tax code for economic engineering.
Quite apart from the need for more energy
supplies, it is grossly unfair to ordinary taxpayers--both
businesses and individuals--for Congress to use the tax code to
benefit a few at the expense of everyone else.
Both
bills would use the tax code to modify economic behavior,
distorting the economic signaling of the marketplace and making the
energy sector and the economy more inefficient. For example, if the
energy marketplace is signaling that petroleum supplies are
currently sufficient, then an effort by Congress to create greater
supplies through tax in-centives would drive down spot petroleum
prices, distort returns on equity and assets used in exploration,
and dislodge plans by companies to heighten their exploration
activity when the price of oil justifies it.
Cost of Energy Plans
A
closer look at the conference report and the Senate's new--and
purportedly leaner--bill shows just how costly, pork-laden, and
irresponsible both proposals are. The Congressional Budget Office
(CBO) and the Joint Committee on Taxation (JCT) estimate that the
conference report would increase direct spending by as much as $5.4
billion over the 2004-2013 period for such activities as research on
ultra-deep wells, coastal restoration in the Gulf Coast, and
development of rural electric projects in distressed communities in
Alaska.
More
alarming, however, are the "incentives" purportedly needed to
enhance the nation's energy supplies. In fact, these incentives are
nothing more than giveaways to special-interest groups to buy their
support for the bill. The CBO and the JCT estimate that the tax
giveaways would total over $25 billion between 2004 and 2013,
making the total price tag about $31 billion over 10 years.
The
conference report, however, has even more giveaways and needless
federal spending than are reflected in the CBO and JCT
estimates--including a minimum of $46 billion in new spending
authorizations over five years, subject to appropriation action.
This figure does not even include other provisions in the bill that
authorize "such sums as are necessary." Given the rapid growth in
federal spending over the past several sessions of Congress, these
new authorizations understandably call into question "promises" for
fiscal restraint this year.
While less costly than the conference
report (the Congressional Budget Office has not yet published an
official estimate of S. 2095), the scaled-back Senate bill still
uses the federal tax code to load the proposal with giveaways to
special interests totaling about $14 billion. For example, the bill
would still subsidize production of oil, gas, bio-diesel, and other
types of fuels; give generous subsidies to large agribusinesses
through a new ethanol mandate; and provide an $18 billion loan
guarantee for construction of a natural gas pipeline in Alaska.
Giveaways to Special Interests
The
generous handouts to special interests come in a variety of forms,
such as tax credits, tax deductions, tweaks to the tax code, and
other changes in existing laws. The tax titles (Title XIII) of both
energy bills contain a number of subsidies, including the
following:
Tax Credit for
"Favored" Fuels--Production Tax Credit (PTC)
Both the conference report and the Senate bill include a
production tax credit (PTC). This market-distorting provision
extends preferential tax treatment for uneconomical renewable
resources used to produce electricity--including wind, closed-loop
biomass, and poultry facilities. The conference report would expand
this subsidy to include new resources: open-loop biomass,
geothermal energy, solar energy, small irrigation power, and
municipal solid waste (the Senate bill would also include
bio-solids and sludge). This special-interest handout alone would
cost $3 billion over 10 years (2004-2013).
Yet,
despite two decades of taxpayer subsidies, grid-connected
generators that use renewable fuels are projected to remain minor
contributors to U.S. electricity supply--increasing from 9.0
percent of generation in 2002 to only 9.1 percent by 2025. Generation from
non-hydroelectric renewables is projected to increase from a mere
2.2 percent in 2002 to only 3.7 percent in 2025.
Instead of subsidizing these uneconomical
energy sources, Congress should enact legislation that would permit
exploration of areas that are currently off limits, such as the
Rocky Mountains, offshore, and the Outer Continental Shelf. This
legislation--not taxpayer subsidies--is the responsible way to
enhance the nation's energy supplies and provide consumers with
abundant, affordable, and reliable energy.
Tax Breaks for
Congressionally "Privileged" Fuels and Alternative Motor
Vehicles
Both bills also include a variety of provisions that
interfere with the marketplace for fuels and the vehicle industry
at a cost of $4 billion over 10 years.
One
scheme creates an artificial market for four select vehicles (so
far rejected by the marketplace) by providing a new tax credit for
the purchase of hybrid motor vehicles, lean-burn diesel vehicles,
alternative-fuel motor vehicles, and fuel motor vehicles. The
conference report would also repeal (the Senate bill would modify)
the current-law phase-out for the credit for electric motor
vehicles. The free marketplace--not Congress--should determine
whether consumers want these particular vehicles.
Select fuels, such as bio-diesel and
certain bio-diesel mixtures, would also receive special treatment
by means of a new tax credit. Additionally, the eligibility for the
small-producer ethanol credit would double from a production
capacity of 30 million gallons per year to 60 million gallons, and
cooperatives would be allowed to pass through this credit to their
patrons.
Taxpayer
Subsidies for Specific
Residential and Business Property
Likewise, the conference report and the new Senate bill
include a variety of market-distorting, energy efficiency
measures--including tax credits, deductions, and provisions to
entice the purchase of specific products; the manufacture of
particular appliances; the construction of certain homes; and
specified improvements to existing property--at a price tag of $2
billion over 10 years. While conservation and energy efficiency are
important components of a responsible energy policy, accurate price
signals from the market--not congressional meddling with the
market--should determine which energy efficiency measures consumers
take and which products they purchase.
Subsidies for
the Coal Industry
Coal-fired electricity generation is expected to continue
growing in 2004 and 2005, driven by increasing demand for
electricity. While
coal is essential to electricity production and the national
economy, the costs of new, innovative, clean coal technologies
should be borne by the industry--not the taxpayers. Both proposals
include over $2 billion in handouts to the coal industry over 10
years.
Handouts for Oil
and Gas Industries
Proponents of the generous tax breaks for the oil and gas
industries--such as a tax credit for oil and gas production from
marginal wells (wells that produce fewer than 15 barrels of oil a
day and less than 90 thousand cubic feet of natural gas per
day)--argue that these subsidies are not handouts, but merely
incentives needed to increase domestic energy supplies. In the
conference report, these subsidies would enrich the oil and gas
industry by about $7 billion over 10 years. The Senate bill would
delay some of these subsidies to make the proposal appear less
costly in hopes of garnering votes from fiscal conservatives.
However, these incentives are needed only
because Members of Congress do not have the political will to
ensure that U.S. consumers have adequate, affordable, and reliable
supplies of energy. If this were their goal--not special-interest
handouts--they would have authorized oil and gas exploration in
Alaska, in the Rocky Mountains, and on the Outer Continental Shelf.
The tax breaks for the oil and gas industries would likely increase
domestic supplies to some degree, but this is the wrong way to do
it.
Tax Breaks for
Reliability
The tax tweaks in this category are intended to enhance
the delivery of the nation's energy supplies. For example, these
provisions shorten the class life and recovery periods for natural
gas gathering lines, distribution lines, and electric transmission
property. They permit small-business refiners to claim an immediate
deduction for up to 75 percent of the costs of complying with
environmental regulations on sulfur emissions, and they also modify
special rules for nuclear decommissioning costs. The Joint
Committee on Taxation estimated that these handouts would cost
taxpayers about $4.3 billion if Congress adopted the conference
report.
The
new Senate bill contains similar provisions. While well-intended,
these tax tweaks favor certain investments rather than allowing
market signals to determine where those investment dollars should
go.
Additional
Special-Interest Giveaways
The conference report also includes miscellaneous tax
breaks for a variety of special interests. In fact, one of these
taxpayer subsidies even gives a two-year suspension of tariffs on
imported ceiling fans. According to The Wall Street Journal, this
provision was added as a favor to Atlanta-based Home Depot, Inc. While still too
costly, the new Senate bill strikes this industry-specific handout
from the energy bill.
Loan Guarantees
Regrettably, Congress's largesse is not
limited to the tax title. Buried in both bills are various loan
guarantees for specific projects. For example, the report
authorizes a loan guarantee of up to $18 billion to support the
construction of an Alaska natural gas pipeline from the North Slope
to the lower 48 states--a project that industry has considered too
economically risky to attract private investments.
Likewise, the bills authorize the
Secretary of Energy to make loan guarantees (amounts to be
determined by the Secretary) for a variety of clean coal projects
around the country--including coal gasification, integrated
gasification combined cycle technology, and petroleum coke
gasification. While advancing clean power is commendable, the
private sector should finance these projects without taxpayer
subsidies.
The
bills also authorize the Secretary of Energy to provide loan
guarantees (no amounts given) for the construction of facilities to
produce Fischer-Tropsch diesel fuel and its commercial byproducts.
Likewise, both bills authorize the Secretary of Energy to provide
loan guarantees (no amounts given) for construction of facilities
to process and convert municipal solid waste and cellulosic
bio-mass into fuel ethanol and other commercial byproducts. If
these facilities really merit construction, the marketplace will
attract the private capital needed without the generous
"assistance" of taxpayer dollars.
More Excessive Spending
Lest
any special interest connected to the energy sector be left out of
these generous taxpayer subsidies, Congress also created a host of
unnecessary programs, studies, and grants. Under the conference
report, these new spending authorizations would cost taxpayers tens
of billions of dollars over the 10-year period.
The
new Senate bill also includes costly and unwarranted new
authorizations, such as $1.1 billion to restore the coastal impact
of offshore oil and gas drilling, and $500 million for the
development of rural electric projects in Alaska.
More Favors for Special Interests
Among the major beneficiaries of these
handouts are corn farmers and big agribusinesses. One company
alone, Archer-Daniels-Midland (ADM), produces over 40 percent of
the nation's ethanol. Under the Clean Air Act of 1990, the federal
government mandated reformulated gasoline (RFG) to improve air
quality in smoggy cities. RFG requires either methyl tertiary butyl
ether (MTBE) or ethanol to make gasoline supposedly burn cleaner. Both bills create an
artificial market for ethanol by mandating a doubling of its use by
2012. Consumers will pay for ethanol's special treatment with
increased prices at the pump. Consumer demand--not congressional
favors for special interests--should determine whether there is a
viable market for ethanol.
Further, due to concerns about ground
water contamination, both the conference report and the Senate bill
ban the use of MTBE by December 31, 2014, and provide $2 billion in
grants to assist producers of MTBE in converting to production of
other fuel additives.
Given that the federal government
established a fuel oxygenate standard that encouraged the use of
MTBE, the conference report includes liability protection for
producers and users of MTBE during the industry's 10-year
phase-out. This safe harbor provision became one of the most
contentious provisions in that report. The House approved the
conference report on November 18, 2003, by a bipartisan vote of 246
to 180.
Due
in large part to this MTBE liability protection, however, Senate
proponents of the report have been unable to garner the votes
necessary to break a filibuster. Senate leaders recently negotiated
an agreement on a new energy bill (S. 2095) that deletes the safe
harbor provision, and the Senate is expected to vote on the new
bill in the near future. Nonetheless, the House and Senate versions
will still need to be reconciled before either energy plan can
become law.
Other generous handouts for ethanol and
motor fuels programs in these bills include $12 million for a
resource center to further develop bioconversion technology using
low-cost biomass for the production of ethanol at the Center for
Biomass-Based Energy at the University of Mississippi and the
University of Oklahoma; $125 million for research grants and
development of renewable fuel production technologies; and $750,000
in grants to producers of cellulosic biomass ethanol and
waste-derived ethanol in the U.S.
Moreover, in both bills, Congress would
continue to meddle with the market by authorizing spending for
research and development in specific areas of the energy sector.
For example, the conference report authorizes $2 billion over five
years for a hydrogen research program and almost $38 billion over
five years for other select categories of energy research and
development. These include commercial application activities such
as $3.9 billion for energy efficiency; $3 billion for renewable
energy; $2 billion for nuclear energy; $2.9 billion for fossil
energy; and almost $24 billion for science projects.
The
list of new spending authorizations for unnecessary taxpayer-funded
programs, grants, and projects in these bills goes on and on.
Congress needs to stop trying to micromanage the energy sector and
allow the marketplace do what it does best--choose the nation's
energy winners and losers.
Conclusion
Congress needs to remember that the
primary purpose of a comprehensive energy plan is to provide
consumers with sufficient, affordable, and reliable energy
supplies. Regrettably, neither the conference report on H.R. 6 nor
the new, slimmed-down S. 2095 achieves this objective. Instead,
both bills simply enrich a wide range of special interests at the
expense of taxpayers and consumers. Consumers would be better off
without an energy bill than with either of these seriously flawed
energy plans.
Charli
E. Coon, J.D., is Senior Policy Analyst for Energy and the
Environment in the Thomas A. Roe Institute for Economic Policy
Studies at The Heritage Foundation. Erin Hymel, Research Assistant
in the Roe Institute, contributed to this paper.