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WebMemo #521 on Energy and Environment

June 15, 2004

The Energy Bill Returns: Still a Missed Opportunity

By

Last year's House-passed energy conference report returns to the House floor for a vote this week as H.R. 4503, the Energy Policy Act of 2004. Given the adverse impact that high energy prices can have on consumers and the overall economy, House leadership has, appropriately, included national energy policy as part of its "job agenda."

 

But while energy demand is booming worldwide, this energy bill fails to adequately increase domestic energy supplies, promote fuel diversity, or stabilize prices. Congress needs to go back to the drawing board-once again-and craft a responsible energy policy that ensures reliable and affordable energy for American families and businesses by opening energy exploration in areas currently "off-limits," reducing burdensome regulations, and letting the marketplace determine the nation's energy winners and losers.

 

Demand and Supply

Demand for energy is rising the world over at breakneck speed. Rapid economic growth in China, Eastern Europe, and other regions has brought with it increased demand for fuel, especially oil. As affluence increases in these areas and automobiles and household appliances multiply, energy consumption will further accelerate.

 

Demand is also rising in the United States. According to projections from the U.S. Department of Energy's Energy Information Administration, domestic energy consumption will increase by 43 percent by 2025. Production, however, is projected to grow only 23 percent.

 

While lawmakers could have advanced policies to enhance the nation's energy security in the long-term, they instead took the easy way out, proposing generous tax breaks to special interest groups for only marginal increases in supply for the short-run.

 

Long-term thinking would have prompted bolder policies:

  • Opening access to energy-rich areas currently "off-limits" for exploration, such as off-shore and in the Outer Continental Shelf, and
  • Authorizing use of a mere 2,000 acres in the Artic National Wildlife Refuge (ANWR) for exploration-an area whose mean estimate of economically recoverable oil is 10.3 billion barrels. More then twice the proven reserves in all of Texas.

Instead Congress came up with so-called tax "incentives" for special interests totaling over $23 billion:

 

  • Over $11 billion in giveaways for the oil and gas industry;
  • About $3 billion in tax credits for the use of renewable fuels to produce electricity;
  • $2.5 billion for investment and production credits for clean coal technology;
  • Over $2 billion for alternative motor vehicles incentives; and
  • Almost $2 billion in tax breaks for the electric power industry and other businesses.

These tax cuts are nothing more than an attempt to modify economic behavior and distort the economic signaling of the marketplace. As a result, these so-called "incentives" would make the energy sector and the economy less efficient and increase energy costs in the future. This sort of congressional meddling with the marketplace is shortsighted and irresponsible.

 

An Expensive Proposition

In addition to tax incentives, Congress's energy plan includes many costly provisions that would do little or nothing to enhance the nation's energy security. In fact, some provisions would actually constrain supply and increase costs.

 

For example, the bill would create an artificial market for ethanol with a mandate that more than doubles the use of renewable fuels in gasoline, primarily corn-based ethanol, to 5 billion gallons a year by 2012, increasing costs to families and businesses. As consumers have learned over the past decade, additive requirements can also cause extreme regional price spikes at the pump.

 

Likewise, H.R. 4503 includes 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. Moreover, the bill would expand this subsidy to include new resources: open-loop biomass, geothermal energy, solar energy, small irrigation power, and municipal solid waste. This special-interest handout alone would cost $3 billion over 10 years (2004-2013).

 

The bill also includes 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 taxpayers. The bill includes over $2 billion in handouts to the coal industry over 10 years.

 

Finally, the bill contains billions in other special interest handouts. An $18 billion loan guarantee would support construction of a natural gas pipeline from Alaska-a project that has been seen as too risky to attract private investment. Billions more would go to all manner of programs, studies, and grants, including billions for research and development in specific areas of the energy sector, such as hydrogen fuels.

 

Conclusion

Congress should remember that the primary purpose of a comprehensive energy plan is to provide consumers with abundant, affordable, and reliable energy supplies-all essential for a strong economy and national security. Current energy legislation fails to achieve these ends. Congress should remove impediments to oil and natural gas production on federal lands, offshore areas, and the outer continental shelf, streamline bureaucratic regulations, and let the marketplace determine the nation's energy winners and losers.

 

Charli Coon is Senior Policy Analyst in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.

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