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WebMemo #1581 on Energy and Environment

August 1, 2007

The House Energy Bill: As Anti-Energy As the Senate Version

By

Over the years, Washington has tried a lot of bad ideas in response to high energy prices: subsidies for politically correct alternative energy sources, energy-efficiency regulations, tax hikes, and regulatory restrictions on domestic energy producers. They all failed in the past, but they're all back anyway. The House is about to vote on its latest energy bill, and like the Senate version that passed on June 21, it offers not even one truly pro-energy provision. Instead, it repeats past mistakes and will likely lead to lower domestic energy supplies and higher costs over the long term.

A Renewable Portfolio Standard for Electricity

The House seeks a requirement that 20 percent of electricity be generated from so-called renewable sources--chiefly wind but also solar and others. In effect, the requirement forces utilities that produce America's electricity from natural gas, coal, and nuclear power to diversify into these alternatives.

Of course, the only reason why a federally mandated Renewable Portfolio Standard is needed in the first place is that that these alternatives are far too expensive to compete otherwise. In effect, Washington is forcing costlier energy options on the public. This is particularly true of certain states, especially those in the Southeast and parts of the Midwest, where the conditions are not conducive to wind power. And since renewables are lavished with substantial tax breaks, a national mandate will cost Americans both as taxpayers and as ratepayers.

About half the states already have their own renewable portfolio standards (such as California, New York, and Texas), and others have opted not to have them. There is no good reason for the federal government to step in with a costly, one-size-fits-all measure.

Appliance Efficiency Standards

Energy efficiency can be beneficial for consumers, but rarely when Washington tries to force it on the public. The House bill contains numerous new federal efficiency standards for home appliances, such as clothes washers, dishwashers, and lighting fixtures. The goal is to reduce energy use by setting limits on how much electricity these appliances are allowed to consume.

However, energy-efficient appliances will not painlessly lower electricity bills. These measures also impose costs, and consumers benefit only if the energy savings outweigh the costs. For one thing, mandatory improvements in efficiency usually raise the purchase price of appliances; sometimes the increase is more than enough to negate the energy savings. In addition, the forced reduction in energy use can come at the expense of reduced product performance, features, or reliability. In other words, the appliances use less energy but do not work as well or last as long. For example, Consumer Reports recently concluded that the latest ultra-efficient clothes washers "left our stain-soaked swatches nearly as dirty as they were before washing," and that "for best results, you'll have to spend $900 or more."[1] Yet the House bill seeks an even tougher standard. This bill may even eliminate some options entirely; for example, the lighting provisions could spell the end to Edison's incandescent light bulb in favor of the less popular compact fluorescents bulbs.

Advances in energy efficiency for appliances, or for any other product, do not require government regulations. Manufacturers and consumers are perfectly capable of determining for themselves the proper balance between energy efficiency and other product attributes. Rigid federal standards simply give efficiency priority over everything else, often to the detriment of families and businesses.

The Tax Title

Raising taxes on energy sources that work in order to subsidize those that don't--that is the crux of the House tax bill. It smacks of 1970s- and early 1980s-style energy micromanagement, and it will not work any better now than it did then.

The bill proposes a number of tax code changes that would raise taxes paid by companies working to expand oil and natural gas supplies. The changes include punitive measures that eliminate or reduce some existing deductions against income from energy production, most notably the manufacturer's deduction created by the American Jobs Creation Act of 2004. This deduction, which applies to domestic industries, would be modified to exclude oil and natural gas activities.

Unfortunately, the House tax measures would likely reduce supplies and increase prices in the years ahead by discouraging investment in domestic production of oil and natural gas. This was clearly the lesson of the disastrous windfall profits tax of 1980, which, according to the Congressional Research Service, "reduced domestic oil production from between 3 and 6 percent, and increased oil imports from between 8 and 16 percent. This made the U.S. more dependent upon imported oil."[2] The latest tax increases will also have a negative impact on badly needed domestic production.

Tax hikes on domestic energy also undercut the energy security rationale for the bill. The tax title would improve the comparative advantage of OPEC and other non-U.S. suppliers, whose imports are not subject to most of these provisions.

Much of the extra revenues generated from the energy bill's new taxes would be used to subsidize politically correct alternatives like ethanol, wind, and solar energy. The bill includes both tax incentives to build the plants that generate alternative energy and tax credits on the energy sold. These policies have been tried before, with dismal results. The 30-plus-year history of federal attempts to encourage alternative energy technologies contains numerous failures--such as electric cars and solar energy--and few, if any, successes.

Congress never seems to learn that these alternatives have serious economic and technological shortcomings, which is why they need special treatment in the first place. The bottom line for consumers is that federal attempts to pick winners and losers among energy sources leads to higher costs.

Restrictions on Domestic Production

The energy bill contains other measures that would further hamper domestic energy production, especially on federally controlled areas in the West and offshore.

The United States has significant amounts of domestic energy that are locked up--either access to the land is restricted outright or it is subject to burdensome regulations that effectively make it so. Also, 85 percent of America's offshore areas are restricted. The first order of business in any real energy bill would be to streamline or eliminate these provisions, but the House is moving in exactly the opposite direction by adding to them.

For example, the bill would restore the need for redundant and overlapping environmental reviews under the National Environmental Policy Act. Other measures would pile on more red tape and extend the delays surrounding domestic oil and gas projects. The bill would also slow efforts to develop shale oil, a potential long-term substitute for petroleum for which test projects are underway.[3] Many of these measures rescind useful reforms from the 2005 energy bill that were just beginning to have an effect. Perhaps worst of all, the bill seeks to add to the already massive amount of land on which energy production is forbidden.

Of course, efforts to reduce domestic energy production can only be bad news for the energy-using public and have no place in a so-called energy bill. Only Members of Congress could think otherwise.

Conclusion

A real energy bill would take steps to ensure that the nation's energy supplies are as abundant and affordable as market forces will allow. Toward that end, Congress should reduce federal interference in energy markets and open access to domestic resources. Unfortunately, this bill does the opposite and would add to the long and disappointing history of anti-energy energy bills.

Ben Lieberman is Senior Policy Analyst for Energy and the Environment in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.


[1] ConsumerReports.org, "Washers & Dryers: Dirty Laundry," June 2007, at http//www.consumerreports.org/cro/appliances/
washing-machines/washers-and-dryers-6-
07/overview/0607_wash_ov_1.htm
.

[2] Salvatore Lazzari, "The Windfall Profit Tax On Crude Oil: Overview of the Issues," Congressional Research Service Report for Congress, September 12, 1990, at /static/reportimages/14E4C1678F562908AFC91439EE161791.pdf.

[3] Daniel Fine, Ph.D., "Oil Shale: Toward a Strategic Unconventional Fuels Supply Policy," Heritage Lecture No. 1015, April 26, 2007, at www.heritage.org/Research/EnergyandEnvironment/hl1015.cfm.

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