Failed energy policy bills represent missed opportunity
Governmental dysfunction, unclear rationale pose issues
Passing U.S. energy legislation has never been easy. And it seems to be getting harder each year. This state of affairs reflects any number of factors: the complexity of the issues, the often-contentious science behind them and the multitude of interest groups— both business and environmental — with a stake in the outcome. We can add yet another factor to an already complicated picture: governmental dysfunction.
There are two recent cases in point. In May, a relatively modest bill to promote more energy efficient buildings and industrial operations failed in the U.S. Senate. Another bill — known as tax extenders legislation, which would renew existing energy and other tax breaks — also failed last month. In both cases, the legislation enjoyed broad bipartisan support, which collapsed when Democratic Majority Leader Harry Reid refused to permit amendments. Reid, for his part, essentially accused the Republicans of badfaith in supporting legislation that they would later kill by “poison pill” amendments to which Obama administration could never agree.
We’re not going to parse the relative merits of the Republican and Democratic positions. We do, however, believe that the Congress is missing an opportunity to bring some long-overdue sense to U.S. energy policy.
This is particularly important when it comes to the tax code, where there are numerous provisions aimed at advancing the goal of a more efficient, less carbonintensive U.S. economy. The energy provisions in the tax extenders bill, for instance, use various kinds of tax breaks to target a wide variety of technologies, including wind production, alternative fuels and infrastructure, vehicle technologies and energy-efficient buildings.
The sums involved may not be budgetbusters. But they aren’t trivial, either: A two-year extension of the wind tax credit could cost more than $13 billion over a 10year period.
Ironically, the way we handle many of these tax incentives undermines their purpose. By extending them for a year or two at a time — or failing to do so — we discourage companies from making longterm investments that will increase energy efficiency or deploy renewable technology. The tax extenders bill offers more of the same. Additionally, policies have provided different levels of subsidies for various technologies with no clear rationale.
Last December, former Democratic Senator Max Baucus suggested a better way to handle energy tax breaks. His ideas centered on consolidating our bewildering array of tax incentives, extending their duration and including metrics for their phase-out. The last is a crucial point. While it is important to provide companies with a predictable tax environment, it is also vital to avoid making tax breaks a permanent subsidy.
More specifically, Baucus proposed reducing the various incentives for energy production to only two — one for cleaner sources of electricity and another for cleaner vehicle fuels. The fewer greenhouse gases the technologies emit, the greater the subsidy they receive. This technology-neutral approach is more rational and streamlined than the status quo, and Congress should keep it in mind as it continues to debate energy tax credits.
However, we believe the Baucus tax plan should be tweaked to account for the fact that some energy technologies are more mature than others. Newer technologies typically offer more opportunities for cost reductions, and they should be given more support than mature technologies. For instance, many studies have shown that subsidies to a new technology like offshore wind will tend to lead to greater declines in cost than the same subsidies givento a more established cousin, suchas onshore wind.
Thus, the subsidy for each technology should be reduced each year or two as cumulative deployment increases. This predictable subsidy system targets emerging technologies and increases investor confidence.
The big energy news at the moment is the Environmental Protection Agency’s proposal to limit greenhouse gas emissions from existing powerplants. The proposal will be the subject of huge political controversy and a flurry of litigation. Regardless of the nature of its implementation, we should continue to address other measures, such as reform of our tax treatment of energy. U.S. energy policy must be broad-based, encompassing both the supply and demand side of the equation, including the encouragement of new technologies.
Bringing some rationality to our tax treatment of energy is critical to an effective, national strategy. It also will help Texas, which has seen a boom in alternative energy production, particularly wind power.
The resurgence in our state’s hydrocarbon production thanks to hydraulic fracturing in places like Eagle Ford has tended to overshadow the extent to which even Texas — a byword for oil and gas production for a century — has also moved decisively into renewable energy. We need a national tax code that reflects — and reinforces — this reality.