[Senate Hearing 113-643]
[From the U.S. Government Publishing Office]
S. Hrg. 113-643
REFORMING AMERICA'S OUTDATED
ENERGY TAX CODE
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HEARING
BEFORE THE
COMMITTEE ON FINANCE
UNITED STATES SENATE
ONE HUNDRED THIRTEENTH CONGRESS
SECOND SESSION
__________
SEPTEMBER 17, 2014
__________
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COMMITTEE ON FINANCE
RON WYDEN, Oregon, Chairman
JOHN D. ROCKEFELLER IV, West ORRIN G. HATCH, Utah
Virginia CHUCK GRASSLEY, Iowa
CHARLES E. SCHUMER, New York MIKE CRAPO, Idaho
DEBBIE STABENOW, Michigan PAT ROBERTS, Kansas
MARIA CANTWELL, Washington MICHAEL B. ENZI, Wyoming
BILL NELSON, Florida JOHN CORNYN, Texas
ROBERT MENENDEZ, New Jersey JOHN THUNE, South Dakota
THOMAS R. CARPER, Delaware RICHARD BURR, North Carolina
BENJAMIN L. CARDIN, Maryland JOHNNY ISAKSON, Georgia
SHERROD BROWN, Ohio ROB PORTMAN, Ohio
MICHAEL F. BENNET, Colorado PATRICK J. TOOMEY, Pennsylvania
ROBERT P. CASEY, Jr., Pennsylvania
MARK R. WARNER, Virginia
Joshua Sheinkman, Staff Director
Chris Campbell, Republican Staff Director
(ii)
C O N T E N T S
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OPENING STATEMENTS
Page
Wyden, Hon. Ron, a U.S. Senator from Oregon, chairman, Committee
on Finance..................................................... 1
Hatch, Hon. Orrin G., a U.S. Senator from Utah................... 2
WITNESSES
Nickles, Hon. Don, president and CEO, The Nickles Group, LLC,
Washington, DC................................................. 4
Augustine, Norman R., retired chairman and CEO, Lockheed Martin
Corporation, Bethesda, MD...................................... 6
Metcalf, Gilbert E., Ph.D., professor of economics, Tufts
University, Medford, MA........................................ 8
Zindler, Ethan, head of policy analysis, Bloomberg New Energy
Finance, Washington, DC........................................ 10
Kreutzer, David W., Ph.D., research fellow in energy economics
and climate change, Center for Data Analysis, The Heritage
Foundation, Washington, DC..................................... 12
ALPHABETICAL LISTING AND APPENDIX MATERIAL
Augustine, Norman R.:
Testimony.................................................... 6
Prepared statement........................................... 31
Responses to questions from committee members................ 38
Hatch, Hon. Orrin G.:
Opening statement............................................ 2
Prepared statement........................................... 43
Kreutzer, David W., Ph.D.:
Testimony.................................................... 12
Prepared statement........................................... 46
Responses to questions from committee members................ 59
Metcalf, Gilbert E., Ph.D.:
Testimony.................................................... 8
Prepared statement........................................... 62
Responses to questions from committee members................ 72
Nickles, Hon. Don:
Testimony.................................................... 4
Prepared statement........................................... 74
Responses to questions from committee members................ 79
Wyden, Hon. Ron:
Opening statement............................................ 1
Prepared statement........................................... 82
Zindler, Ethan:
Testimony.................................................... 10
Prepared statement........................................... 84
Responses to questions from committee members................ 104
Communications
Algae Biomass Organization (ABO)................................. 109
American Farm Bureau Federation.................................. 114
The American Institute of Architects............................. 116
Biomass Thermal Energy Council (BTEC)............................ 118
Ceres............................................................ 120
Comfort Systems USA Energy Services.............................. 127
Energy Recovery Council.......................................... 130
Energy Tax Savers................................................ 135
Harling, Karen................................................... 137
Lake Washington Partners......................................... 139
National Association of Energy Service Companies (NAESCO)........ 141
National Association of Manufacturers............................ 145
National Biodiesel Board (NBB)................................... 150
National Rural Electric Cooperative Association.................. 166
Renewable Energy Markets Association (REMA)...................... 168
Solar Energy Industries Association (SEIA)....................... 170
Tampa Bay Trane.................................................. 174
REFORMING AMERICA'S OUTDATED
ENERGY TAX CODE
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TUESDAY, SEPTEMBER 17, 2014
U.S. Senate,
Committee on Finance,
Washington, DC.
The hearing was convened, pursuant to notice, at 10:22
a.m., in room SD-215, Dirksen Senate Office Building, Hon. Ron
Wyden (chairman of the committee) presiding.
Present: Senators Stabenow, Nelson, Cardin, Bennet, Casey,
Hatch, Grassley, Crapo, Enzi, Cornyn, Thune, Isakson, and
Portman.
Also present: Democratic Staff: Ryan Abraham, Senior Tax
Counsel; Michael Evans, General Counsel; Jocelyn Moore, Deputy
Staff Director; Kevin Rennert, Senior Advisor for Energy; and
Joshua Sheinkman, Staff Director. Republican Staff: Chris
Campbell, Staff Director; Jim Lyons, Tax Counsel; and Mark
Prater, Deputy Staff Director and Chief Tax Counsel.
OPENING STATEMENT OF HON. RON WYDEN, A U.S. SENATOR FROM
OREGON, CHAIRMAN, COMMITTEE ON FINANCE
The Chairman. The Finance Committee will now come to order.
Around the world, countries driven by tough global
competition, dramatic demographic shifts, climate change, and
an investment boom in clean technology are ripping up the 20th-
century energy playbook and laying out a new path forward. Our
country--with a long tradition of innovation and
entrepreneurship--has the opportunity to lead the way.
In order to lead, our challenge is to guarantee that
outdated energy policies do not pull America back into the
pack. And on our watch, leading the pack on energy--and
striving for American energy exceptionalism--means leading the
pack on tax reform. Here are a few examples of what leadership
will look like.
For the first time, our tax code must take the costs and
benefits of energy sources into account. Our committee--on a
bipartisan basis--needs to be part of a robust conversation
about how best to determine costs and benefits. I believe the
list of factors must include considerations that do not always
figure in today, such as energy efficiency, affordability,
pollution, and sustainability.
Second, it is past time to replace today's crazy quilt of
more than 40 energy tax incentives with a modern, technology-
neutral approach. Let us clear the hurdles that slow down
America's energy innovators, and let us introduce a new level
of competition and fairness into the marketplace.
Third, the disparity in how the tax code treats energy
sources--and the uncertainty that it causes--has to end.
Traditional sources benefit from tax incentives that are
permanently baked into law. But clean energy sources are stuck
with stop-and-go incentives that have to be renewed every few
years.
The Congress has developed a familiar pattern of passing
temporary extensions of those incentives, shaking hands, and
then heading home. But short-term extensions cannot put
renewables on the same footing as the other energy sources in
America's competitive marketplace.
Clean energy projects take time to plan, and they take time
to finance. The facilities and machinery take years to get up
and running, especially with sources like hydropower,
geothermal, and biomass. Predictable, level-playing-field tax
policies could clear the way for America's clean energy sector
to thrive at home and outmatch the global competition that
hungrily eyes the multi-trillion-
dollar market for energy goods and services.
It is important to recognize, finally, that better tax
policy alone does not address all of America's energy needs.
Yet energy tax reform has to be part of an overall strategy
that moves our country towards a cleaner energy future. That
cohesive, overall strategy for American energy is what is
lacking today.
That is what, on a bipartisan basis, this committee has to
change. I see energy tax reform as a way for the Finance
Committee to come together to drive America's energy policy
towards a modern, level-playing-field approach. Today's hearing
is an opportunity for us to begin to map out the road ahead.*
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* For more information, see also, ``Present Law and Analysis of
Energy-Related Tax Expenditures,'' Joint Committee on Taxation staff
report, September 16, 2014 (JCX-100-14), https://www.jct.gov/
publications.html?func=startdown&id=4667.
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[The prepared statement of Chairman Wyden appears in the
appendix.]
The Chairman. As is our tradition, we are going to do this
in a bipartisan way. Senator Hatch has been very constructive
in advancing that. Senator Hatch, why don't you make your
opening statement?
OPENING STATEMENT OF HON. ORRIN G. HATCH,
A U.S. SENATOR FROM UTAH
Senator Hatch. Thank you, Mr. Chairman. I appreciate you
for holding today's hearing. Discussions about our Nation's
energy policy are always timely.
It has always been my position that, when it comes to
energy policy, we need an all-of-the-above approach. Indeed,
there is no such thing as too much energy. We need to encourage
energy production across the board, and we need to do so in an
effective, cost-efficient manner.
Sadly, this is not the approach we have seen under the
current administration. President Obama claims that he supports
an all-of-the-above approach to energy policy. However, the
truth is that the Obama administration's real energy policy
boils down to a belief that fossil fuels are bad, and that the
Federal Government should enact policies to punish the
production and use of fossil fuels.
Just ask the coal miners and consumers of electricity
negatively affected by the Obama administration's war on coal.
And just look at the administration's Fiscal Year 2010 Treasury
Green Book. Regarding the administration's proposal to repeal
the provision in our tax code for intangible drilling costs, it
states: ``To the extent expensing encourages overproduction of
oil and gas, it is detrimental to long-term energy security and
is also inconsistent with the administration's policy of
reducing carbon emissions and encouraging the use of renewable
energy sources through a cap-and-trade program.''
This approach, in my view, represents a backwards view of
our Nation's energy policy. Instead of discouraging the
domestic production of oil and gas, we should welcome the
recent production increases that we have seen. Increases in the
domestic production of oil and gas reduce our dependence on
foreign oil and create many high-paying jobs. That being the
case, the energy boom in places like the Bakken shale region,
as well as the Uintah Basin in Utah, and areas down in Texas
that have just been discovered, is something to be supported,
not punished.
President Obama's first misguided effort to transform our
energy policy came in the form of cap-and-trade. In 2008,
talking about his cap-and-trade plan and in a refreshing moment
of candor, Candidate Obama stated: ``Under my plan of a cap-
and-trade system, electricity prices would necessarily
skyrocket.''
After the 2008 elections, Speaker Pelosi rammed President
Obama's wrongheaded cap-and-trade proposal through the House,
and nothing further was done with it. Proponents of a cap-and-
trade approach have, for the most part, acknowledged that this
proposal is dead. However, instead of admitting failure and
moving on, they are repackaging cap-and-trade by calling it a
carbon tax.
I am no marketing expert, but if you could not sell the
American people on a bad idea, adding the word ``tax'' to it is
not going to make it look any more appealing. Raising the price
of electricity, natural gas, and gasoline does not sound like a
good idea to most hard-working, middle-class Americans. Yet,
that is precisely what a carbon tax would do.
My view on this is simple: if you really want to pursue a
policy that ships jobs overseas, enact a carbon tax. If we
purposefully enact policies to make energy--something every
business needs--more expensive, American businesses and jobs
will go to China, India, and elsewhere. It is just that simple.
Cap-and-trade and the carbon tax are not the only bad ideas
out there. In addition, over the last few years, we have seen
the administration's continued refusal to approve no-brainer
energy projects like the Keystone Pipeline. Our entire pipeline
infrastructure needs to be updated and enhanced, yet the Obama
administration continues to sit on its hands.
In December 2014, then-Chairman Baucus put forward an
energy tax proposal that he claimed was technology-neutral.
However, by picking carbon emissions as the standard for
judging whether a technology would get Federal dollars or not,
the proposal is biased against fossil fuels such as coal, oil,
and natural gas.
Now, as we all know, many of our Nation's energy tax issues
are addressed in the tax extenders package, which is one of the
many reasons why it is so important that Congress act as soon
as possible to pass that legislation. I hope we can do it in
the lame duck session.
We did our work on the extenders package here in the
committee. I will not go into the particulars of what happened
on the floor with that bill--if I did, we would likely be here
all day. Instead, I will just say that we need to set
partisanship and political gamesmanship aside and get the
extenders package across the finish line as soon as possible.
Ultimately, when we turn to tax reform--hopefully soon--I
believe we need to examine all existing tax provisions,
including energy tax provisions, under President Reagan's three
criteria for tax reform: fairness, simplicity, and efficiency.
Looking at the witnesses, it is clear that we have a good
representation of different viewpoints about the various energy
sources addressed throughout the tax code. My hope is that this
hearing will contribute to our tax reform efforts.
I want to thank you, once again, Mr. Chairman, for holding
this important hearing, and I really look forward to hearing
what this panel has to say about all these things.
The Chairman. Senator Hatch, thank you, and you make a
number of important points. I especially want to support the
urgency that you are conveying with respect to the extenders
package.
[The prepared statement of Senator Hatch appears in the
appendix.]
The Chairman. Colleagues, as you know, this was something
we did in a bipartisan way in the committee. Just this past
Monday, we had scores of businesses all across the country--
because they had to make another quarterly tax payment--in
effect, making an interest-free loan to the government because
it has not been possible to do what Senator Hatch talked about,
which was to get this extender package passed and signed into
law. So I appreciate your making those points and look forward
to working with you.
We have an excellent panel of guests, including the
Honorable Don Nickles, president and CEO of the Nickles Group
here in Washington; Mr. Norman Augustine, retired chairman and
CEO of Lockheed Martin in Bethesda; Dr. Gilbert Metcalf,
professor of economics at Tufts; Mr. Ethan Zindler, head of
policy analysis for Bloomberg New Energy Finance; and Dr. David
Kreutzer, research fellow in energy economics and climate at
the Heritage Foundation. We welcome all of you.
You can see there is substantial interest among Senators.
We would like you to try to keep your opening remarks to 5
minutes or so. We will make your prepared remarks a part of the
hearing record in their entirety, and it will leave us plenty
of time for questions.
We now have a veteran of this committee, appropriate to
begin with. Mr. Nickles, welcome.
STATEMENT OF HON. DON NICKLES, PRESIDENT AND CEO, THE NICKLES
GROUP, LLC, WASHINGTON, DC
Senator Nickles. Mr. Chairman, thank you very much. It is a
pleasure to be before this committee with you and other former
colleagues as well as new Senators whom I did not have the
pleasure of serving with. I think it is the best committee in
the Senate, and I served on a lot of them. I enjoyed this
committee more than any other.
Issues before this committee are actually why I ran for
Senate back in 1980. Congress passed a bad law called the
Windfall Profits Tax. That motivated me to run for Senate more
than anything else, and probably made the difference in my
election. It basically taxed domestic production but did not
tax foreign imports, and therefore it encouraged imports and
discouraged domestic production. It was really a bad, bad idea.
It took 9 years, but we eventually repealed it--I was very
proud of that. Tax policies matter, and this committee can make
a difference.
Mr. Chairman, you mentioned having a tax policy that is
neutral among fuels, and I have to take issue with that a
little bit. You cannot afford to make fossil fuels' tax equal
to the enormous subsidy that wind currently receives. Everybody
knows wind receives a credit--it says in your report 2.3 cents
per kilowatt hour. What your report does not say is, that is
equal to 40, 50, even 60 percent of the wholesale price of
electricity.
If you wanted to have something comparable for oil, you
would need a $50 or $60 a barrel subsidy for oil. You do not
want that--or $2 for gas--we cannot afford it, and nobody asked
for it. So there is no comparison. The 1-year extension of the
Production Tax Credit is $13.3 billion. That is enormous, and
it is too much.
I was here when the PTC passed. I remember people saying it
would jumpstart the industry. Well, the industry has been
jumpstarted. It has done quite well. Some people say it can
stand on its own. It is time for it to stand on its own. Enough
is enough.
And who benefits from the PTC subsidy? Mr. Buffett--who is
a big wind investor--has said of wind energy: ``We get a tax
credit if we build a lot of wind farms. That is the only reason
to build them. They do not make sense without the tax credit.''
His MidAmerican Energy Company is collecting wind subsidies
based on their installed capacity. If they operate at 30
percent of capacity, then this year alone he will receive $138
million in tax credits. That is 1 year. Over 10 years, that is
more than a billion dollars. I will bet you that, over 10
years, that number is a lot closer to $2 billion. Well done
Warren Buffett, a good investor taking advantage of an over-
generous tax credit that Congress passed. But enough is enough,
and the PTC does not need to be and should not be extended
forever.
The credit has been on the books for 22 years. I was here
when people said, ``It will be temporary. We just need a
jumpstart.'' I do not fault that reasoning, but the jumpstart
has occurred.
To make matters worse, when the PTC was extended 2 years
ago, Congress lessened requirements to qualify for the tax
credit. Instead of a wind farm placed in service to qualify,
all you had to do was start construction. Then the IRS came up
with a new regulation and said you only have to invest 3
percent to qualify for the PTC. So you invest 3 percent and you
are going to get 10 years' worth of tax credits. Wow. This is
an enormous, way too generous subsidy. It is crowding out a lot
of other fuels.
I know some of the proponents say that it creates a lot of
jobs. For every job that it creates, it is costing more jobs in
other energy sectors: natural gas, coal, or nuclear power. Wind
blows in some areas where they do not need the energy, but wind
producers--selling not to the marketplace but only for the tax
credit--and other energy producers actually receive negative
prices.
You cannot start and stop a nuclear power plant. Gas plants
are not made to stop and start every few hours. It really is
absurd how wind is distorting the electric grid and the
marketplace.
I mentioned the idea of having tax parity--well, do the oil
companies have unfair advantages? No. Intangible drilling costs
are out-of-pocket expenses. That is not a subsidy. That is not
Uncle Sam writing a check. Most of that is wages. Any business,
in my opinion, should be able to deduct wages in the year they
occur. I do not look at that as a subsidy.
The other big subsidy is section 199. That is a
differential on manufacturing taxes. Wait a minute. Oil and gas
companies actually pay a higher corporate tax rate than all
other manufacturers. When Congress passed a differential tax on
manufacturers, I argued against it. I think we should have one
uniform corporate tax rate. Right now you have a 35-percent
rate for most corporations, 32 percent for manufacturers, and
33 percent for oil companies. It should be uniform.
Mr. Chairman--I compliment you for this--you have been
working on reforming the tax code for a long time. I do hope
that this Congress will work together to really reform the tax
code. It needs to be reformed if we are going to be competitive
internationally. It needs to happen.
One other little piece of advice--I compliment the
chairman--when you marked up the extenders bill, you had a
markup. Members on both sides offered amendments. That is the
way it is supposed to work. That is the way it happened when I
was on this committee, and it worked.
We also amended bills on the floor. Tax bills, budget
bills, and so on were allowed amendments on the floor. I think
if that is done, it would restore comity in the Senate. I think
it would restore respect to the Senate. All members would get
to participate and have an opportunity to voice their ideas.
The amendment process--the democratic process, quite frankly--
would work, and the Senate would no longer be the dysfunctional
group that I am afraid that it has turned out to be the last
few years.
I encourage you to take bills to the floor and offer ample
opportunities for all sides to offer amendments. I think it
would really help the system.
The Chairman. Thank you very much. I know we are going to
have questions in a moment.
[The prepared statement of Senator Nickles appears in the
appendix.]
The Chairman. Mr. Augustine?
STATEMENT OF NORMAN R. AUGUSTINE, RETIRED CHAIRMAN AND CEO,
LOCKHEED MARTIN CORPORATION, BETHESDA, MD
Mr. Augustine. Well, thank you very much, Mr. Chairman and
members of the committee. My remarks today will be based on the
work of the American Energy Innovation Council, of which I am a
member. We refer to it as the AEIC. I appear as an individual
today. I believe my views, though, do represent those of the
other members of our council.
The AEIC has a somewhat interesting background. About 5
years ago, seven of us, who were then CEOs or former CEOs of
major non-energy companies, were discussing our concern over
the Nation's energy situation and concluded that we had--in our
careers--to make some tough decisions and that perhaps we could
be helpful in making suggestions with regard to energy. We have
been supported by the Bipartisan Policy Council founded by
colleagues of yours, Senators Baker, Daschle, Dole, and
Mitchell. We represent no other organization. We are just a
group of individuals who are very informal. Our membership is
listed in my written statement.
The focus to date has been on research and development,
which is where the answers to so many of the questions in
energy production reside. The search for answers to those
questions certainly depends on an enlightened tax policy. I
would emphasize that I am an engineer, not an economist. Tax
policy is not my forte. On the other hand, the members of our
group are business persons who, of course, have had some
experience in the practical aspects of tax matters.
Very few issues have greater importance for the Nation's
well-being than our energy policy, whether it be the impact of
foreign sources of energy making us vulnerable to geopolitical
coercion in peacetime, the impact on open conflict, the impact
on the natural environment, and certainly the impact on the
economy as a whole, especially including jobs.
The AEIC has published two reports and a number of case
studies. The first of those reports pointed to the need for
greater investment in energy R&D. Today that is less than \1/2\
of 1 percent of the Nation's energy bill, which makes it
clearly an outlier as compared with other disciplines. The
second report dealt with the role of the government in
resolving these energy challenges. Aside from the more
conventional roles such as regulation and enforcement, the
government has an especially important role in energy in terms
of providing certain kinds of funding, participating in some
efforts itself, and assisting in the implementation of many of
the new concepts that have been brought out.
We particularly emphasize the importance of the government
supporting basic research and also helping corporations get
through the two valleys of death that financial folks refer to
when trying to introduce new ideas through technology. The
first of these valleys of death would be the time between the
discovery of new knowledge and the proof of principle and a
prototype. The second--which is particularly important in the
energy area--is the matter of going from a prototype, a
feasibility prototype, into a full-scale viability
demonstration, including the economics of the concept. The
second is particularly challenging in the energy area because
of the major costs of new infrastructure and the longevity of
that infrastructure.
With regard to tax policy, there are certain features that
we believe are important. One is that--clearly--we encourage
the development of clean, affordable, sustainable domestic
energy sources. The second is that we seek to be technology-
and energy source-
sensitive in our tax policy--that is, focused on outcomes, not
on input constraints--and not de facto favor any particular
source or technology.
We think it is very important that our tax policy be
predictable. If there is anything people in business dislike,
it is uncertainty. We believe, on the other hand, that tax
policy should not be permanent in this area. It should be open
for review, but without sudden changes.
Energy tax modification, in our view, takes place best in
an environment of overall tax reform. That is so that we can
avoid non-optimized tax policies.
In conclusion, as you might suspect, my colleagues and I on
the AEIC are very strong proponents of the free enterprise
system. At the same time, there are some things that the free
enterprise system cannot or will not do. Among those in the
energy area, certainly, is investing in very high-risk, very
long-term, uncertain payoff research. That is a role where the
government would seem to need to intervene.
The other area would be dealing with these areas referred
to as valleys of death, where work that is of the public
interest needs to be accomplished, but the financial markets
that exist today simply will not permit industry to undertake
those projects, all of which makes government involvement
extremely important, including maintaining a stable, unbiased
if you will, tax policy.
Thank you very much. I will be happy to answer any
questions you might have.
The Chairman. Mr. Augustine, thank you very much.
[The prepared statement of Mr. Augustine appears in the
appendix.]
The Chairman. Our next witness will be Dr. Gilbert Metcalf.
Doctor, welcome.
STATEMENT OF GILBERT E. METCALF, Ph.D., PROFESSOR OF ECONOMICS,
TUFTS UNIVERSITY, MEDFORD, MA
Dr. Metcalf. Chairman Wyden, Senator Hatch, and members of
the committee, thank you for the invitation to testify on
reforming the energy tax code today. I am a tax economist and
teach tax principles at Tufts University, so let me began with
three design principles for thinking about reforming the energy
tax code.
First, energy tax policy should address the unequal playing
field that results from not recognizing the social cost of
pollution in energy tax production and consumption. A tax on
pollution internalizes the externality so that firms take into
account the social costs of pollution. This approach implicitly
makes clear that pollution-generating activities have social
benefits as well as costs. An optimal policy must balance those
costs against the benefits, and a tax is an efficient means of
effecting that balance.
Alternatively, a subsidy to clean energy production can
also level the playing field between clean and dirty energy in
terms of ensuring that the private cost of energy between fuels
reflects the differentials due to pollution externalities.
In addition to using the tax code to level the playing
field between clean and dirty energy sources, good policy will
provide stability and clarity in the tax code, important design
principles given the long-lived nature of most major energy
capital investments.
Finally, policy should be designed to avoid giving tax
benefits to firms or individuals for activities they would have
undertaken with or without the tax incentive. Such
inframarginal activities reduce the bang for the buck for any
given policy.
So let me address these design principles in the context of
greenhouse gas emissions, given the important role the energy
sector plays in contributing to those emissions, and given the
importance of addressing climate change. Economists associated
with both the Republican and Democratic parties have long
advocated using a carbon tax to reduce greenhouse gas
emissions.
In a recent analysis, I modeled a $20-per-ton carbon tax
and estimate that it would raise roughly $100 billion dollars
annually in the initial years. This would provide sufficient
revenue to lower the payroll tax by roughly 1\1/2\ percentage
points or the corporate income tax by 8 percentage points.
These examples highlight that carbon revenue provides
fiscal flexibility to contribute to a comprehensive tax reform
package focusing on efficiency and equity improvements while
maintaining overall budget neutrality for the Federal
government. The fiscal benefits are clear. However, as they say
in the late night infomercials: ``But wait, there's more.''
With the carbon tax in place, the various renewable energy
tax preferences could be eliminated, as could oil and gas
preferences including, among other things, percentage depletion
and expensing of intangible drilling costs. Eliminating these
subsidies provides another $30-plus billion over a 5-year
budget window that could be used to finance further reductions
in marginal tax rates or other tax reform initiatives.
But wait, there's more. A stable and well-designed carbon
tax would make the EPA's Clean Power Plan unnecessary. This
would provide additional administrative and efficiency cost
savings.
All taxes involve dead-weight loss, and a carbon tax is no
exception. We live in a world in which we require tax revenue
to fund important government activities. When given a choice
between taxing goods--capital and labor--or taxing bads--
pollution--I favor the latter. A wealth of economic analysis
supports this view. In general, reputable studies of carbon
taxes, including the Energy Information Administration's
various analyses, find modest and negligible economic losses
from a well-designed carbon tax.
Despite the efficiency benefits, as well as the revenue
benefits of a carbon tax, it is clear that this policy would be
a major political lift in Washington right now. Given that
fact, well-designed tax preferences for clean energy production
are a reasonable second-best policy to level the playing field.
A preference-based energy tax reform should consist of two
elements. First, the tax preferences for coal, oil, and gas
should be repealed. Repealing these incentives would level the
playing field between oil and gas and coal assets and other
physical assets. In other words, we would apply income tax
principles to these goods and services.
Second, a tax credit for clean energy production or
investment should be based on principles of technology
neutrality. And here the Senate Committee on Finance chairman's
staff discussion draft from last December takes a number of
important steps in the right direction, by reducing the number
of incentives; focusing on measuring results rather than
rewarding particular technologies; and eliminating the policy
uncertainty that results from the need to reauthorize tax
preferences regularly, while ensuring that clear and
transparent benchmarks are set so that the policies may phase
out as they are no longer needed.
Such an approach would provide greater clarity and
rationality to the current tax code. While an improvement, it
is not as efficient as a carbon tax, but, given that we are
operating in a second-best world, this approach would likely
provide significant gains in low- and no-carbon energy
provision at a cost-effective price.
Thank you for this opportunity to speak, and I look forward
to your questions.
The Chairman. Thank you very much.
[The prepared statement of Dr. Metcalf appears in the
appendix.]
The Chairman. Mr. Zindler, welcome.
STATEMENT OF ETHAN ZINDLER, HEAD OF POLICY ANALYSIS, BLOOMBERG
NEW ENERGY FINANCE, WASHINGTON, DC
Mr. Zindler. Good morning. Thank you, Chairman Wyden,
Senator Hatch, and the committee staff, for this privilege
today. It is truly an honor to be before you and offer my
thoughts.
I join you today in my role as an analyst with Bloomberg
New Energy Finance, which is a market research division of
Bloomberg LP focused on the transitions underway in the global
energy markets. Our firm's clients include financiers, energy
equipment
makers, independent power producers, utilities, oil majors,
non-
governmental organizations, and government agencies in over 50
countries--in short, folks who want to make money investing in
new energy technologies.
My remarks today represent my views alone, not the
corporate positions of either Bloomberg LP or BNEF. I invite
the committee to review the accompanying slides I have
submitted as I read my remarks. I will focus my comments today
on how the two largest U.S. non-hydro renewables sectors, wind
and solar, are impacted by their respective tax credits. I
recognize there are a number of other intriguing ideas on the
table about reforming the tax code, including the Baucus white
paper from last year and the ideas that Gib just mentioned as
well. I look forward to talking about these during the Q&A.
Let me start by making two basic assertions. First, the
energy sector is in the midst of a fundamental transformation.
How we produce, deliver, consume, and even think about energy
are all changing rapidly and, I would argue, irreversibly. And
second, these trends, which began in the last decade and picked
up steam in the past 5 years, are going to continue over the
next 2 decades. This is inevitable thanks to incredible
advancements in natural gas extraction, declines in solar
module prices, improvements in wind turbine technology, and
greater connectivity and intelligence of electricity-consuming
devices and of the grid itself--to name just four changes.
Since 1992, the Production Tax Credit has played a vital
role in subsidizing and spurring the construction of U.S. wind
projects. The PTC's current $23 per megawatt-hour benefit
coupled with accelerated depreciation benefits has allowed wind
capacity to grow nearly ninefold since 2009. The PTC's
importance has been illustrated each time Congress has allowed
it to lapse. Each time, installations have fallen sharply. Last
year we saw the sharpest fall of all.
Today, the PTC remains officially off the books, meaning
that new greenfield projects generally do not qualify for the
project. However, due to a critical change in the 2012 Taxpayer
Relief Act, the credit continues to have important market
impact. That change effectively allows most projects that began
but did not complete construction before the credit sunset to
still qualify. This adjustment has helped to sustain the wind
industry this year and will continue into 2015. In all, we
anticipate 15 gigawatts of new capacity will be installed in
the U.S. in 2014 and 2015, marking a significant rebound from
last year, when just 1 gigawatt was installed.
So, what happens if Congress does not extend the credit? In
our view, the market will, as it has in the past, experience a
sharp decline in activity, potentially resulting in layoffs for
manufacturers with operations on U.S. soil. A somewhat similar
cliff now looms for the solar sector, which enjoys the benefit
of the Investment Tax Credit allowing developers to receive a
credit equal to 30 percent of their project's capital
expenditures.
The ITC is now due to sunset at the end of 2016. At that
time, when the ITC steps down to 10 percent, we anticipate
another drop in solar installations similar to what we have
historically witnessed with wind. One option that has been
proposed has been for the ITC to adopt the same placed-in-
service language as the PTC. Such a move would--in our view--
help sustain the solar industry longer-term.
Critics charge that these tax credits provide little
motivation for these nascent sectors to improve their economics
and become price-competitive. But recent evidence suggests that
the wind and solar industries are rapidly reducing costs, in
large part, to compete with natural gas-fired generation.
In the case of solar, the cost of a photovoltaic panel
today is 50 cents a watt approximately, by our calculation,
compared to over $3 a watt as recently as 2008. This has
created areas in the U.S. where so-called ``socket parity'' now
exists for new solar. That means, for a new homeowner or a
business owner, it can actually make more economic sense to put
a system on their roof in the long run than to pay the utility
for the power that they would otherwise receive.
In the case of large-scale solar projects which are
connected into the utilities, we have seen prices associated
with power contracts decline recently in the last few years.
There is a slide associated that demonstrates that. The main
reason for this has less to do with technology and more to do
with economies of scale, as the PV industry is now 10 times the
size it was just 5 years ago. Similarly, wind generation costs
have dropped in recent years, though in this case the reasons
have more to do with technological advancements.
Further improvements are coming, in our view. These
technologies will not stop evolving, and their costs will not
stop declining. For this reason, we project that wind and solar
will ultimately account for at least 20 percent of all capacity
in the U.S. by 2030. This may sound ambitious, but on a
generation basis, which is the actual number of megawatt-hours
that get generated, we anticipate that coal, gas, and nuclear
will still meet the large majority of demand by 2030. And no, I
should point out, our forecast does not assume that these tax
credits are extended. We think this is going to happen anyway.
In closing, I would just reiterate my two basic points: (1)
major changes in the energy sector are upon us, and (2) these
are going to continue through 2030 as the trends set in recent
years continue. Thus, the question becomes, what role will the
U.S. play in this revolution? Will the U.S. market follow a
smooth or rocky path toward clean energy deployment? Will the
U.S. be a market-maker or price-taker? Will the U.S. primarily
be a clean energy equipment importer or exporter?
Inconsistent and unpredictable short-term policy-making
will not fundamentally undermine the long-term changes underway
in the energy sector worldwide. These are now inevitable,
thanks to technological innovation, economies of scale, and
yes, policy support coming from many nations around the globe,
including, most notably, China. But inconsistent policy-making
can impact the role the U.S. plays in this change. Thus, the
decisions Congress makes on certain aspects of the tax code
today could have far-reaching implications for U.S.
competitiveness tomorrow.
Once again, I thank the committee for this opportunity, and
I look forward to your questions.
The Chairman. Thank you very much.
[The prepared statement of Mr. Zindler appears in the
appendix.]
The Chairman. Dr. Kreutzer?
STATEMENT OF DAVID W. KREUTZER, Ph.D., RESEARCH FELLOW IN
ENERGY ECONOMICS AND CLIMATE CHANGE, CENTER FOR DATA ANALYSIS,
THE HERITAGE FOUNDATION, WASHINGTON, DC
Dr. Kreutzer. Chairman Wyden, Ranking Member Hatch, and
other members of the committee, I want to thank you for giving
me this opportunity to speak to you today about energy tax
policy.
My name is David Kreutzer, and, at the risk of embarrassing
a staffer, I want to point out it is ``e'' before ``u.'' I only
mention it because that misspelling grows like kudzu when it
gets into records, and it is hard to extinguish.
The Chairman. David, we will make sure it is expunged.
Dr. Kreutzer. All right. I appreciate that. [Laughter.]
I am a research fellow in energy economics and climate
change at the Heritage Foundation. However, the views I express
are my own. They should not be construed as representing any
official position of the Heritage Foundation.
I want to make several points regarding carbon taxes.
First, carbon taxes do economic damage. As was mentioned by my
colleague to the right, there is with every tax something
called excess burden or dead-weight loss. It is true with a
carbon tax.
If you look at the numbers on the carbon tax, when I talk
about the damage, I am getting these estimates from three
analyses of carbon taxes: two done by the Energy Information
Administration and one done by us at Heritage using a clone of
their energy model, which is described in the appendix of my
written testimony.
I do not find those impacts to be moderate. In the $20-per-
ton carbon tax case of the Boxer-Sanders bill that we analyzed
at Heritage, the peak year job losses were 400,000; that is,
employment fell more than 400,000 jobs below the baseline that
we would have had without a carbon tax. I do not find that
moderate or trivial.
GDP losses for all three analyses of the carbon tax by 2030
would be measured in trillions of dollars, which comes out
roughly to, if you want to look at a nominal family of four, in
the order of $1,000 per year. I do not think that is moderate
or trivial.
And you do not get these losses back. With all of these
models, the economy recovers at some point. But you have people
being employed at worst jobs. If you look even at the EIA's
analysis, even going out to 2040, which I think is a bit too
far for much belief, we still have GDP $140 billion or so below
the baseline, which is the equivalent of the GDP generated by a
million people. So you have a million people working for
nothing.
So, carbon taxes do damage to the economy in ways that
simply cannot be avoided--you cannot slice the pie differently
and not have those damages.
Second, I want to point out that I do not think you can
justify these carbon taxes by the impact they will have on
world temperature. The carbon tax that the EIA has analyzed in
their Annual Energy Outlook 2014 would cut carbon dioxide
emissions from power generation by about 50 percent by 2050.
If you look at a carbon tax calculator that has been
created to look at how much that would affect world
temperatures, the best guess is it would cut world temperature
by the end of this century by \1/2\ of 1 degree centigrade.
That would be about .09 degrees Fahrenheit, less than one-tenth
of a degree Fahrenheit.
Some people say, well, that is just the first step. Well,
if you cut it by 50 percent, there is only one step left after
that before we have to hold our breath. If you are looking at
trying to get other countries to come in to join us because we
are providing some sort of leadership, you would only have to
look at this week's Climate Summit at the UN to see the leaders
who are not showing up from India, from China, from Germany,
from Australia, from Canada, to get an idea of what our
leadership is likely to bring.
Third, I would like to talk about the social cost of
carbon. The social cost of carbon is generated from three
fairly sophisticated computer programs that at their core are
fundamentally vacuous. They are flawed, and they do not give us
numbers that are meaningful.
At the Heritage Foundation, we have installed two of those
programs. The third program, the proprietor refuses to allow
anybody to publish anything on using his model--and that is the
PAGE model--without the right of co-authorship, which
eliminates the possibility of having independent analysis.
The two we looked at--they are used by the EPA to estimate
the social cost of carbon, which is driving the cost benefit
analysis for virtually all of their carbon regulations--did not
even use the OMB guidance for the discount rate that you need.
The social cost of carbon estimates look at--supposedly we are
able to calculate economic damage from climate warming 300
years down the road, in the year 2300.
I think it is unlikely we know what is going to happen to
the climate in 2300, and even less likely that we know what is
going to happen to the economy because of the climate in the
year 2300. But they pretend to make that measure anyway.
It is important to use the right discount rate. The OMB
gives guidance for 3 percent and 7 percent. The EPA and the
interagency working group did not use the 7 percent.
What happens if you use the 7 percent rate? One of the two
models that we used, the PAGE model by Richard Tol, actually
goes negative. So, if you believe the logic here of getting the
markets to balance things properly, as Professor Metcalf has
pointed out, that would imply we should subsidize
CO2 emissions. Now, I do not know that we want to
use a tool that cannot decide whether we should subsidize
CO2 emissions or tax CO2 emissions to
drive CO2 tax policy.
In summary, carbon taxes do damage to the economy. All the
carbon taxes that I have seen proposed would have, at most, a
negligible impact on world temperatures. And the social cost of
carbon is not a tool that is ready at this point to be used for
serious regulatory analysis.
Thank you very much.
The Chairman. Thank you very much.
[The prepared statement of Dr. Kreutzer appears in the
appendix.]
The Chairman. Before we get to questioning, colleagues,
there is an important bit of committee business that needs to
be done.
Senator Grassley turns 81 today. Senator Hatch and I have
decided, knowing of his enormous affection for Dairy Queen, we
are getting him a gift certificate. Some of you may want to
honor him in different ways, but I just wanted all of our
colleagues to know.
Now, with respect to Senator Nickles's comments, I want to
pursue a different line of questioning before this sparring
back and forth, with respect to renewables and fossil fuels,
goes too far.
Until recently, I chaired the Senate Energy Committee. I
come from a State without a drop of fossil fuels. My first
hearing was on natural gas, which kind of shocked and amazed
everybody. The reason I did it is that I am not interested in
this sparring back and forth and back and forth, because I want
us to advocate a
technology-neutral kind of policy.
Here is what concerns me. Right now, given the fact that
the wind Production Tax Credit has expired, if you start a new
wind farm now, you get nothing because the Production Tax
Credit has expired. If you start a new oil-drilling operation
now, you get access to the permanent subsidies. So this is--
and, Senator Nickles, you are right to say--this is going to be
a part of the tax reform debate. Senator Hatch and I are going
to pursue these issues in a bipartisan way. They were central
to coming together with Senator Coats on the bill.
So I want to start with the clean energy sector and my
comments earlier. I talked about something I think we can all
come together on, and that is America leading the pack in what
I call ``American energy exceptionalism.'' I want to apply that
principle to the clean energy sector. In my statement, I talked
about what are we going to have to do to thrive at home and
particularly to beat the global competition, because this is a
market for energy goods and services that is estimated as a
multi-trillion-dollar market.
Let us start with you, Mr. Zindler, because you come from
exactly that field. Looking at the energy markets, looking at
the potential--I am going to give everybody a chance to do
this, but, if you got a chance to look at one policy change
that would be
market-oriented for us to tap the potential for the clean
energy sector here at home and around the world, what would it
be? You start us, Mr. Zindler.
Mr. Zindler. Well, it is a very good question. There are a
variety of them, I would say. It does strike me that something
that tries to take into account--let us just back up for 1
second.
Our perspective globally is, frankly, fairly optimistic,
like you see here for the U.S. We think we are going to see a
lot more adoption of clean energy technologies in countries
around the world. In fact, the rates of adoption in the
developing world are probably even going to be faster, because
some of them have the best natural resources for wind and
solar. A number of them have hundreds of millions of people who
are not on the grid.
The cost of solar is even more competitive when you are
talking about literally putting a system on somebody's roof as
opposed to having to build a hub and spoke type of delivery
system. It is somewhat analogous to what is going on with
telecom and with not building hard landlines for telephones in
a lot of these countries.
So we think that the opportunity is enormous. The growth
rates that we are seeing in the developing world are enormous.
So then the question is, if you want to be a competitive
country in trying to service these nations and export, what can
you do to be supportive? I am, sort of, of the view that, to
some degree, where we are now is a very interesting point and
that a lot of these technologies are close to competitive on
their own without subsidies, but not there yet in many parts of
the world.
So the real question is--and this gets to what Norm
Augustine was saying--what do we do to support the next
generation of technologies, the ones that are going to be down
the road, the ones that my chart shows taking over the world 5
or 10 years from now? How can we support them through greater
R&D, whether it is tax credits or whether it is grants or other
types of things? From the U.S. competitiveness perspective,
from my perspective, a lot of what you would want to think
about in terms of long-term competition are things that support
technology under development now but also technology that will
make an impact in about 5 or 10 years from now.
The Chairman. Why don't we see if we can get Mr. Augustine
in on this, and then somebody who disagrees with Mr. Zindler
and Mr. Augustine.
Mr. Augustine?
Mr. Augustine. Thank you. I would focus on increasing the
Nation's investment in research and development in two ways.
The first would be to substantially increase the research
budget that is supported out of the Department of Energy. I
would single out ARPA-E * as an example. It is badly
underfunded for its potential.
---------------------------------------------------------------------------
* The Advanced Research Projects Agency--Energy.
---------------------------------------------------------------------------
The second thing would be to make the R&D tax credit
permanent. Make it outcome-focused rather than having any
built-in biases one way or the other in terms of technology
resources.
The Chairman. Well, there is a lot of interest, as you
know, Mr. Augustine, in this committee in making the R&D tax
credit permanent.
Nobody is required to disagree with Mr. Zindler or Mr.
Augustine. Does anybody want to?
Dr. Kreutzer. Yes. I just want to add a little bit. I also
taught economics and tax policy for 26 years at Ohio University
and later James Madison University.
The definition of net income or profits that we use in the
tax code is one that was actually developed for owners and
potential owners of firms to get an idea of what the situation
for their firm was. It is not a good definition for tax policy.
For instance, using an example that Senator Nickles brought
up, if I buy a ream of paper to use in the office headquarters,
I get to deduct that 5 bucks from this year's tax. If I buy a
ream of paper to use in the printer in the trailer out at the
drilling site, then it is an intangible drilling cost. If you
get rid of that deduction, I have to expense that $5 ream of
paper that is identical to another one used somewhere else in
the company for--who knows--15 or 20 years.
It makes much more economic, straightforward sense for tax
policy, I think, to have expensing for everything. I think that
would promote all sorts of investment. You would not have to
worry about whether you get to deduct it in 5 years, or 3
years, or 2 years. You get to take it off now.
I think people would understand--if I spent $5 buying
something, I should be able to take that off of my revenue for
this year.
The Chairman. I am well over my time.
Senator Hatch?
Senator Hatch. Well this has been a very interesting panel,
as far as I am concerned. Let me ask this question for Dr.
Kreutzer and Senator Nickles.
A number of tax policy experts believe that the tax system
should only be used to raise the revenue necessary to fund a
constitutionally limited Federal government, and that we should
not get involved in social engineering through the tax code.
Now these experts suggest that energy policy should not be run
through our tax code as part of the tax reform exercise of
lowering tax rates. This is one approach to dealing with energy
tax provisions. I would like to have both of your thoughts on
such an approach to energy tax reform.
Senator Nickles. Well, Senator Hatch, just a couple of
comments. If you do really good tax reform, you do not need
energy tax issues. Let the marketplace work. By that I mean,
allow expensing where expensing makes sense. Everybody is
talking about subsidies, and I keep hearing people mention
subsidies for the oil industry. Basically, you are talking
about expensing. You are talking about expensing out-of-pocket
costs that are non-recoverable, most of which are wages.
I have always said--I have said it on both sides of this
table--everybody in any business should be able to expense
their wages. They should not, in my opinion, get a tax credit
for the wages. That is Uncle Sam writing a check. There is a
big difference between a tax credit and expensing.
That is what is wrong about the Production Tax Credit. It
is a tax credit. Uncle Sam is writing a check to enormous
investors, some of whom are billionaires, to produce products.
That is an enormous subsidy--absurdly large--in comparison to
allowing somebody to deduct their out-of-pocket expenses
incurred.
So I hope, when you are doing overall tax reform, you will
keep that in mind. You can always debate how long we should
amortize something, whether it is a pipeline, a building, you
name it. We have different amortization schedules for
everything.
I have always believed that the shorter you can keep that
time--allowing people to deduct what they wrote a check for--
makes good sense. What does not make sense is having Uncle Sam
write you a check that pays 30, 40 even 50 percent of the value
of the commodity. Unfortunately, that is what happens with the
wind Production Tax Credit.
Senator Hatch. Dr. Kreutzer?
Dr. Kreutzer. I think having it done through expenditure is
probably a little bit cleaner and more up-front. You are seeing
the dollars actually spent for the various projects.
I am probably willing to subsidize many fewer things than
most of the people in the room or on this panel. I agree with
Senator Nickles. I think the market works pretty well in this
regard. I do not see many valleys of death that are followed by
something other than great plains of death and mountains of
death on the investment.
If an investment is a good idea, we see it being made. We
see George Mitchell for years and years putting his money
behind the technology that allows us to get to the shale gas,
which he did primarily with his own money.
So I think it is a good idea to simplify the tax. I think
if you went to straight expensing, you could turn K Street into
public housing. There would be no need for three-fourths of the
lobbyists in this town, because so much of it is based on,
should we accelerate it 3 years or 5 years or whatever.
I agree in general. I think it is better to do expenditures
for things you want to promote instead of trying to jimmy it
up.
Senator Hatch. Let me ask you another question, Dr.
Kreutzer. What economic effect would a carbon tax have on U.S.
workers, businesses, and consumers, in your opinion?
Dr. Kreutzer. As I say in my testimony, it would be
negative overall. We would see some significant damages,
especially in manufacturing, obviously in the energy-intensive
sectors. The reason for this is that 85 percent of the energy
that we get in the U.S. is based on hydrocarbons. So a carbon
tax is going to hit all of them. It will hit coal heavier than
petroleum, and petroleum heavier than natural gas, but it is
going to hit all of that 85 percent.
We will see families of four--again, a nominal family of
four--facing $1,000 per year of lost income. That does not come
back.
Senator Hatch. I got that. Let me ask this question for
everybody on the panel.
Congress is in the process, once again, of extending
certain expiring tax provisions, more commonly known as tax
extenders. In the context of tax reform, I am curious if anyone
on the panel believes we should set up a system whereby energy
tax provisions are either made a permanent part of the tax code
or dropped altogether. In other words, should we get out of the
business of enacting temporary energy tax provisions?
Senator Nickles. I definitely think so. I think they have
had their time. Enough is enough. Some of these subsidies, as I
have mentioned, are really not affordable, and they have
distorted the marketplace in the electric sector significantly.
I am amazed going through the list of all of the tax
provisions that are there, absolutely amazed. I know you all
have a difficult job. I know you have to deal with extenders. I
happen to favor expensing. I have already mentioned that. That
is one of the extenders.
I am a small businessman. You could make me amortize that
computer over 2 years, or my cell phone over 2 years, or the
paper I buy over 2 years. I am able to expense it. I think that
makes good sense. I do not look at that as a subsidy. I had to
write a check for that. I think I should get the deduction, but
to receive tax credits for all of these various different
energy provisions does not make sense. Uncle Sam does not write
checks for drilling companies to drill wells.
I am on the board of a big refining company, Valero. Uncle
Sam does not write checks for us to be refining. People talk
about all of these subsidies as if they apply to fossil fuels
as well as to renewables. There is a big difference, and I take
issue with that.
Senator Hatch. All right. Mr. Augustine, and then I would
like--if you could keep your answers fairly short, I would
appreciate it, because my time is up.
Mr. Augustine. Yes, I think it would be proper to reflect
the views of my group that we would not favor temporary tax
provisions in general. We would favor phasing them out over a
period of time. Sudden changes are disruptive.
The problem with temporary provisions tends to be that they
cause management to act in ways that are not optimal in the
long term. I would point out, though, that there are other
investments that would be important for the government to make.
Senator Hatch. Dr. Metcalf?
Dr. Metcalf. So I think you want to fish or cut bait. You
want clarity and permanence. So I think temporary provisions
are not good, but whether you have them or not depends on how
you want to address the problems that we face in terms of the
unlevel playing field because of the social cost of fossil
fuels.
One comment on expensing: if we were at a hearing on a
consumption tax versus an income tax, I think I would be a
great fan of expensing as a principle of consumption taxation.
But we do have an income tax by and large, and one of the
principles of an income tax is that you allocate the costs as
you accrue the revenue.
So, if I buy a ream of paper for my business and use it
this year for revenue I earn this year, then of course, I take
that as a deduction. But the whole principle of an income tax
is that we allocate the expenses to match the revenue over
time. Of course, a drill rig is earning revenue over time, and
so proper tax treatment would call for amortization. So I think
we need to be careful what we are calling a subsidy and what we
are calling a simple cost of business.
Senator Hatch. Mr. Zindler?
Mr. Zindler. I guess I would just echo that. I am having a
little trouble with this parsing between expensing and tax
credits. In both cases, as I understand as a taxpayer, that
means less revenue that is coming in for the American
government. Is that the bottom line? They are both subsidies,
right? Unless I am missing something here.
[Off mic.]
Mr. Zindler. They are not? They do not both result in less
tax being collected?
The Chairman. Let us have Senator Hatch ask the questions
and see if we can get colleagues some time here. [Laughter.]
Mr. Zindler. I am sorry.
Senator Hatch. I kind of like that. I like seeing the fight
going on here. [Laughter.]
Dr. Kreutzer?
Dr. Kreutzer. No. Expensing changes when you pay the tax.
You get a tax credit that reduces how much you pay.
I think if we have good tax policy, we want it to be
permanent. I think the reason we see the temporary provisions
is that so many people think, well, there are a bunch in there
that are bad, and I would rather have a bad tax policy be
temporary than permanent. So that is the battle.
In general, if you have decided on what is good tax policy,
there is no good argument for having it be temporary and
renewable.
The Chairman. Senator Stabenow is next.
I just want to make one point with respect to your comment,
Mr. Zindler. What will get us out of the parsing business, this
back and forth, is if we can really advance a policy built
around technology neutrality. So to the extent any of you can
help us do that, that will be constructive.
Senator Stabenow?
Senator Stabenow. Well, thank you very much, Mr. Chairman.
This is a very important discussion, I think, in terms of the
future of our country in so many ways, in terms of jobs and
energy. Thanks to all of you.
Don, it is great to see you again. I am still in your old
office, and it is doing well. So, thank you for that.
Let me say though--I am going to challenge you. I want to
talk a little bit about oil, because I think you have kind of
made light of expensing on oil. The reality is that we have had
a permanent tax policy since 1916 in some way incentivizing and
supporting oil. As a manufacturing State, I am sure I would
have supported that then, and we have seen--at least, in the
last 30 years--fossil fuel energy companies getting subsidies
in some form or other, write-offs, worth over $166 billion
after being adjusted for inflation. So that is just 30 years.
That is not 100 years.
So I would argue for folks who have said, we should not
pick winners and losers--well, as I have said before, we picked
a winner, and they won. So now the question is, can we create
more competition for different kinds of energy and create a
policy that makes sense for all of them? We still have,
regardless of the amount, stop-start provisions on
alternatives, whether it is biofuels, whether it is wind,
whether it is solar, all of which are very important.
When we look at all of the pieces from the section 199
manufacturers' deduction--which I would argue against as a
manufacturing State; I would question whether that is
manufacturing on the oil and gas side--we have depletion
methods, and expensing and amortization periods, and passive
loss limits, and deductions for underground injections, and
marginal well tax credits, and enhanced oil recovery credits. I
mean there are a lot of things that we have done in support of
one sector of our energy provision industry. So I think at this
point that it is important that we have certainty, even if it
is phase-outs, on the rest of it to create a level playing
field.
I have to say, Mr. Zindler, you were talking about solar in
other countries. I just came from a trip to Africa with a
number of members where we saw individual solar units way up in
the mountains of Ethiopia where they are still using an ox and
a plow, but they have a cell phone and they have solar. It is a
very interesting situation, and it is individual units that
they are coming in with.
But when we talk about leveling the playing field, I think
an interesting policy--and, Mr. Zindler, I will ask you this--
is something called master limited partnerships. Senator Coons
has a bill that I am pleased to be a cosponsor of that is
bipartisan, with Senator Moran and Senator Murkowski, that
would take a form of financing that is currently only available
for oil and natural gas and coal extraction and pipelines--so
fossil fuels--and expand it to alternative energy. I am
wondering if you might speak to allowing clean energy sources
to use the same kind of financing structure, the MLP structure,
and whether or not that would be a good way to open up and
encourage investment in clean energy.
Mr. Zindler. Thanks for the question. The MLP subject is an
interesting one. It is a very complex one, so I will try not to
get into too many details.
I will say that the spirit in which that legislation is
being pursued, to me, to some degree makes a lot of sense, in
the sense that the costs of capital for renewable energy
products, typically these days you could argue, are
artificially high, in part because they rely on this tax credit
system. There are a limited number of players that provide tax
equity financing. And in part, that is because investors, these
retail mom and pop investors, can invest in the companies that
make these technologies, but if you look at those stock
valuations, they kind of go up and they go down; they are
risky.
There are very few avenues for the sort of mom and pop
investors to simply buy a share of an operating wind farm. And
those are fairly low-risk investments that can offer cash flows
that are similar to a bond, particularly a high-yielding bond.
So the idea of a master limited partnership is one that I think
makes a lot of sense for the industry, in that it could
potentially open a new pool of capital, make a new pool of
capital available to wind and solar and other projects.
One interesting note though is that this idea has been on
the table now for, I think, 2\1/2\ to 3 years, since Senator
Coons first announced it. In the interim, interestingly enough,
Wall Street has found a number of interesting ways to try to
sort of replicate this in their own way. So there has been this
series of so-called yield companies that have been floated over
the public exchanges.
What these essentially are are companies that own perfectly
well-operating wind or solar projects. They simply put them
together, and then they IPO them on the stock exchange.
Investors know that they are not investing in Google, they are
not investing in Facebook, they are investing in something that
will produce a reliable, solid dividend for them in much the
same way that a bond or other types of things would. So we have
seen market activity to try to actually create an MLP-type
world, but there are limits on how effective that could be, and
the MLPs offer a further option for public investors.
Senator Stabenow. Thank you. I did not mention one other
piece to this story about looking at solar in Africa, and that
is that these were individual Chinese units that were highly
subsidized and being sold for a very small amount. When we look
at China investing $54 billion a year in clean energy
technologies to win the race, I worry that if we are not in the
race and providing some solid long-term policy, we are going to
lose jobs here. We are going to lose jobs in the long run.
So, Mr. Chairman, I know I am out of time. Thank you.
The Chairman. Thank you, Senator Stabenow.
Senator Enzi?
Senator Enzi. Thank you, Mr. Chairman, and thank you for
holding this hearing. As the accountant, I am extremely
interested in tax reform. A lot of these details are very
exciting for me. I do think that we can make the tax code a lot
fairer and simpler, and I am interested in doing that.
I am glad that this is an energy hearing, because energy is
Wyoming. We have every kind of energy in Wyoming. The southern
part of Wyoming is rapidly growing in wind turbines because
Denver is the mile-high city, and you have to go uphill to get
to Wyoming. And when you go uphill, you get above the trees.
And when there are no trees, there is a lot of wind.
In fact, on the first turbines that were put up there, the
rotors blew off. They now have them designed so that when the
wind gets to 80 miles an hour, they turn the blades into the
wind, so they stop. But if they do not turn fast enough, it
blows the whole tower apart. So we are big on wind. We have a
lot of sunshine, more days of sunshine than almost anywhere but
Arizona, I think.
But for a long time, we have been involved in oil and gas
and coal. In fact, 40 percent of the Nation's coal comes from
my county. There are 92 train-loads of 150 cars a day that
leave our county full of coal.
So I pay a lot of attention, of course, to what is
happening in the way of taxes and tax credits. I do blame the
oil and gas industry for a poor naming of their part of the tax
code, because they call it intangible drilling costs, which
sounds like it really did not happen. But it is real stuff. It
is like that ream of paper that Dr. Kreutzer mentioned. It is
also the pipe that goes down in the hole. It is also the cost
of getting the lease to begin with, and all of the costs
associated with that. We do not allow them to deduct any of
that until they actually have some production. So it is not a
deductibility of expenses, and it is even done over a longer
period of time.
One of the things I always caution the committee on is, if
we eliminate some of these things, first of all, we ought to be
sure that it is not the same as somebody else is getting, just
under a different name. I will use one example that we have
talked about a little bit which I expect will never happen, and
that is elimination of the individual's mortgage deduction.
If we were to eliminate that overnight--or many of these
other things that we talk about--we would create a real cash
flow problem in the United States. Yes, the government would do
really well in the year that we did those.
So I keep talking about transition on any of these. We do
have a little bit of a transition on the Production Tax Credit,
because it extends for another 10 years. So that gives people a
chance to adjust to it as it disappears. I have talked about
transition enough that most of the members of the committee
talk to me about transitioning----
The Chairman. People need to understand how exciting in the
tax reform area it is to do the transition work. I mean this is
really root canal kind of stuff. [Laughter.]
I just want to commend Senator Enzi for constantly, in all
of our tax reform discussions, coming back to that point. It is
fine to talk about how you are going to be somewhere in a few
years, but if you do not do what Senator Enzi is talking about,
which is describe how you are actually going to get there step
by step, tax reform does not come together. So I appreciate my
colleague talking about that.
Senator Enzi. I appreciate that, Mr. Chairman.
I do think that oil and gas development is important, just
as important as any of the other energy sectors. One of the tax
increases the administration wants is changing the
deductibility of intangible drilling and development costs.
Those are comparable, perhaps, to research and development, but
I think they are more comparable to amortization and
depreciation. So the loss of this deduction for producers would
reduce their available capital immensely.
So, Senator Nickles, can you speak to why this deduction
continues to be vitally important to the industry and how the
elimination of the deduction would impact the economy?
Senator Nickles. Thank you, Senator Enzi. The biggest
economic boon to this country has been the explosion of oil and
gas activity, primarily because of fracking. There has been big
growth in drilling, and you see oil production going up, gas
production going up, jobs, severance taxes, you name it. Those
are real jobs. Some people do not make the connection that
extending the subsidies for wind actually works to the
detriment of some of those jobs, but it does.
If Congress passed the administration's proposal on
intangible drilling costs, you are telling the person who is
drilling a well that he cannot expense the wages on that well.
He has to amortize that over 5 years, a portion of it. That, to
me, makes no sense. As an example, look at Harold Hamm, the
biggest developer in the Bakken. He is spending more money than
he makes back into that field. Why cause him to put a lot less
money in that field? You are going to have a lot less
production.
The administration's proposal would dramatically scale down
the activity in the oil patch. Surely, this Congress is going
to look at that and say, wait a minute. Uncle Sam is not
writing a check to Harold Hamm to drill that well. Does he get
to expense his costs in the year incurred? Yes. Is that Uncle
Sam writing a check for it? No. Uncle Sam is writing a check to
Warren Buffett to produce windmills--$138 million.
There is a big difference. Warren Buffet receives a
subsidy. Harold Hamm is allowed to expense something. You can
debate over how long it should be, but I think people should be
able to deduct, at least, their wages in the year incurred.
Senator Enzi. Thank you, Senator. I did have a question on
percentage depletion deduction that I was going to ask Dr.
Kreutzer, but I will submit that in writing. I also have a
number of questions on the Production Tax Credit, and wind and
solar, and I will be submitting those questions too. If you
would be so kind as to answer them for me, I would appreciate
it. It will be helpful in our debate about tax fairness.
The Chairman. Thank you, Senator Enzi.
Senator Bennet?
Senator Bennet. Thanks, Mr. Chairman. Thanks for holding
this hearing, and thank you to the witnesses for being here.
One of the things I would add to your list as we think
about tax reform is the extent to which incumbent interests use
the tax code to their benefit and to the detriment of
innovators in the economy. We should be on the lookout for that
everywhere in our statute books, especially in the context we
were having a discussion about, which is winners and losers. I
think we will have an interesting opportunity to debate that.
I guess I would start with Mr. Augustine, East High grad
from Denver, CO. It is nice to see you. When you guys were
looking at the R&D question, was there a conclusion about why
it is such a small percentage of the overall energy economy
that we spend on research and development?
Mr. Augustine. There really was not a great discussion of
that in that particular group. Based on other conversations and
studies, I think one factor is that, up until recently, the
energy economy was moving along fairly smartly. We did not
realize we had the kind of problems we have today. It was
somewhat status quo.
I think also a factor is that the investments in the energy
arena tend to be very long-lasting. The facilities that are
built last a very long time. There is not the drive to
constantly bring in new technology and update what you have.
I would cite as an example of the contrary, Intel
Corporation. The CEO of Intel has told me that of the revenues
that Intel receives on the last day of any fiscal year, 90
percent of them come from products that did not exist on the
first day of that fiscal year. Whereas, if you are in the
energy business--I was on the ConocoPhillips board for many
years--your investments are very high and they last a very long
time. So you do not have that drive.
Senator Bennet. Yes. Mr. Zindler, it has been our
experience in Colorado--and, Senator, it is great to have you
here--that we have had great growth in oil and gas jobs, and we
have had great growth in wind jobs. I have not detected that
the wind jobs are taking away the oil and gas jobs.
I wonder if you could talk a little bit more about the
effect of the on-off switch that has happened with the wind PTC
and the damage that would be done to the manufacturing base
that relates to wind technology in this country if we do not
figure out some way to stop sending the kind of signal that we
have sent.
Mr. Zindler. Sure. Thanks very much. Well first, just to be
clear on my comments regarding the drilling costs, I am only
saying these are all subsidies and we should just be honest
about it. I am not saying one is better. I leave that to all of
you to make the value judgments on which ones you want to be
supportive of, but they are all subsidies supporting these----
Senator Bennet. You are saying the mechanics of either the
government writing a check to somebody or somebody writing a
check to the government----
Mr. Zindler. Right. Which, by the way, the government does
not write a check. They simply expect you to pay less taxes
thanks to the tax credit.
Senator Bennet. Right.
Mr. Zindler. Anyway, that aside, both represent supports,
and arguably, both are very important if you want to pursue
what has been described as an all-of-the-above kind of policy
strategy for U.S. energy. I think it is interesting that we
have not seen what I would call any kind of crowding out--to
the best of my knowledge--of the wind industry crowding out the
natural gas industry.
The natural gas industry has been surging. I give full
credit to George Mitchell and others whose incredible
innovations have gone on and taken place over the years, as
well as the new discoveries and the abilities to exploit them
in the various shales around the U.S. It has really been an
incredible thing, and it is helping American economic
competitiveness.
In terms of the wind industry and the potential impact,
there are approximately 10 gigawatts of potential capacity of
manufacturing on U.S. soil. We are thinking that about 15
gigawatts are going to be built between this year and next.
So, if you simply were to drop that down very substantially
in 2017, 2018, and beyond, yes, you end up with a situation
where you might have a considerable amount of built
manufacturing capacity that essentially goes idle, similarly to
what happened a couple years ago, the last time the industry
faced this.
Senator Bennet. Thank you. Professor Metcalf, one last
question for you. In your testimony, you talked about the
attractiveness of so-called technology-neutral tax credits. The
chairman has talked about that as perhaps the most realistic
proposal to energy tax policy. I think I agree with that, but
it is important for us to get the details right to ensure the
policy works as well as existing credits. For example, Mr.
Zindler was just talking about natural gas.
Some of us have thought about, well, would you have a
standard of emissions as a way of making sure that natural gas
was a beneficiary as part of this? I just wonder whether you
could talk a little bit about the details of what would be a
sensible neutral credit.
Dr. Metcalf. Thank you. So it is an excellent question.
Senator Bennet. Finally. [Laughter.]
Dr. Metcalf. So again, I think with all of these policies,
we are trying to address market failures. And just a quick
comment on your initial question about R&D: information is a
pure public good, and we know that private markets under-
provide information, so providing support for R&D is, I think,
quite valuable and in that way quite important in the energy
sector.
So what we really want to do is to get the relative price
of fossil fuels and non-fossil fuels right, taking into account
the social cost of greenhouse gas emissions. So you need a
baseline. Now, whether the baseline is the current emissions
per million BTUs of natural gas or whether it is, say 90
percent of that level, I think that is something that is an
important question. I do not, quite frankly, know what the
right number is. Part of it depends on where we think that we
can incentivize technology in the short run for natural gas to
improve their emissions, and it might be around capturing
fugitive emissions or other kinds of things like that.
Once you have that baseline, then you do provide the right
incentives, both for natural gas, as well as for wind and
solar. It does give you the right signal, the price signal.
And just one last very quick point: we have been talking a
lot about expensing of intangible drilling costs. I just want
to point out that the cost to the tax system of percentage
depletion is double that of intangible drilling costs. We
should not forget that either.
Senator Bennet. I want to apologize for going over, Mr.
Chairman. It is the first time ever, but thanks for the great
panel.
The Chairman. No, not all. Thank you for the important
point.
Senator Cardin?
Senator Cardin. Mr. Chairman, first, thank you very much
for holding this hearing. It is incredibly important that we
update our tax incentives for the energy realities of today. So
I thank you for doing this, and I thank you for your
leadership.
I do want to point out that, in the legislation this
committee has approved, we have already taken, I think, an
important step on energy conservation with section 179D. I hope
we will get that to the finish line. That allows not only the
extension of 179D, but the improvements, with your help, that
we put in here that deal with nonprofits being able to take
advantage of the 179D credits. And we are working together to
deal with pass-through entities and how we can make it work for
them. I hope we also can get to existing structures using the
179D, because energy conservation is one of the easy areas that
we should be able to deal with in an energy policy in this
country.
I want to spend my time getting answers from the panel on
dealing with an area that we have not really focused on, which
is tax incentives. We spent a lot of energy and time talking
about how we generate electricity and what we can do to
encourage the generation of electricity, but we have not talked
about how we can make more efficient the transmission and
storage of energy in this country.
There are a lot of new technologies focused on how we can
do this in a much more efficient manner that could save energy,
could save costs. I am interested in hearing from the panel
their ideas on what we can do to encourage a more efficient
system. Now, it can come from traditional sources, such as coal
generating electricity or it could come from our renewable
sources, such as solar or wind.
How do we tackle the issue of this country being more
efficient in the way that we store and transmit energy in
America? Who wants to tackle that first?
Yes, sir?
Dr. Metcalf. That is a great question. I have done a fair
amount of research thinking about our transmission grid in the
United States, and some thinking as well about storage. They
are different issues in my mind.
Storage is really an issue of research and development,
coming up with technologies to store electricity at a cost-
effective price. There is a lot of interesting work going on to
do that. Of course, there is long-term storage. There is short-
term storage for smoothing out fluctuations in energy. So I
think continued R&D support is critical for making advances on
the storage side. Of course, we have had storage going back a
long time. Pump storage for hydroelectricity is a form of
electricity storage, though it is less popular these days.
On transmission, I think that we do have a good provision
in the tax code in terms of accelerated depreciation for
transmission. Here I think some of the challenges may be more
on a regulatory basis. We are looking to move electricity great
distances from resource-rich areas where we can produce wind to
population-rich areas where we want to consume it. Often this
requires sending that electricity across State lines, and then
you have federalism issues and who gets to write the rules on
this. Is it the Federal government? I think some advances were
made in recent years on that, but that----
Senator Cardin. Mr. Zindler, do you want to jump in here? I
know there are some concerns about the difficulty of storing
and transmitting with solar, with wind. I know there are some
regulatory issues. There is no question about that, but can the
tax code be more efficient in helping us deal with this?
Mr. Zindler. It is an interesting question. Thinking about
storage and balancing is something that, as you look to the
long-term future and you see more of these variable sources of
energy deployed, you certainly have to take into account.
As far as the tax code is concerned, it is a good question.
I think one of the more interesting--it is actually a non-tax
solution, but in California, they have begun to mandate that
the utilities put a certain amount of power storage onto the
grid. I think that is not necessarily a bad idea, given the
kinds of new challenges that we are facing.
It is hard for utilities and others to justify some of
these investments right now, but the need for storage that will
be there 5 or 10 years down the road sort of calls out, in my
view, for policymakers to think about putting in place policies
that create the right kinds of incentives.
Senator Cardin. Does anyone else wish to comment? I have 18
seconds left, so somebody could take it.
Dr. Kreutzer. I think the grid operators and utilities
should be the ones that come up with the money for doing this,
unless it is basic research on technology that does not exist.
But if there is a cheap source of energy that is variable and
intermittent, then they would get the benefit of coming up----
Senator Cardin. I think that point is well-taken. The
problem is, it is just not being done today. I hear more and
more of the generators saying, well, we cannot deal with the
storage and transmission, therefore, we are either wasting
energy or we are not producing as much as we would otherwise
produce.
Mr. Chairman, thank you very much.
The Chairman. Senator Cardin, thank you for bringing up
storage, because, obviously, the sun does not always shine, and
wind does not always blow. The Department of Energy actually--
back when I was chair--put together a report that came in,
essentially, at the end of last year, and we are supposed to
see soon what they have done to actually implement it. So most
of the action has been on the regulatory side, but I am glad
you are raising it here, because clearly this ought to be part
of the tax debate too.
All right. The birthday man of the hour, the recipient of
the Dairy Queen gift certificate, has arrived. [Laughter.]
Senator Grassley. Thank you. Mr. Chairman, you probably
know that while Senator Nickles was in the Senate, we probably
only disagreed on one thing.
The Chairman. I understand that. [Laughter.]
Senator Grassley. So I never had an opportunity to ask him
a question where he had to answer. [Laughter.]
I am not going to go into a lot of this stuff--I got here
late--that I assume has already been asked dealing with oil and
what some of us would say would be preferences for one energy,
where we would like to ask you, why for those and not for
others?But I would like to make this point and ask you, when it
comes to understanding why eliminating one tax preference that
you might support might be a job-killing tax hike, while
eliminating another is ending a subsidy, do you believe that
raising taxes on alternative energy and raising their cost of
doing business will lead to job losses, and is there a
difference, then, between a job loss in the oil and gas sector
versus one lost in the renewable energy sector?
Senator Nickles. Senator Grassley, it is a pleasure to see
you and happy birthday to you, and just two or three very quick
comments.
You and I served together for 24 years. You know I do not
like subsidies, any subsidy. I happen to think there is a
difference in allowing somebody to deduct an out-of-pocket
expense. I do not consider that a subsidy. I do consider it a
subsidy, a tax credit, if it is refundable, and someone is
receiving a check. If not, they are reducing their taxes by a
certain amount.
In energy--as some people in this room know--I led the
effort to repeal the windfall profits tax. We finally did. I
led the effort to decontrol natural gas. We finally did. I want
the marketplace to work in energy, and it can. It has proven to
be effective.
Credits distort the marketplace, particularly if the
credits are enormous. In the case of wind--to give a tax credit
of 2.3 cents per kilowatt hour compared to, let us say an
average cost of 6 cents--you are talking about a subsidy that
is about 40 percent of the wholesale price. That is enormous.
If it was going to be comparable to oil--big oil as you
might say, Senator Grassley--that would be roughly $2 per Mcf.
Those are enormous subsidies. When people talk about parity, I
say, you cannot afford parity--you cannot afford to extend the
subsidies that are in the Production Tax Credit to other forms
of energy. It just is not doable.
There is one other comment I would just make. Senator Enzi
is here. I noticed the CEO of Wyoming Power is building a
multi-
billion-dollar wind farm in Wyoming, and he said he can do it
without the tax credits. He says it is market-competitive. I
hope it is.
The PTC has been on now for 22 years and is going to extend
another 10. That is 32 years. That is long enough.
I do see an enormous difference between the PTC, which I do
consider a subsidy, and intangible drilling costs. Another big
subsidy for big oil--according to the administration--is
section 199, the manufacturing rate. I know, Senator Grassley,
you will remember that I argued against having a lower
manufacturing rate--a lower corporate rate. When you all are
rewriting this next year, I hope you eliminate this disparity
between manufacturers and non-manufacturers.
In the definition of manufacturers, you have movie
production, you have Starbucks, you have a whole lot of people
that--really, those are manufacturers? Oil production, I might
say, and----
Senator Grassley. Can I interrupt your filibuster,
because----
Senator Nickles. Sure. [Laughter.]
Senator Grassley. My question was, is a job loss in one
industry any different than a job loss in another? You make the
point that, if we do away with these, there is going to be job
loss in the petroleum industry, in the gas industry. What about
job losses in the alternative energy industry if we end these?
Senator Nickles. I would think that they would be made up
by other industries. I think wind, particularly, is crowding
out other sources. It is crowding out a coal plant in Wyoming
that shut down. It may force nuclear power plants to be shut
down prematurely. Those are jobs as well.
Natural gas is kind of the swing fuel. Right now it is the
competitive fuel, because natural gas sells for about $4 per
Mcf. So if the jobs are not being created in wind, I think they
will be created or added--not deleted--in the other industries.
I would think you would not see overall job loss. You may have
some reduction in the wind sector, maybe not, because Wyoming
says it can go on its own, but there might be some. My guess is
it will be made up in other sources.
Energy needs to be produced. We have a hunger for energy.
We need to provide it. Our economy depends on it.
Senator Grassley. Mr. Chairman, you might wonder, with his
being in the U.S. Senate, how I was able to get the Wind Energy
Tax Credit passed. [Laughter.]
The Chairman. None of us underestimates your incredible
legislative prowess.
Senator Nickles. Not only were you the father of wind, but
you were the father and sustainer of ethanol for many years. My
compliments to your effectiveness. [Laughter.]
Senator Grassley. Well, thank you. [Laughter.]
The Chairman. Thanks.
Senator Grassley. You bet.
The Chairman. My colleagues are heading to the exit. I just
want to ask one last question, again, in the interest of trying
to go forward and not continue just the sparring that we have
seen.
I am sure that you have already picked up that, with
respect to tax reform, everything has to be on the table,
because, if everybody walks in and says, look, I am for tax
reform except for that one thing that is important to me or my
constituents and is so incredibly wholesome, you are never
going to be able to have tax reform, because you will have 100
Senators all doing that.
Senator Gregg, who was--and Senator Nickles remembers
this--Leader McConnell's go-to person on economics, sat next to
me every week on a sofa for 2 years to produce our tax reform
bill, which is still the only bipartisan Federal income tax
reform bill. You do not get everything you want. Then you come
into a committee like this and say, everything is on the table,
and that is how you proceed.
So in that regard, I want to just ask one last question
about the technology-neutral approach, which you talked about,
Dr. Metcalf, and maybe some others would like to as well. Let
us say we take this crazy quilt of these 40-plus incentives and
here--on this point, at least, we will not have a riot
breakout. Some of them are fossil-related. Some of them are
renewables-related. So we can, sort of, start from that point.
Let us say we decided to, in effect, make a change so that
for the long-term, the few provisions that we would have would
be based on performance, not fuel type. Now, from the seat of
my pants--and I would want to talk with you all and others--it
strikes me, for example, that natural gas would probably do
pretty well with a standard like that. And again, this is just
purely, kind of, seat of the pants.
But you started that with Senator Bennet. I have talked
about it, and other Senators have talked about it. Is that,
sort of, the kind of lodestar we ought to be talking about,
seeing if we can move to a tech-neutral kind of approach, so
that the focus is on performance and getting out of winners,
losers, and all the rest? Some provisions now are for fossil
fuels. Some now are for renewables. That is where we want to
go. Is that the kind of thing you are talking about, and is
that what we ought to be building around?
Dr. Metcalf. Given that we are not in a world where we are
going to be looking at carbon pricing, then I think this is the
right approach to be taking. And you really said something very
important, that it is performance-based. What we care about is
not how many generating plants we build, but how much clean
electricity we get out of them or how much lower-emission
electricity we get out of these plants. So that really speaks
to the value of a production-based approach. Though I
understand that there are, perhaps, liquidity reasons why
investment approaches would be valuable as well.
So performance, I think, is important, and here I
absolutely agree with Mr. Nickles that we do not want to be
supporting mature industries. In that regard, I think the oil
and gas industry is no longer an infant industry. I think
percentage depletion is not related to the actual cost
incurred, so I think we can make savings there.
This actually provides some of the revenue to pay for these
things, because you have the tough job of actually having to
finance these tax breaks in the system. So a performance-based
system will incentivize cleaner use of natural gas, and it will
incentivize other technologies, and it will incentivize
technologies that we do not even know about yet that will come
along, whether it is cellulosic ethanol or other technologies.
By not linking it to particular fuel types, we open the door to
inventors and researchers to come up with technologies that
will fit into this technology-neutral approach.
The Chairman. Let us do this. You can tell that I am
interested in this. I think this has the potential to be
something that could be bipartisan. All of these capable people
are toiling away on tax reform. If you or any of the panel
members have further thoughts on this technology-neutral kind
of approach, call all these good people nights and weekends and
take their free time. [Laughter.]
This is extraordinarily important.
Senator Nickles, you are absolutely right with respect to
the challenge of tax reform. When Senator Gregg retired,
Senator Coats came in. Senator Coats had a number of areas that
were important to him in the energy area, and you can see that
I tried to address those as part of our reform bill going
forward.
The old notion--I think I still ascribe this to Senator
Bradley at the time--is that tax reform is always totally,
completely, and thoroughly impossible until about 15 minutes
before it comes together. That means that this debate is in the
``to be continued'' department.
We are going to keep the record open for all who would like
to offer added submissions. With that, the Finance Committee is
adjourned.
[Whereupon, at 12:03 p.m., the hearing was concluded.]
A P P E N D I X
Additional Material Submitted for the Record
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Communications
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