[Senate Hearing 113-643]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 113-643
 
                     REFORMING AMERICA'S OUTDATED 
                            ENERGY TAX CODE

=======================================================================

                                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

                              ----------                              

                           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

                              ----------                              


                      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.*
---------------------------------------------------------------------------
    * 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.
---------------------------------------------------------------------------
    [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

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