    [House Hearing, 115 Congress]
    [From the U.S. Government Publishing Office]

     FEDERAL ENERGY-RELATED TAX POLICY AND ITS EFFECTS ON MARKETS, PRICES,
                                 AND CONSUMERS

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

                                    HEARING

                                   BEFORE THE

                             SUBCOMMITTEE ON ENERGY

                                     OF THE

                        COMMITTEE ON ENERGY AND COMMERCE
                            HOUSE OF REPRESENTATIVES

                         ONE HUNDRED FIFTEENTH CONGRESS

                                 FIRST SESSION

                                   __________

                                 MARCH 29, 2017

                                   __________

                               Serial No. 115-22

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

          Printed for the use of the Committee on Energy and Commerce
                            energycommerce.house.gov

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                        COMMITTEE ON ENERGY AND COMMERCE

                              GREG WALDEN, Oregon
                                     Chairman

    JOE BARTON, Texas                    FRANK PALLONE, Jr., New Jersey
      Vice Chairman                        Ranking Member
    FRED UPTON, Michigan                 BOBBY L. RUSH, Illinois
    JOHN SHIMKUS, Illinois               ANNA G. ESHOO, California
    TIM MURPHY, Pennsylvania             ELIOT L. ENGEL, New York
    MICHAEL C. BURGESS, Texas            GENE GREEN, Texas
    MARSHA BLACKBURN, Tennessee          DIANA DeGETTE, Colorado
    STEVE SCALISE, Louisiana             MICHAEL F. DOYLE, Pennsylvania
    ROBERT E. LATTA, Ohio                JANICE D. SCHAKOWSKY, Illinois
    CATHY McMORRIS RODGERS, Washington   G.K. BUTTERFIELD, North Carolina
    GREGG HARPER, Mississippi            DORIS O. MATSUI, California
    LEONARD LANCE, New Jersey            KATHY CASTOR, Florida
    BRETT GUTHRIE, Kentucky              JOHN P. SARBANES, Maryland
    PETE OLSON, Texas                    JERRY McNERNEY, California
    DAVID B. McKINLEY, West Virginia     PETER WELCH, Vermont
    ADAM KINZINGER, Illinois             BEN RAY LUJAN, New Mexico
    H. MORGAN GRIFFITH, Virginia         PAUL TONKO, New York
    GUS M. BILIRAKIS, Florida            YVETTE D. CLARKE, New York
    BILL JOHNSON, Ohio                   DAVID LOEBSACK, Iowa
    BILLY LONG, Missouri                 KURT SCHRADER, Oregon
    LARRY BUCSHON, Indiana               JOSEPH P. KENNEDY, III,
    BILL FLORES, Texas                   Massachusetts
    SUSAN W. BROOKS, Indiana             TONY CARDENAS, California
    MARKWAYNE MULLIN, Oklahoma           RAUL RUIZ, California
    RICHARD HUDSON, North Carolina       SCOTT H. PETERS, California
    CHRIS COLLINS, New York              DEBBIE DINGELL, Michigan7
    KEVIN CRAMER, North Dakota
    TIM WALBERG, Michigan
    MIMI WALTERS, California
    RYAN A. COSTELLO, Pennsylvania
    EARL L. ``BUDDY'' CARTER, Georgia

                             Subcommittee on Energy

                              FRED UPTON, Michigan
                                     Chairman
    PETE OLSON, Texas                    BOBBY L. RUSH, Illinois
      Vice Chairman                        Ranking Member
    JOE BARTON, Texas                    JERRY McNERNEY, California
    JOHN SHIMKUS, Illinois               SCOTT H. PETERS, California
    TIM MURPHY, Pennsylvania             GENE GREEN, Texas
    ROBERT E. LATTA, Ohio                MICHAEL F. DOYLE, Pennsylvania
    GREGG HARPER, Mississippi            KATHY CASTOR, Florida
    DAVID B. McKINLEY, West Virginia     JOHN P. SARBANES, Maryland
    ADAM KINZINGER, Illinois             PETER WELCH, Vermont
    H. MORGAN GRIFFITH, Virginia         PAUL TONKO, New York
    BILL JOHNSON, Ohio                   DAVID LOEBSACK, Iowa
    BILLY LONG, Missouri                 KURT SCHRADER, Oregon
    LARRY BUCSHON, Indiana               JOSEPH P. KENNEDY, III,
    BILL FLORES, Texas                       Massachusetts
    MARKWAYNE MULLIN, Oklahoma           G.K. BUTTERFIELD, North Carolina
    RICHARD HUDSON, North Carolina       FRANK PALLONE, Jr., New Jersey (ex
    KEVIN CRAMER, North Dakota               officio)
    TIM WALBERG, Michigan
    GREG WALDEN, Oregon (ex officio)

                                      (ii)

                                 C O N T E N T S

                                  ----------
                                                                       Page
    Hon. Fred Upton, a Representative in Congress from the State of
      Michigan, opening statement....................................     2
        Prepared statement...........................................     3
    Hon. Jerry McNerney, a Representative in Congress from the State
      of California, opening statement...............................     4
    Hon. Greg Walden, a Representative in Congress from the State of
      Oregon, opening statement......................................     5
        Prepared statement...........................................     7
    Hon. Frank Pallone, Jr., a Representative in Congress from the
      State of New Jersey, opening statement.........................     8
        Prepared statement...........................................     9

                                   Witnesses

    Terry Dinan, Ph.D., Senior Advisor, Microeconomic Studies
      Division, Congressional Budget Office..........................    11
        Prepared statement...........................................    13
    Robert P. Murphy, Ph.D., Senior Economist, Institute for Energy
      Research.......................................................    32
        Prepared statement...........................................    34
    Devin C. Hartman, Electricity Policy Manager and Senior Fellow, R
      Street Institute...............................................    60
        Prepared statement...........................................    62
    Steve Clemmer, Director of Energy Research and Analysis, Climate
      & Energy Program, Union of Concerned Scientists................    77
        Prepared statement...........................................    79
    Joseph E. Aldy, Associate Professor of Public Policy, Harvard
      Kennedy School.................................................    97
        Prepared statement...........................................    99
    Benjamin Zycher, Ph.D., John G. Searle Chair and Resident
      Scholar, American Enterprise Institute.........................   109
        Prepared statement...........................................   111

                               Submitted Material

    Statement of the American Institute of Architects, March 28,
      2017, submitted by Mr. Sarbanes................................   172
    Statement of Doug Koplow, President, Earth Track, Inc., March 29,
      2017, submitted by Mr. Sarbanes................................   176
    Statement of Lake Erie Energy Development Corporation, March 29,
      2017, submitted by Mr. Sarbanes................................   196
    Statement of Biomass Thermal Energy Council, March 29, 2017,
      submitted by Mr. Sarbanes......................................   198
    Statement of the American Public Power Association, March 29,
      2017, submitted by Mr. Olson...................................   201
    Statement of Matthew Godlewski, President, Natural Gas Vehicles
      for America, March 29, 2017, submitted by Mr. Olson............   208

     FEDERAL ENERGY-RELATED TAX POLICY AND ITS EFFECTS ON MARKETS, PRICES,
                                 AND CONSUMERS

                                  ----------

                           WEDNESDAY, MARCH 29, 2017

                      House of Representatives,
                                Subcommittee on Energy,
                              Committee on Energy and Commerce,
                                                        Washington, DC.
        The subcommittee met, pursuant to call, at 10:21 a.m., in
    Room 2322 Rayburn House Office Building, Hon. Fred Upton
    (chairman of the subcommittee) presiding.
        Members present: Representatives Upton, Olson, Barton,
    Shimkus, Murphy, Latta, Harper, McKinley, Kinzinger, Griffith,
    Johnson, Long, Bucshon, Flores, Mullin, Hudson, Walberg, Walden
    (ex officio), McNerney, Peters, Green, Castor, Sarbanes, Welch,
    Tonko, Loebsack, Schrader, Kennedy, and Pallone (ex officio).
        Staff present: Grace Appelbe, Legislative Clerk, Energy/
    Environment; Ray Baum, Staff Director; Mike Bloomquist, Deputy
    Staff Director; Karen Christian, General Counsel; Wyatt
    Ellertson, Research Associate, Energy/Environment; Blair Ellis,
    Press Secretary/Digital Coordinator; Tom Hassenboehler, Chief
    Counsel, Energy/Environment; A.T. Johnston, Senior Policy
    Advisor, Energy; Ben Lieberman, Senior Counsel, Energy; Brandon
    Mooney, Deputy Chief Energy Advisor; Mark Ratner, Policy
    Coordinator; Annelise Rickert, Counsel, Energy; Christopher
    Sarley, Policy Coordinator, Environment; Dan Schneider, Press
    Secretary; Peter Spencer, Professional Staff Member, Energy;
    Madeline Vey, Policy Coordinator, Digital Commerce and Consumer
    Protection; Evan Viau, Staff Assistant; Hamlin Wade, Special
    Advisor for External Affairs; Everett Winnick, Director of
    Information Technology; Andrew Zach, Senior Professional Staff
    Member, Environment; Jeff Carroll, Minority Staff Director;
    David Cwiertny, Minority Energy/Environment Fellow; Tiffany
    Guarascio, Minority Deputy Staff Director and Chief Health
    Advisor; Rick Kessler, Minority Senior Advisor and Staff
    Director, Energy and Environment; John Marshall, Minority
    Policy Coordinator; Jessica Martinez, Minority Outreach and
    Member Services Coordinator; Alexander Ratner, Minority Policy
    Analyst; and Tuley Wright, Minority Energy and Environment
    Policy Advisor.

       OPENING STATEMENT OF HON. FRED UPTON, A REPRESENTATIVE IN
                  CONGRESS FROM THE STATE OF MICHIGAN

        Mr. Upton. Good morning, everybody. Sorry I'm late. Today's
    hearing gives us an opportunity to take a big-picture look at
    the effects of decades of Federal energy tax policy on energy
    markets, prices, and most importantly, consumers. So I'm
    hopeful that our discussion today will help us develop a deeper
    understanding of the costs and benefits of driving energy
    policy through the tax code. There is a great deal of interest
    in this topic and, with comprehensive tax reform on the agenda
    by the Ways and Means Committee, I look forward to working with
    them to deliver for the American people.
        For decades, the Federal Government has used the tax code
    to support the energy sector and promote energy policy goals.
    Tax preferences provide the bulk of Federal support, and, to
    put that in perspective, in 2016, energy-related tax
    preferences cost an estimated $18.4 billion, while relevant DOE
    spending programs cost nearly 6 billion.
        Looking back on the historical trends, we see that tax
    treatments have been used for a variety of purposes. One of the
    primary motivations has been to bring down costs for
    alternative energy sources and other energy-related
    technologies that would have otherwise been uneconomic.
        By some measures, tax subsidies have been pretty
    successful. For example, median installed prices for solar PV
    has fallen dramatically. Prices declined by 6 to 12 percent per
    year on average over the last 20 years, from about $12 per watt
    to less than $4 per watt, according to the DOE. Some critics
    might contend that solar costs would have come down anyway even
    without those tax measures, or that competing technologies were
    discouraged while solar was given an unfair advantage.
    Nonetheless, many see the role of the tax code as positive for
    the development of affordable solar energy.
        Similar stories can be told for wind generation and energy-
    efficiency technologies. In 1980, the cost of wind energy was
    over $500 per megawatt hour. Today, the levelized cost of wind
    energy is about $50 per megawatt hour, according again to the
    EIA. In '05, the country reached its highest level of per
    capita electricity consumption. Today, electricity consumption
    continues to decline thanks to the adoption of energy-efficient
    technologies that were subsidized through the tax code.
        Clearly, a strong argument can be made that specialized
    energy-tax treatments have played a major role in helping the
    U.S. achieve its energy goals. However, given the lasting
    market and price distorting impacts that these policies place
    on effective price formation and bidding in competitive
    markets, some are questioning whether yesterday's justification
    for energy-tax policies remain appropriate for today.
        Today's markets are evolving to respond to new trends in
    energy production, electricity generation, technological
    innovation, and State policies, which are all having an impact,
    a positive one, on the proper functioning of the interstate
    wholesale electricity system.
        So, as we look to modernize our energy policies, we are
    going to put consumers first. Consumers should be driving
    energy markets from the bottom up rather than having the
    Federal Government driving them from the top. With tax reform
    on the horizon, Congress should be asking, How can we level the
    playing field to encourage competition, and will this policy
    grow our economy and keep energy policies affordable and
    reliable? Today's hearing is an important step in that process.
        [The prepared statement of Mr. Upton follows:]

                     Prepared statement of Hon. Fred Upton

        Good morning. Today's hearing gives us an opportunity to
    take a big picture look at the effects of decades of Federal
    energy-tax policy on energy markets, prices, and most
    importantly, consumers. I am hopeful that our discussion today
    will help us develop a deeper understanding of the costs and
    benefits of driving energy policy through the tax code. There
    is a great deal of interest in this topic and with
    comprehensive tax reform on the agenda, I look forward to
    working with our colleagues on the Ways and Means Committee to
    deliver for the American people.
        For decades, the Federal Government has used the tax code
    to support the energy sector and promote energy-policy goals.
    Tax preferences provide the bulk of Federal support. To put
    this in perspective, in 2016, energy-related tax preferences
    cost an estimated $18.4 billion, while relevant DOE spending
    programs cost $5.9 billion.
        Looking back on historical trends, we see that tax
    treatments have been used for a variety of purposes. One of the
    primary motivations has been to bring down costs for
    alternative energy sources and other energy-related
    technologies that would have otherwise been uneconomic.
        By some measures, tax subsidies have been successful. For
    example, median installed prices for solar PV have fallen
    dramatically. Prices have declined by 6- 12 percent per year on
    average over the last 20 years from about $12 per watt to less
    than $4 per watt according to the DOE. Some critics might
    contend that solar costs would have come down anyway even
    without these tax measures, or that competing technologies were
    discouraged while solar was given an unfair advantage.
    Nonetheless, many see the role of the tax code as positive for
    the development of affordable solar energy.
        Similar stories can be told for wind generation and energy-
    efficiency technologies. In 1980, the cost of wind energy was
    over $500 per megawatt hour; today the leveled cost of wind
    energy is around $50 per megawatt hour, according to EIA.
        In 2005, the country reached its highest level of per
    capita electricity consumption; today, electricity consumption
    continues to decline thanks to the adoption of energy-efficient
    technologies that were subsidized through the tax code.
        Clearly, a strong argument can be made that specialized
    energy-tax treatments have played a major role in helping the
    United States achieve its energy goals. However, , given the
    lasting market and price distorting impacts that these policies
    place on effective price formation and bidding in competitive
    markets, some are questioning whether yesterday's
    justifications for energy-tax policies remain appropriate for
    today. Today's markets are evolving to respond to new trends in
    energy production, electricity generation, technological
    innovation, and State policies, which are all having an impact
    on the proper functioning of the interstate wholesale
    electricity system.
        As we look to modernize our energy policies, we're going to
    put consumers first. Consumers should be driving energy markets
    from the bottom up, rather than having the Federal Government
    driving it from the top down. With tax reform on the horizon,
    Congress should be asking ``how can we level the playing field
    and encourage competition?'' and ``will this policy grow our
    economy and keep energy prices affordable and reliable?''
        Today's hearing is an important step in this process.
        With this goal in mind, I look forward to today's hearing
    and continuing the work with our colleagues on the Ways and
    Means Committee to modernize our tax code to reflect our
    changed energy landscape and 21st century realities.

        Mr. Upton. And I would yield to any of my colleagues on the
    right. The gentleman from the Texas, the vice chairman.
        Mr. Olson. I thank you, Mr. Chairman, and I will be very
    brief. This hearing is very important because all too often we
    are only looking at one side of the coin. Tax policy without a
    doubt moves markets when it comes to energy. For example, my
    home State of Texas leads the Nation in wind power. Some of
    that is because of how the State has handled construction of
    power lines, but it is also absolutely true that the wind
    production tax credit is distorting our markets.
        At the same time, there are credits that give a leg up on
    some sources and leave others behind. In our current tax
    system, DC bureaucrats pick winners and losers and they have a
    dubious record. They always pick the losers. My fellow Texan,
    Kevin Brady, is on the driver's seat for tax reform. I am glad
    we are having this hearing this morning and can be part of that
    conversation. I yield back.
        Mr. Upton. I appreciate the gentleman's testimony. Now I
    will look to my friends on my left. I recognize Mr. McNerney
    for 5 minutes for an opening statement.

     OPENING STATEMENT OF HON. JERRY MCNERNEY, A REPRESENTATIVE IN
                 CONGRESS FROM THE STATE OF CALIFORNIA

        Mr. McNerney. Well, I thank you, Mr. Chairman, and this is
    an area I care a lot about. You know, climate change has been
    happening, it is affecting our water, our air, our public
    health, and our environment. And despite all this, yesterday,
    our President signed an executive order to retract the Clean
    Power Plan, to roll back carbon standards for new power plants,
    to rescind methane standards, and it is unfortunate that the
    administration is trying to undo the progress that we have made
    while ignoring where our energy sector is actually heading. We
    should be a world leader in clean energy.
        Our hearing today is about the larger implication of our
    Nation's energy-tax policy. We use the tax code for a lot of
    stuff, for incentivizing things like water use, energy
    deployment and directing business expenditures, and we use tax
    policies to encourage innovation. The Federal Government plays
    a critical role in supporting energy development and production
    and this leads to increased efficiency, jobs, and reduced
    emissions.
        I worked in the renewable energy sector for 2 decades
    before coming to Congress back when we actually had to climb
    windmills to work on them up on the top of the towers. So I
    have seen firsthand how the industry has grown from the late
    1980s to where it is today, and I saw more than once what
    happens when Federal subsidies change. We saw innovation and
    jobs and industry going overseas during periods of low Federal
    support.
        However, we have learned from that mistake and the Federal
    Government has taken a steadier hand. Let's look at some of the
    progress with wind. The wind capacity has doubled since 2010.
    It represents nearly one-third of all new electricity
    generation capacities since 2007; and in 2016, 15,000 new jobs
    were directly created in wind energy, and 102,000 indirect
    full-time jobs were created.
        Now, with solar there is a record 14,800 megawatts of solar
    capacity installed in 2016, over 42,000 megawatts installed in
    the U.S. That is more than eight million homes and this is key,
    it created over 260,000 jobs just in 2016. So we are moving in
    the right direction. In hydropower about 101 gigawatts
    capacity, that is a lot of big watts. A lot of capacity was
    added with potential to grow to 150 more gigawatts by 2050.
    This would mean $209 billion in savings from avoided global
    damages from greenhouse gas emissions.
        The U.S. tax code supports the energy sector by providing a
    number of targeted tax incentives related to production of
    fossil fuels, nuclear power, renewable energy, and energy-
    efficiency technology. Oil and gas firms benefit from a number
    of direct and indirect subsidies that increase their
    profitability and these are permanent subsidies, whereas the
    renewable sector the subsidies are always grandfathered and
    always sunset.
        Now, it is not about and it shouldn't be about picking
    winners and losers. We can have a reliable generation developed
    in this country that is zero or low emission. I think it is
    unfair to overly simplistically claim that the tax incentives
    have somehow ruined the wholesale/retail markets across this
    country. For example, in California is one of the three least
    carbon-intensive economies in the world, and in 2014,
    California averaged monthly residential bills were 20 percent
    lower than the U.S. as an average. The argument ignores such
    factors as changes in our centralized versus de-centralized
    generation, policies intended to protect our air and water
    resources, natural gas prices and transmission congestion.
        In order for the U.S. to remain globally competitive we
    need to recognize a couple of things. We have to decarbonize
    the electric sector and we need to modernize our electric grid.
    The Nation's electric grid is undergoing rapid changes right
    now that we have seen new technologies help shift the market
    structure across the United States. This includes demand-
    response and distributed energy sources. The boom in solar and
    wind, the potential for storage, has allowed customers and
    consumers to become more engaged in the electricity market
    including selling energy back to the grid.
        These dynamics along with the more cost competitive nature
    of renewable energy has been driving the wheel where we need to
    go. It will be important that we have a grid that is able to
    incorporate this growing clean energy to the variable energy
    needs and can reliably produce energy regardless of the
    generation sources. I am about to run out of time so I am going
    to wrap up here. The market is moving toward clean, renewable
    energy. Let's not change that. With that, I yield back.
        Mr. Upton. I would have given my friend on the left an
    extra 10 seconds, so thank you. I recognize the chairman of the
    full committee, the gentleman from Oregon, Mr. Walden. Go
    Ducks.
        Mr. Walden. Thank you very much. Go Ducks, yes. Sorry about
    Michigan.
        Mr. Upton. Time has expired.
        [Laughter.]
        Mr. Walden. That is what happened, kind of ran out.

      OPENING STATEMENT OF HON. GREG WALDEN, A REPRESENTATIVE IN
                   CONGRESS FROM THE STATE OF OREGON

        Over the last decade, the United States has undergone an
    energy revolution. I think we all know that. Old assumptions
    have been proven wrong and the future of energy production is
    brighter than it has ever been, and the shale revolution made
    the peak oil theory simply obsolete, while technological
    advances combined with greater market competition have driven
    power sector emissions down below 2005 levels. And new
    information and communication technologies are providing
    consumers new insights into their energy consumption habits
    that were once taken for granted.
        While some of these developments have been assisted by
    Federal policy, the bulk of the changes are the result of
    market forces over the last decade. So much of our Federal
    energy policy is designed to address an antiquated marketplace
    that looks entirely different than the one we see emerging
    today. This is especially true regarding tax policy. A host of
    energy-related provisions have intermittently been added to the
    tax code over decades. This includes everything from tax
    credits for renewable electricity production to incentives for
    installing energy-saving devices in our homes. Now, there are
    also provisions that create favorable depreciation schedules
    for certain energy investments. The list goes on and on.
        We have allowed these tax measures to accumulate, frankly,
    without sufficient oversight, and it is time to give them a
    long-overdue checkup. For example, it is not hard to find
    instances where tax credits encourage a particular activity but
    tough regulations and lengthy permitting delays are at the same
    time discouraging it. We are also seeing more State-level
    interventions through tax and nontax policy in the markets,
    which add another layer of complexity to this issue.
        So I think it is important for all of us, the committee of
    jurisdiction on energy matters, to understand all of these
    energy-related policies and view them in an integrated fashion,
    which is why we are having this hearing today. The stakes could
    hardly be higher. Getting energy-tax policy right can preserve
    millions of jobs in the energy and manufacturing sectors while
    potentially adding many more emerging sectors in the years
    ahead. Our efforts can also bolster our economic strength as
    America continues to emerge as the 21st century's newest energy
    superpower and expand its export market opportunities.
        However, what ultimately matters most are these policy
    impacts on consumers. We need to do what is best for households
    struggling to pay the electric or gas bill. Open and
    competitive markets are the surest way to keep prices down for
    families while taking full advantage of the technological
    improvements that give consumers more control over the way we
    use energy.
        This Congress we will examine how energy and electricity
    markets, and the policies affecting those markets, are
    impacting consumers. Congress will also need to consider ways
    to modernize and better integrate tax-related energy policy.
    But before we reach that point we need to have a broader
    understanding of where our energy policies stand right now, and
    that is why we are here today. So we appreciate our witnesses'
    testimony and your guidance and counsel you will give us today
    and in the future.
        Mr. Chairman, I thank you for your leadership on this issue
    as well. I can tell you in Oregon we have a robust energy
    policy. In my district alone we have thousands and thousands of
    megawatts of wind energy, we have great potential for
    geothermal energy, we have solar energy, and of course massive
    hydroelectric energy throughout the Northwest.
        So we have been on the forefront of renewable energy for a
    long time. It has been a good thing, but I think it is always
    good to look and evaluate it, how all these incentives and
    subsidies and all affect the market and are they really needed.
    In some areas, some they are, some maybe not. Some maybe have
    come to maturity and don't need them at all. Others may
    continue to need them.
        I think it is important for us to take a look at the whole
    panoply of support systems, markets, and look at the grid as
    well, you know we are doing that in your committee, as we look
    at the whole issue going forward. So thank you, Mr. Chairman,
    for doing this hearing. I look forward to hearing from our
    witnesses. I would admit up front I have another subcommittee I
    am bouncing back and forth between, but I have all your
    testimony. Thank you, and I yield back.
        [The prepared statement of Mr. Walden follows:]

                     Prepared statement of Hon. Greg Walden

        Over the last decade, the United States has undergone an
    energy revolution. Old assumptions have been proven wrong and
    the future of energy production is brighter than it has ever
    been. The shale revolution made the peak oil theory obsolete,
    while technological advances, combined with greater market
    competition have driven power sector emissions down below 2005
    levels. And new information and communication technologies are
    providing consumers new insights into their energy-consumption
    habits that were once taken for granted. While some of these
    developments have been assisted by Federal policy, the bulk of
    the changes are the result of market forces over the last
    decade.
        So much of our Federal energy policy is designed to address
    an antiquated marketplace that looks entirely different than
    the one we see emerging today. This is especially true
    regarding tax policy. A host of energy-related provisions have
    intermittently been added to the tax code over decades. This
    includes everything from tax credits for renewable electricity
    production to incentives for installing energy-saving devices
    in our homes. There are also provisions that create favorable
    depreciation schedules for certain energy investments. The list
    goes on.
        We have allowed these tax measures to accumulate without
    sufficient oversight, and it is time to give them a long-
    overdue check-up. For example, it is not hard to find instances
    where tax credits encourage a particular activity but tough
    regulations and lengthy permitting delays are at the same time
    discouraging it. We are also seeing more State-level
    interventions through tax and nontax policy in the markets,
    which add another layer of complexity to this issue.
        It is important for us, the committee of jurisdiction on
    energy matters, to understand all of these energy-related
    policies and view them in an integrated fashion.
        The stakes could hardly be any higher. Getting energy-tax
    policy right can preserve millions of jobs in the energy and
    manufacturing sectors while potentially adding many more in
    emerging sectors in the years ahead. Our efforts can also
    bolster our economic strength as America continues to emerge as
    the 21st century's newest energy superpower and expand its
    export market opportunities.
        However, what ultimately matters most are these policy
    impacts on consumers. We need to do what is best for households
    struggling to pay the electric or gas bill. Open and
    competitive markets are the surest way to keep prices down for
    families while taking full advantage of the technological
    improvements that give consumers more control over the way they
    use energy.
        This Congress, we will examine how energy and electricity
    markets, and the policies affecting those markets, are
    impacting consumers. Congress will also need to consider ways
    to modernize and better integrate tax-related energy policy.
    But before we reach that point, we need to have a broader
    understanding of where our energy policies stand right now, and
    that is why we are here today.
        I welcome today's witnesses and look forward to hearing
    their thoughts on today's energy policies.

        Mr. Upton. The gentleman yields back. The Chair recognizes
    the ranking member of the full committee, Mr. Pallone from New
    Jersey, for 5 minutes.

    OPENING STATEMENT OF HON. FRANK PALLONE, JR., A REPRESENTATIVE
                IN CONGRESS FROM THE STATE OF NEW JERSEY

        Mr. Pallone. Thank you, Mr. Chairman. Thanks for holding
    this hearing on how tax policy affects our Nation's energy
    policy. The conversation of late has focused on the various tax
    credits that benefit solar, wind, and other renewables, yet
    every form of energy produced receives some form of favorable
    tax treatment. Many also receive favorable regulatory treatment
    as well.
        And this is not new. It can be traced back to the tariffs
    giving domestic coal an advantage right after we became a
    nation. Coal and wood fueled the early growth of our country
    and the railroads that eventually connected it, while the
    Government put forward policies that helped underwrite
    dominance of all three. And looking back on the 20th century,
    Federal energy-tax subsidies almost entirely benefited oil and
    gas interests. It wasn't until the early 1900s, I should say
    the early 1990s that the Federal Government began to provide
    meaningful tax credits for energy produced from renewable
    resources.
        So, when someone pulls out a statistic from a given year in
    recent memory citing the preponderance of tax credits for
    renewable energy, it is worth remembering that coal, oil, and
    gas have benefited from centuries of beneficial tax treatment,
    and many of those fossil incentives are permanent, unlike the
    temporary nature of tax credits for renewables. Now, let me be
    clear: I am not taking issue with tax incentives or saying it
    is a bad thing in any way to have supported all of these
    technologies at certain times throughout our history. But it is
    important to put today's hearing in context.
        As I said, there have been and likely will continue to be
    subsidies for all types of energy production. But our task as
    legislators now is to determine where Federal support should be
    focused. The choices we make in providing tax benefits to one
    type of generation versus another have real world impacts on
    the energy sector. And these are important choices because we
    must keep energy affordable, but we must also think about the
    impacts certain sources of energy have on human health and the
    environment.
        The Federal Government should be incentivizing technologies
    that are cleaner, safer, and more protective of the health of
    all Americans. The renewable energy sources in particular
    provide societal benefits that cannot be effectively valued by
    the markets. Another important factor we must consider are new
    technologies with clear benefits to the electricity grid such
    as battery storage and energy efficiency.
        Tax subsidies are among the policy drivers least understood
    by the general public. This is largely because they also are
    the least transparent. Many are only known because they expire
    and have to be reconsidered every few years. However, there are
    many more that are not known to the public because they are
    permanent in nature. For example, oil and gas firms can
    organize as master limited partnerships, a corporate form that
    allows the companies to pass-through profits without paying
    corporate taxes. And this benefit continues in perpetuity with
    no reauthorization by Congress needed.
        There are also many nontaxed regulatory subsidies that I
    hope will not be overlooked as we consider subsidies and the
    impact on the energy market. For instance, Section 404 of the
    Clean Air Act literally contains the names of hundreds of coal-
    fired electric generating units that were each given the right
    to emit thousands of tons of sulphur dioxide pollution
    extending their operating lives and keeping them competitive
    with cleaner forms of energy.
        Another example, the Superfund statute excludes oil and gas
    from the definition of hazardous substance, providing massive
    liability protection to one specific energy sector that is
    often a major source of contamination in communities around the
    country. This provides an economic boost that would otherwise
    be on the hook for expensive cleanups. Similarly, oil and gas
    exploration and production waste are excluded from RCRA
    regulations. All of this special treatment directly affects the
    costs associated with producing and distributing oil, gas, and
    electricity at the expense of taxpayers and the environment.
        So Mr. Chairman, if we are to move down this path of
    examining tax subsidies we must also consider all subsidies,
    direct, indirect, and regulatory. And I believe the tax
    policies should seek to limit the cost of pollution to society
    including the costs that regulatory subsidies often effectively
    shift from companies onto the taxpayer and the environment
    itself. Unfortunately, if fuels and energy truly reflect the
    long-term cost to society and the environment as well as
    individuals, people will make rational choices that will
    benefit all of us. And I yield back.
        [The prepared statement of Mr. Pallone follows:]

                 Prepared statement of Hon. Frank Pallone, Jr.

        Thank you, Mr. Chairman, for holding this hearing today on
    how tax policy affects our Nation's energy policy.
        The conversation of late has focused on the various tax
    credits that benefit solar, wind and other renewables. Yet
    every form of energy produced receives some type of favorable
    tax treatment. Many also receive favorable regulatory treatment
    as well. This is not new--it can be traced back to the tariffs
    giving domestic coal an advantage right after we became a
    nation. Coal and wood fueled the early growth of our country
    and the railroads that eventually connected it, while the
    Government put forward policies that helped underwrite
    dominance of all three. And, looking back on the 20th century,
    Federal energy-tax subsidies almost entirely benefitted oil and
    gas interests.
        It wasn't until the early 1990s that the Federal Government
    began to provide meaningful tax credits for energy produced
    from renewable sources. So, when someone pulls out a statistic
    from a given year in recent memory citing the preponderance of
    tax credits for renewable energy, it's worth remembering that
    coal, oil and gas have benefitted from centuries of beneficial
    tax treatment. And, many of those fossil incentives are
    permanent, unlike the temporary nature of tax credits for
    renewable energy.
        Now, let me be clear, I am not taking issue with tax
    incentives or saying it is a bad thing in any way to have
    supported all these technologies at certain times throughout
    our history, but it is important to put today's hearing in
    context. As I said, there have been, and likely will continue
    to be, subsidies for all types of energy production. Our task
    as legislators now is to determine where Federal support should
    be focused.
        The choices we make in providing tax benefits to one type
    of generation versus another have real world impacts on the
    energy sector. These are important choices because we must keep
    energy affordable, but we must also think about the impacts
    certain sources of energy have on human health and the
    environment. The Federal Government should be incentivizing
    technologies that are cleaner, safer, and more protective of
    the health of all Americans. Renewable energy sources, in
    particular, provide societal benefits that cannot be
    effectively valued by the markets. Another important factor we
    must consider are new technologies with clear benefits to the
    electricity grid, such as battery storage and energy
    efficiency.
        Tax subsidies are among the policy drivers least understood
    by the general public. This is largely because they are also
    the least transparent. Many are only known because they expire
    and have to be reconsidered every few years. However, there are
    many more that are not known to the public because they are
    permanent in nature. For example, oil and gas firms can
    organize as Master Limited Partnerships, a corporate form that
    allows the companies to pass through profits without paying
    corporate taxes. And this benefit continues in perpetuity with
    no reauthorization by Congress needed.
        There are also many nontax, regulatory subsidies that I
    hope will not be overlooked as we consider subsidies and their
    impact on the energy market. For instance, Section 404 of the
    Clean Air Act literally contains the names of hundreds of coal-
    fired electric generating units that were each given the right
    to emit thousands of tons of sulfur dioxide pollution,
    extending their operating lives and keeping them competitive
    with cleaner forms of energy.
        Another example: the Superfund statute excludes oil and gas
    from the definition of a hazardous substance, providing massive
    liability protection to one specific energy sector that is
    often a major source of contamination in communities across the
    country. This provides an economic boost to companies that
    would otherwise be on the hook for expensive cleanups.
    Similarly, oil and gas exploration and production wastes are
    excluded from RCRA regulations. All of this special treatment
    directly affects the costs associated with producing and
    distributing oil, gas, and electricity at the expense of
    taxpayers and the environment.
        Mr. Chairman, if we are to move down this path of examining
    tax subsidies, we must consider all subsidies: direct,
    indirect, and regulatory. I believe that tax policies should
    seek to limit the cost of pollution to society, including the
    costs that regulatory subsidies often effectively shift from
    companies onto the taxpayer and the environment itself.
    Ultimately, if fuels and energy truly reflect their long-term
    costs to society and the environment as well as individuals,
    people will make rational choices that will benefit all of us.

        Mr. Upton. The gentleman yields back.
        We are delighted to have the witnesses that we have today,
    and I am told that our computer is back online so we can have
    the little presentation. We are joined by Terry Dinann----
        Dr. Dinan. Dinan.
        Mr. Upton. Dinan. I am sorry--Senior Advisor from CBO; Ben
    Zycher, Resident Scholar and John G. Searle Chair from AEI;
    Robert Murphy, Senior Economist, Institute for Energy Research;
    Devin Hartman, Electricity Policy Manager for the R Street
    Institute; Joseph Aldy, Associate Professor from Harvard,
    School of Government; and Steve Clemmer, Director of Energy
    Research and Analysis from the Union of Concerned Scientists.
        Thank you all for being here. Dr. Dinan----
        Dr. Dinan. Thank you.
        Mr. Upton [continuing]. Thank you. You are recognized for 5
    minutes.

    STATEMENTS OF TERRY DINAN, PH.D., SENIOR ADVISOR, MICROECONOMIC
       STUDIES DIVISION, CONGRESSIONAL BUDGET OFFICE; ROBERT P.
        MURPHY, PH. D., SENIOR ECONOMIST, INSTITUTE FOR ENERGY
      RESEARCH; DEVIN C. HARTMAN, ELECTRICITY POLICY MANAGER AND
     SENIOR FELLOW, R STREET INSTITUTE; STEVE CLEMMER, DIRECTOR OF
     ENERGY RESEARCH AND ANALYSIS, CLIMATE & ENERGY PROGRAM, UNION
    OF CONCERNED SCIENTISTS; JOSEPH E. ALDY, ASSOCIATE PROFESSOR OF
      PUBLIC POLICY, HARVARD KENNEDY SCHOOL; AND BENJAMIN ZYCHER,
      PH.D., JOHN G. SEARLE CHAIR AND RESIDENT SCHOLAR, AMERICAN
                          ENTERPRISE INSTITUTE

                        STATEMENT OF TERRY DINAN

        Dr. Dinan. Thank you. Chairman Upton, Congressman McNerney,
    and members of the subcommittee, thank you for the invitation
    to testify on the support that the Federal Government provides
    for the development, production, and use of energy and
    technologies and fuels. In fiscal year 2016, tax preferences
    provided the bulk of that support. Based largely on estimates
    from the staff at the Joint Committee on Taxation, energy-tax
    preferences resulted in $18.4 billion in foregone revenues. In
    contrast, spending programs administered by the Department of
    Energy totaled $5.9 billion.
        First, I would like to discuss tax preferences. As shown on
    the display, for most years until 2005, the largest share of
    that support went to domestic producers of oil and natural gas.
    Beginning in 2006, the cost of energy-related tax preferences
    grew substantially. Moreover, an increasing share of those
    costs was aimed at encouraging energy efficiency and the use of
    energy produced from renewable sources.
        Now I will turn to the breakdown of tax preferences in
    fiscal year 2016. As shown in this figure, provisions aimed at
    energy efficiency and renewable energy accounted for about 75
    percent of all energy-related tax preferences and provisions
    aimed at fossil fuels made up most of the remaining amount.
    Under current law, the mix of energy-tax preferences will look
    quite different in the future. That is because about $5
    billion, or a little more than 35 percent of the support for
    energy efficiency and renewable energy came from provisions
    that expired at the end of calendar year 2016.
        In contrast, most of the support for fossil fuels and
    nuclear power came from provisions that are permanent. Although
    temporary tax preferences have often been extended, their lack
    of permanence creates uncertainty and reduces the extent to
    which they are likely to motivate investment. Next, I would
    like to turn to the Department of Energy. Oops, it doesn't seem
    to be flipping. OK.
        DOE supports energy technologies by making investments in
    them and by subsidizing and guaranteeing loans. DOE's funding
    has also changed over time, but with the exception of 2009 has
    generally been less since 2010 than it was in the early 1990s.
    Looking at fiscal year 2016, we find that 35 percent of DOE's
    support for energy technologies is directed towards energy
    efficiency and renewable energy, 31 percent supports basic
    science, 15 percent is directed at nuclear energy, and 11
    percent at fossil fuels.
        Boosting domestic production of oil and gas, reducing
    greenhouse gas emissions, and encouraging research that would
    benefit society have historically been central goals motivating
    the support of energy. Determining the cost effectiveness of
    Federal support in achieving those goals is difficult. However,
    in 2015, CBO estimated that over the previous decade tax
    preferences increased U.S. production of crude oil by less than
    one percent and did so at a cost of roughly $90 to $200 per
    additional barrel of oil produced. In addition, a 2013 study by
    the National Research Council indicated that production
    investment tax credits for renewable electricity generation
    reduced carbon dioxide emissions at an average cost of $250 per
    ton, a value that is several times higher than a commonly used
    estimate of the benefit of such reductions.
        Evaluating the effects of R&D is also challenging. However,
    Government funding is most likely to be cost effective when it
    supports research on the basic science of energy or research
    aimed at very early stages of technology development. Such
    research is typically underinvested in by private entities
    because it creates benefits for society as a whole but may not
    be profitable for firms to undertake on their own.
        Finally, I would like to note that multiple factors affect
    the mix of fuels and energy technologies in the U.S. For
    example, the share of electricity generated by renewables is
    influenced by tax preferences as well as by State-level
    mandates to increase the production of electricity from wind,
    solar, or biomass. Likewise, the mix of fuels used in the
    transportation sector has been affected not only by the
    provision of tax preferences for renewable fuels, but also by
    the Federal Renewable Fuel Standard which mandates the use of
    particular quantities of renewable fuels. Estimating the extent
    to which tax preferences influence producer and consumer
    choices requires careful analysis that controls for those other
    influences.
        Thank you for the opportunity to testify and I am happy to
    answer any questions you might have.
        [The prepared statement of Dr. Dinan follows:]

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

           Mr. Upton. Thank you.
        Dr. Murphy.

                     STATEMENT OF ROBERT P. MURPHY

        Dr. Murphy. I would like to thank Chairman Upton,
    Congressman McNerney, and the other members of the subcommittee
    for the opportunity to speak on this important topic concerning
    Federal tax policy and its effects on energy markets and
    consumers.
        When it comes to assessing tax policy, economists generally
    focus on the ways the tax code distorts behavior. There is a
    general presumption in favor of letting market prices guide the
    decisions of producers and consumers so that resources are
    allocated according to the underlying economic realities. When
    the tax code artificially steers behavior away from the market
    outcome, this makes society poorer.
        A textbook example of such harms is the distortions caused
    by an income tax. By artificially reducing the reward to
    earning wages, the income tax discourages work effort. On top
    of that an income tax also leads individuals to save less
    because the income earned from saving is itself taxed. The
    income tax thus makes society poorer by both reducing work and
    reducing investment.
        Now, although economists disagree about the proper size of
    government, there is a general consensus that if the Government
    is going to raise a target amount of revenue through a
    percentage tax, then the way to minimize the economic fall is
    applying that tax on as wide of a base as possible in order to
    keep the rate of the tax as low as possible. Now, to be sure,
    there is other goals of tax policy besides economic efficiency,
    but in terms of minimizing the distortion of behavior the tax
    code would apply the same tax rate to all sectors of the
    economy and would contain no arbitrary deductions or credits
    that favor one group over another.
        Now, I should clarify that the principle here is no
    arbitrary deductions. I bring this up because some proposals
    for tax reform want to take away the deductibility of interest
    expenses, an option that currently gives companies an incentive
    to engage in debt finance relative to equity finance. But to me
    it seems this has things backwards. After all, a company's
    interest payments really are expenses to the company. The real
    source of the distortion is the currently high corporate income
    tax rate of 35 percent; lowering that rate would alleviate this
    particular distortion.
        Now, when it comes to energy markets there are many
    provisions of the tax code that violate these general
    principles I have discussed. That is to say the tax code
    currently has many provisions that are specifically designed to
    favor certain sectors of the energy market. Society ends up
    producing energy using more resources than it needs to because
    the tax code artificially hides the true cost of less efficient
    energy sources.
        The best example of such a distortion occurs in the
    electricity market where there can be long stretches of
    negative wholesale prices. Wind operators will pay the grid to
    buy electricity from them with the price sometimes falling
    below $20 per megawatt hour. The reason for this strange
    occurrence is the generous production tax credit, which
    currently gives the owners of wind facilities a tax credit of
    $23 for every megawatt hour they produce. This can make it
    profitable at the individual level to sell wind power even at
    negative prices, but of course from the perspective of society
    as a whole this is clearly a perverse outcome that would not
    occur on a normal market.
        The Congressional Research Service recently estimated the
    implicit expenditures in the tax code for energy-specific
    provisions. It found that the production tax credit was the
    most expensive at a projected cost of $25.7 billion from 2016
    through 2020. The second most expensive provision was the
    related investment tax credit also designed for renewable
    energy sources at a cost of 13.6 billion. These two provisions
    alone accounted for almost 48 percent of the total energy-tax
    advantages analyzed in this particular report. By artificially
    encouraging the expansion of wind and solar capacity, current
    tax policy makes energy production less efficient.
        Now, some have argued that wind and solar are infant
    industries that need support from the tax code, but these
    arguments have been around for decades. At this point wind and
    solar are not infants, they are grown adults. If they can
    currently only serve niche markets, that is the economic
    reality.
        It is also worth addressing the distributional consequences
    of some of these particular tax measures. So, for example, a
    2015 study by UC Berkeley found that for the particular
    measures trying to reward consumers for buying electric
    vehicles, 90 percent of the credits went to filers earning
    above $75,000 per year, and 35 percent of this particular tax
    credit was claimed by people earning above $200,000 per year.
        A more consistent, neutral tax code would let producers and
    consumers choose the mix of energy sources that made the most
    economic sense. Energy would be produced at the lowest cost,
    freeing up resources to increase output in other areas of the
    economy giving Americans more reliable energy and a higher
    standard of living. Thank you, and I look forward to answering
    your questions.
        [The prepared statement of Dr. Murphy follows:]

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Mr. Upton. Thank you.
        Mr. Hartman? Got to keep talking.

                     STATEMENT OF DEVIN C. HARTMAN

        Mr. Hartman. Good morning, Mr. Chairman and members of the
    subcommittee. Thank you for inviting me to have this
    conversation with you today.
        When competitive energy markets thrive so do consumers,
    innovation, and the environment. Well-functioning markets
    require transactions to account for all costs and benefits.
    Markets alone do not fully capture the external cost of
    pollution nor the benefits of all knowledge gains. Government
    interventions have sometimes helped to address these market
    shortcomings, but often result in costly unintended
    consequences that leave society worse off. This underscores the
    importance of limiting government's role to efficiently
    correcting market shortcomings with an underlying objective to
    enhance market performance.
        Energy policy discussions frequently stray from focus on
    market performance. Often they romanticize particular
    technologies associated with certain desirable qualities. From
    this, industrial policy narratives have emerged where
    government explicitly picks winners. This central planning bias
    has notably manifested itself in procurement mandates and
    subsidies including some tax preferences. Industrial policies
    undermine market performance. They inherently result in
    political disputes over the right technologies leading to
    politically vulnerable and unstable policies. This has
    contributed to the proliferation of false narratives and half-
    truths that complicate our ability to have a civil, factual
    energy policy discussion.
        Tax preferences can be effective tools for industrial
    policy, but they seldom correct for market failures
    efficiently. Economic research is not kind to targeted tax
    incentives. They are expensive and inefficient. Clean-energy
    tax preferences reduce emissions modestly at high cost. Tax
    incentives for nascent technologies may create limited
    knowledge gains, but they deter R&D in technologies that don't
    receive preferences. At the same time, tax preferences and
    other industrial policies increasingly distort energy markets.
    For example, production tax credits artificially depress
    electricity prices, which undermines efficient investment and
    grid management, while investment tax credits skew investment
    towards capital-intensive projects.
        Tax preferences also create entrenched interest that deepen
    cycles of subsidization. Look no further than reauthorization
    of tax preferences for mature technologies or excluded
    technologies seeking subsidies to compensate for their
    competitors' preferences. The future performance of competitive
    energy markets depends on unwinding existing industrial policy,
    not layering on additional counter-distorting subsidies.
        With that said, some energy tax incentives improve cost
    recovery, a tenet of pro-growth tax structure, but only apply
    to select technologies. For example, some provisions allow full
    expensing, which is preferable to depreciation because it
    lowers the cost of capital. However, uneven tax treatment can
    distort competitive relationships. Moving toward uniform
    expensing treatment would mitigate these distortions and ensure
    vibrant competition.
        While the best course of action is to eliminate tax
    preferences, Congress may instead pursue a more modest
    direction. Improvements to existing preferences should follow
    objective criteria, such as basing eligibility on technology-
    neutral performance criteria. Department of Energy programs
    should also follow objective economic criteria. DOE direct
    investments in applied energy research more than double those
    in basic research, whereas the greatest spillover benefits of
    knowledge creation occur in basic research.
        All technologies should compete on their merits. High costs
    are a natural barrier to entry that does not justify
    intervention. In contrast, regulatory rules that preclude
    technologies from participating or receiving fair market
    compensation present artificial barriers to entry. Modernizing
    these rules would improve market performance while leveling the
    competitive playing field.
        Americans deserve an energy policy where markets pick
    winners, not government. We need an energy policy vision that
    enhances market performance and uses taxpayers' dollars wisely.
    Congress has an opportunity to take major strides in pursuing a
    politically durable and economically rewarding energy-policy
    framework that includes the following: phase out distortionary
    tax preferences; enable broad-based cost recovery in the tax
    code; align public research expenditures with knowledge
    spillover benefits; reduce unnecessary regulatory burdens; and
    encourage electricity market reforms that enhance competition.
        This framework will generate economic dynamism, improve
    environmental quality, reward innovative companies, lower
    customer bills, and place the United States on a more fiscally
    responsible pathway. Thank you for your time.
        [The prepared statement of Mr. Hartman follows:]

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Mr. Upton. Thank you.
        Mr. Clemmer?

                       STATEMENT OF STEVE CLEMMER

        Mr. Clemmer. Good morning. On behalf of the Union of
    Concerned Scientists and our 500,000 supporters, I would like
    to thank Chairman Upton, Representative McNerney, and the other
    distinguished members of the subcommittee for the opportunity
    to testify today. In contrast to a couple of the previous
    speakers, my comments today are going to focus on how the
    Federal tax credits for renewable energy have been an effective
    and affordable policy.
        As Representative McNerney said, tax credits have been a
    key driver for the recent growth in the wind and solar
    industries spurring innovation and creating new jobs, income,
    and tax revenues for State and local economies. They have also
    been very effective in driving down the cost of wind and solar
    power, making renewable energy more affordable for consumers.
    Tax credits are needed to provide more parity in the tax code
    with fossil fuels and nuclear power.
        As we have heard, these industries have received enormous
    tax subsidies and other tax benefits over the past hundred
    years. And I would take issue with some of the presentation of
    these subsidies either on an annual basis or even a few years.
    Because some of the tax preferences for other technologies are
    permanent, you really need to look at this over a long period
    of time which paints a very different picture than what we have
    heard.
        Federal tax credits also represent a way to value the
    environmental and other public benefits of renewable energy
    that are not currently priced in energy markets. Tax credits
    have also helped the U.S. become a global leader in
    manufacturing and deploying renewable-energy technologies with
    excellent potential for export. Federal tax credits combined
    with State renewable standards have been the key driver for the
    recent growth in wind and solar.
        As Representative McNerney said, the U.S. wind capacity has
    more than doubled since 2010 and has accounted for more than a
    third of all generating capacities since 2007. It has also just
    recently surpassed U.S. hydro capacity. In addition, a record
    amount of solar went in last year as we heard nearly doubling
    the previous year's record and making solar the largest source
    of new capacity for the first time.
        The rapid growth in these technologies have provided
    significant benefits to State and local economies. The wind
    industry has invested more than $143 billion in the U.S.
    economy over the past decade and almost all of this has gone
    into rural areas where these wind farms are located. They have
    also added nearly 15,000 jobs in 2016, reaching a total of over
    a hundred thousand jobs in all 50 States. The amount of
    employment has doubled since 2013 in the wind industry.
        The growth of domestic manufacturing of wind turbines is
    also a major success story. More than 500 manufacturing
    facilities located in 43 States produced 50 to 85 percent of
    the major wind turbine components installed in the U.S. Just
    back in 2007 we were only producing about 20 percent. Wind
    power is also providing a significant source of income for
    rural communities. About 70 percent of wind projects installed
    in 2015 are located in low-income counties that fall below U.S.
    median household income levels. Wind also provided $222 million
    in lease payments to landowners in 2015.
        The solar industry is also a major source of new jobs.
    Total industry employment doubled since 2012 and 51,000 jobs
    were added in 2016. In total, there are more than 9,000
    businesses located in every State that is involved in the solar
    industry. A recent DOE report found that more Americans worked
    in solar and wind power generation in 2016 than in either
    nuclear, coal, natural gas, or hydroelectric generation. As we
    have heard, the cost of wind and solar have also fallen by
    about two-thirds since 2009.
        The tax credits are also a benefit for consumers. Recent
    DOE analyses have shown that the environmental and public
    health benefits of increasing renewable energy are 2 to 3 times
    greater than the cost of the Federal tax credits. The studies
    that DOE did also showed that renewables could reduce wholesale
    electricity prices and natural gas prices, saving consumers
    about $13 to $49 per megawatt hour of renewable generation.
        In terms of the policies going forward, Federal tax credits
    and R&D funding have been important complements to State
    policies, as I have discussed. But until we can transition to
    national policies that recognize the public benefits of
    renewables and other low-carbon sources of energy in energy
    prices, we recommend extending the tax credits by at least 5
    more years to maintain the sustained, orderly growth of the
    industry.
        A long-term tax credit extension for renewables could also
    be part of a well-designed technology-neutral tax credit, and
    tax credits should also be expanded to encourage investments in
    energy-storage technologies to help accelerate deployment and
    cost reductions. Thanks again for the opportunity to testify. I
    would be happy to answer any questions.
        [The prepared statement of Mr. Clemmer follows:]

     [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Mr. Upton. Thank you.
        Mr. Aldy?

                      STATEMENT OF JOSEPH E. ALDY

        Mr. Aldy. Thank you, Chairman Upton, Congressman McNerney,
    and members of the committee for hosting me today for this
    testimony. I am an associate professor of Public Policy at the
    Harvard Kennedy School where my research in teaching focuses on
    the design, the evaluation, and the rationale for energy and
    environmental policy. I appreciate the opportunity to speak
    about energy-tax policy today, and I would like to begin the
    conversation with suggesting three public policy principles.
        First, energy-tax policy should correct market failures.
    Well-functioning markets do not need government interventions.
    Indeed, when the Government intervenes in well-functioning
    markets, we risk government failures that actually make society
    worse off. Now, if there is too much pollution or too little
    innovation, then an energy-tax instrument could be a very
    effective way to remedy this problem.
        Second, energy-tax policy should promote cost
    effectiveness. If the policy targets the market failure cost
    effectively, then we can make the American people, businesses,
    consumers better off. Taxpayers should get the biggest bang for
    their tax expenditures, because one firm's tax benefit or tax
    preference in the tax code is implicitly financed by another
    firm's or family's taxes.
        Third, reviewing the impacts of tax instruments can inform
    the design and potential reform of energy-tax policy. When we
    think about the implementation of energy policy and
    environmental policy that has impacts on the energy sector we
    see a really big disconnect between how we review energy policy
    that is subject, say, to regulation which typically then is
    subject to benefit-cost analysis, public comment, and
    congressional review; whether the instrument of implementation
    is spending, which is subject to congressional oversight and
    agency evaluation; or tax instruments, which typically are
    subject to very little review and analysis.
        And I think that is why it is really important for this
    committee to look at the role of energy-tax instruments in
    energy policy. We should be very comprehensive in our
    assessment of what are the most effective ways to deliver on
    our social goals through energy policy and assess whether the
    best way forward is through the tax code, through regulation,
    through spending, or by recognizing that the private market may
    be best left on its own.
        In my written testimony I illustrate principles in my
    review of fossil fuel tax expenditures including the expensing
    of intangible drilling costs, percentage depletion, the
    manufacturing deduction for oil and gas, and other hydrocarbon
    subsidies in the tax code. I show how these fossil fuel tax
    expenditures fall short on each of these principles. The
    current slate of fossil fuel subsidies do not target an
    externality, although some past subsidies, for example the
    unconventional natural gas production tax credit, I think, was
    important in helping to promote and address concerns associated
    with innovation.
        Indeed, when we look at the fossil fuel subsidies in the
    tax code today, they have the potential to increase the
    production of socially harmful externalities such as air
    pollution that contributes to premature mortality and carbon
    dioxide emissions that contribute to climate change. Moreover,
    retaining fossil fuel subsidies may undermine reform of fossil
    fuel subsidies around the world. We have, as a government,
    worked with a number of other countries to try to get them to
    reform their fossil fuel subsidies in a way that would benefit
    us both economically and environmentally, because if developing
    countries around the world reduce their fossil fuel subsidies
    it actually lowers oil prices in the United States and lowers
    global carbon dioxide emissions.
        Since fossil fuel subsidies do not correct market failures,
    by definition they cannot deliver on the objective of being
    cost effective. And the research literature shows that these
    subsidies don't meaningfully impact production so they don't
    really help us much when we look at the price of gasoline at
    the pump, so we are spending taxpayers' monies without much to
    show for it when we look at the hydrocarbon subsidies.
        Finally, I would note and as has been already noted in this
    hearing, fossil fuel tax expenditures do not have a sunset
    provision. A future reform could set sunset provisions which
    would create milestones that can motivate evaluation of
    effectiveness of the policy, and these provisions could
    leverage the democratic process so that the case could be made
    for continuing, reforming, or eliminating the policy
    intervention. Let me also suggest that we could task some of
    the experts we have in the Government, CBO, EIA, and other
    agencies, to analyze and review energy-tax expenditures in
    order to inform the public debate about energy-tax policy.
        And let me close by noting that if we really want to
    maximize social welfare to make Americans as well off as
    possible, we want to look for ways to transition from the
    second best subsidy instruments that are the norm in the tax
    code on energy and instead transition to a world in which we
    have direct pricing on the externalities associated with
    energy. Such policies could be implemented in a way that
    clearly corrects the externality, does so cost effectively, and
    can enable, review, and reform over time. It would provide tax
    revenues that could enable major reductions in business and
    personal income taxes, and by taxing bad things like pollution
    and reducing taxes on good things like labor and investment, we
    could promote faster economic growth, higher levels in
    employment, and a cleaner environment. Thank you, Mr. Chairman.
        [The prepared statement of Mr. Aldy follows:]

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        Mr. Upton. Thank you.
        Dr. Zycher?

                      STATEMENT OF BENJAMIN ZYCHER

        Dr. Zycher. Thank you, Mr. Chairman. I would like to
    emphasize two points today. First, it is the tax subsidies for
    unconventional energy that, by far, have the most detrimental
    effects on markets, prices, and consumers. Second, the various
    rationalizations offered over the last 4 decades in support of
    those Federal tax subsidies are exceptionally weak
    analytically. The central question always to be asked is, Does
    a tax provision improve economic well-being, that is, the
    productivity of resource use, defined broadly? The subventions
    for various unconventional forms of energy and electricity
    create resource waste and reduce economic well-being.
        Wind and solar power in particular cannot compete without
    large subsidies and guaranteed market shares, and it is clear
    that higher market shares for such power have driven
    electricity rates upward. This is particularly the case given
    the need for expensive backup generation to avoid blackouts and
    the need for extra transmission capacity due to the geographic
    limitations of unconventional generation.
        Moreover, the subsidized expansion of wind and solar power
    is likely to increase rather than to reduce emissions of
    conventional effluents and greenhouse gases, in particular
    because of the up and down cycling of conventional backup units
    needed to preserve system reliability. Clean power is clean
    only if we ignore the adverse environmental effects of wind and
    solar power.
        The various tax provisions for conventional energy in
    general are not subsidies defined properly. And with the
    exception of the clean coal tax credit and perhaps a few
    others, they may or may not improve the efficiency of resource
    allocation depending on various underlying conditions.
        Let me turn to the various rationales offered over the last
    4 decades in support of energy-tax policies. Energy
    independence, the degree of self-sufficiency in terms of energy
    production, is irrelevant analytically because the price
    effects of supply disruptions are independent of the degree of
    self-sufficiency, and such secondary effects as exchange rate
    shifts are not relevant for policy making.
        The infant industry rationale for renewable subsidies is a
    non sequitur because capital markets can sustain promising
    industries or technologies in their infancy. There is no
    analytic evidence that renewables suffer from a subsidy
    imbalance relative to competing conventional energy
    technologies, even if we put aside how the word subsidy is
    defined. Quite the reverse is true. Per unit of energy
    production, renewable subsidies are vastly larger. The level
    playing field argument is simply not correct.
        The sustainability or resource depletion argument for
    renewable subsidies is incorrect as market forces provide
    powerful incentives to conserve resources for consumption
    during future periods. The green jobs employment rationale for
    renewable subsidies does not make analytic sense, as a resource
    shift into the production of politically favored power must
    reduce employment in other sectors and the taxes needed to
    finance the subsidies cannot have favorable employment effects.
    Moreover, the historical evidence on the relationships among
    GDP, employment, and energy consumption does not support the
    green jobs argument.
        Finally, the social cost of carbon argument promoted by the
    Obama administration was deeply flawed. Indeed that estimate of
    about $40 per ton in year 2016 dollars was the single most
    dishonest exercise in political arithmetic that I have ever
    seen produced by the Federal bureaucracy. Moreover, the
    policies previously proposed to reduce emissions of greenhouse
    gases would have temperature effects trivial or unmeasurable
    even at the international level using the EPA's own climate
    model.
        It would be hugely productive for the U.S. economy were
    policymakers to assume that resource allocation in energy
    sectors driven by market prices is roughly efficient in the
    absence of two compelling conditions. First, it must be shown
    that some set of factors has distorted those allocational
    outcomes to a degree that is substantial and that have not been
    addressed with other policy interventions. Second, it must be
    shown that government actions with high confidence will yield
    net improvements in aggregate economic well-being.
        Thank you again, Mr. Chairman, and I will be very pleased
    to address any questions that you and your colleagues may have.
        [The prepared statement of Dr. Zycher follows:]

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

      Mr. Upton. Well, thank you all, and we will now rotate, and
    we will ask questions and ask you all to weigh in.
        So, many of us support the policy of all of the above on
    energy, whether it be fossil fuels, renewables, safe nuclear,
    greater efficiencies, a whole host of things. And I have to say
    it is often very difficult to measure the effects of the tax
    code because you have so many different complicating factors
    from State subsidies. Many States like my State just passed a
    major new energy bill that was bipartisan and Governor Snyder
    signed into law. You have some States where you have a minimum
    of what you have to get from renewable, so, again, my State
    just went from 10 percent to 15 percent to a mandate, and I
    think many of our utilities will be able to meet that mandate.
        Different definitions of what is renewable, is it new
    hydro, is it existing hydro? I mean, the whole--and some would
    argue, of course, that nuclear could be renewable because you
    have no carbon emissions that are there. Where do you get the
    best bang for the buck? Is it these mandates that a State may
    have that they may pass in their State legislature telling the
    utilities what to do and then letting them figure it all out?
        The subsidies as I indicated in my opening remarks on
    energy, wind energy, in 35 years has gone from $500 downward,
    in a large part because of the subsidy because you have those
    greater efficiencies that are there, and down to $50 per
    megawatt hour. What is, you know, if you were rewriting the tax
    code, if you were starting from scratch what would you do
    today? And maybe we will just go--Dr. Zycher, we will start
    with you.
        Dr. Zycher. Thank you, Mr. Chairman. I would urge you to
    support all of the competitive rather than all of the above.
    There is little reason to believe that the subsidies properly
    defined for unconventional energy, for energy efficiency and
    investments, and all the rest have net effects that improve
    economic performance.
        With respect to where do we go from here which is, I think,
    a summary of your last question, the first step is to define
    what is and is not a subsidy. I have heard a lot of talk here
    about fossil fuel subsidies which are permanent in some sense,
    but I have not heard an example. The percentage depletion
    allowance to pick one example is a form of depreciation. Under
    certain conditions it may allow too much depreciation. It is
    not obvious that that problem is worse than the distortions
    created by cost depreciation based on historical accounting
    costs.
        The deduction for intangible drilling expenses conceptually
    is not correct, because spending on a capital asset ought to be
    depreciated not expensed, but that is similar to the treatment
    of R&D in all industries.
        Mr. Upton. And Mr. Aldy made the point that perhaps you
    ought to sunset some of these, but that would then take away
    from the long-term planning, right, in terms of establishing
    what the ground rules would be as it relates to the investment
    that whatever the company, the investors would be making
    whether they be something like an ethanol plant or drilling in
    the Gulf?
        Mr. Aldy. I think, Mr. Chairman, when you consider the
    sunset provision that I described, you want to think about it
    in the context of what is the typical investment planning
    horizon for a project. This has been a challenge for some of
    the wind farm developers where they have seen extensions of
    their PTC as short as 1 year. It takes much longer to do the
    planning, the contracting, the development of a wind farm.
        So I think, if you are looking at this in the context of
    oil and gas, you would want to have a sunset that is long
    enough to take account of their current planning cycle.
        Mr. Upton. OK, other comments? Mr. Clemmer?
        Mr. Clemmer. Yes, I guess I would just say that I think,
    even if you are able to get rid of all of the subsidies in the
    tax code, there is still the most fundamental problem. The
    biggest market price distortion has to do with the fact that
    carbon emissions and other air pollution and public health
    benefits are not factored into the price of electricity, and so
    we need to have a policy that does that. I think we have, in
    this country, used tax policy as a way to implement energy
    policy, and there are other tools that can be done to do that.
        Some of the statements that were made about the effect that
    wind power is having on market prices are grossly overstated,
    the fact that the bigger causes have to do with low electricity
    demand, the inflexibility of nuclear plants to ramp up and
    down, and the low price of natural gas which has really
    affected the economics of both coal and nuclear plants much
    more than renewable-energy technologies.
        Mr. Upton. Mr. Hartman, I will let you respond and then I
    will yield.
        Mr. Hartman. Sure. I would say that if you were to start
    from scratch you would start off with a full expensing approach
    to capital cost recovery. I mentioned that is there are some
    provisions for that and those tend to be more fossil fuel heavy
    in the Code. I would distinguish those very carefully from what
    we might call subsidies in the form of tax credits or, you
    know, direct cash grants.
        So I think the direction of full expensing is something to
    start off with, especially in this context of a broader form of
    tax recovery. That is going to lead to improved growth overall
    and that is really how you drive the level playing field. And
    also, for including R&D expenses within that, that is a much
    more technology-neutral approach to drive.
        Mr. Upton. OK, my time has expired. Mr. McNerney?
        Mr. McNerney. Well, I appreciate that, Mr. Chairman.
        Mr. Hartman, do you see a carbon price or a carbon dioxide
    price as a uniform approach to taxing that would have a
    benefit?
        Mr. Hartman. Yes, that is sort of the first best approach I
    think that Mr. Aldy was alluding to. Generally, you price in
    externalities into the marketplace and that is absolutely the
    preferable way to approach pollution pricing, internalizing it.
    I think if you put that in context of making it revenue-neutral
    and you do so to offset distortionary taxes such as those on
    capital or the corporate tax that was mentioned in Dr. Murphy's
    testimony, those are wonderful approaches to both yield
    economic and environmental co-benefits.
        Mr. McNerney. OK, thank you.
        Mr. Aldy, would you like to comment on that benefit of
    carbon pricing?
        Mr. Aldy. Yes. In fact, in a sense this will answer the
    chairman's last question as well. If you were to start from
    scratch, price carbon through the tax code. It is technology-
    neutral. We get away from this game where we are going to pick
    technology winners with each instrument that is using to
    subsidize this favored technology or that one. We just say here
    is a level playing field, this has important environmental
    impacts that affects people in the United States.
        And if we are able to do this we can raise some meaningful
    revenue that actually allows us to do what people really want
    to do as well on the business side and on the family side,
    which is to pay lower taxes through the tax code.
        Mr. McNerney. Well, I have to say I enjoyed hearing you
    talk about the current benefits or nonbenefits of fossil fuel
    tax subsidies in one form or another. Could you elaborate a
    little bit? It might increase externalities, might encourage
    other countries not to reduce carbon emissions, and they don't
    reduce production costs any.
        Mr. Aldy. Right. So there are about 10 provisions in the
    tax code that effectively subsidize the investment in oil,
    natural gas, and coal development. And these subsidies, the
    empirical evidence when we look at the research literature,
    they have a small impact on production, a very small impact on
    energy prices. Some of the more recent research suggests it
    might affect the price of gasoline by one penny a gallon.
        So we are not really getting much out of that when we look
    at the expenditures. To the extent that it is increasing
    production, we do have more pollution. That is bad when we
    think about people who have chronic bronchitis, asthma, the
    elderly who may die prematurely from the emissions associated
    with burning of these fuels.
        But I think it is also important that if we are able to
    engage our economic partners around the world and get everyone
    to price fuels correctly. In the developing countries they
    typically subsidize dramatically the price of fuels that causes
    excess consumption. If they were to remove those subsidies, we
    would see their emissions of harmful pollutants like carbon
    dioxide go down. It would actually have a positive impact on
    the price of oil and the price of gasoline in the United
    States. We would actually see those prices go down here at home
    if we were able to leverage our leadership and get them to
    reduce their subsidies as well.
        Mr. McNerney. Well, do you think the United States could be
    the world leader in terms of producing renewable energy
    products such as solar and wind energy?
        Mr. Aldy. Oh, I think we have seen the innovation is
    certainly there. The fact that we look at now the manufacturing
    of solar PV occurs more in China than the U.S., a lot of that
    is building off of the ideas that were created in America by
    businesses in America. They have been able to push out more on
    both the manufacturing and even the deployment of solar. So I
    think there is a potential risk here that, as we sort of pull
    back on investments in these new clean-energy technologies, we
    are going to be ceding market share to other countries.
        Mr. McNerney. Thank you.
        Mr. Clemmer, could you talk about the tax benefits of
    incentives for grid storage?
        Mr. Clemmer. The tax benefits?
        Mr. McNerney. Or the benefits, the external benefits.
        Mr. Clemmer. The benefits of storage, yes, I think, I mean
    in terms of there is lots of different benefits from storage.
    One is to help integrate renewable-energy sources in parts of
    the country where we have higher levels of renewables; it can
    provide a role there. With electric vehicles is another way,
    and also as part of microgrids to help shield communities and
    critical infrastructure from disruption from storm-induced
    power outages is another benefit. We have also seen the cost of
    storage coming down.
        So I think, you know, I do think there is a role in the tax
    code for new technologies to help stimulate growth to help
    drive down the cost. We have seen that with wind and solar. I
    think the same could happen with storage as well, we could
    accelerate that.
        Mr. McNerney. And then you see continuing job creation with
    tax benefits for clean energy?
        Mr. Clemmer. Yes, most definitely. That would help
    facilitate and enable more clean energy and as well as jobs
    directly in the storage industry, as well.
        Mr. McNerney. So how would you see the number of jobs
    created with renewable energy compared to the action that the
    President took yesterday to promote the coal industry in terms
    of job creation?
        Mr. Clemmer. Frankly, I think the executive order that came
    out yesterday is not going to do much to help the coal
    industry. The fundamental problem is low natural gas prices,
    low prices for wind and solar. Even without the tax credits,
    the prices for those technologies in some parts of the country
    is competitive, and so I don't think it is going to
    fundamentally change that.
        But I do think it is really important to have programs in
    place to help with the transition to a cleaner energy economy,
    work a transition to diversify some of the economies in those
    States, but the coal industry is really being hurt by a lot of
    the market factors and pressures particularly from natural gas.
        Mr. McNerney. Thank you.
        Mr. Upton. Thank you. Mr. Olson?
        Mr. Olson. I thank the Chair, and good morning and welcome
    to our six witnesses. A special welcome to you, Mr. Aldy. Like
    yourself, my wife is a Duke Blue Devil, class of 1985. She is
    just getting out of the funk from the smackdown South Carolina
    gave us 10 days ago, so thanks for being here.
        Mr. Aldy. Sixty five points in the second half is tough.
        Mr. Olson. Yes, sir. It was devastating.
        My first question is for you, Mr. Hartman. In your
    statement you mentioned the need to subject all energy-tax
    provisions to a, quote, objective criteria, end quote, and the
    need to, quote, equalize, end quote, tax structures. Could you
    please talk some more about what you mean by that and maybe
    about how those ideas tie together in terms of a level playing
    field? And when I say level playing field I mean a playing
    field that is driven by the free market.
        Mr. Hartman. Absolutely. No, that is a wonderful framing of
    the question. First off, I would say that the unequalizing
    treatment part that gets back to some prior comments I made on
    capital cost expensing which is a very good idea in principle
    to expand cost recovery. What we need to be careful of is doing
    it in a preferential manner. What we should be doing is across
    the board, because it will distort capital investments between
    technologies and across industries if we are just picking
    winners with it, so we should be doing that, putting everyone
    on a level cost recovery platform.
        The other part there was talking about the objective
    criteria. So, again, sort of the first best outcome is that we
    phase to just a tax preference-free world where markets fully
    decide everything, of course recognizing some constraints in
    facilitating that.
        Mr. Olson. Politics.
        Mr. Hartman. Yes, thank you. I think a good way of looking
    at it is to put some objective criteria in place. So I would
    say one is to look at the performance characteristics. So, if
    it is a certain environmental performance characteristic, make
    it across all technologies that qualify for that. If it has
    some other reliability performance or other, you know, great
    technology spillover benefits, then, you know, determine what
    that should be operationalized and let that qualify, let those
    qualifications occur across multiple technologies and
    industries.
        And also--and we have seen some progress on this front in
    terms of setting phase-out provisions, so, even though I
    disagree with the infant industry argument that I think was
    well-articulated by some of my counterparts here, I think that
    if we are going to use that as a crutch to support tax credits,
    then we need to have firm phase-out provisions based on when
    economies of scale are targeted and hit.
        Mr. Olson. Thank you. Further question on, as you all know
    not all tax policy is the same. For example, some policies give
    people a credit for the money they spent to build a facility or
    help them recover the costs that they spent working on a
    project, but some credits like the production tax credits
    incentivize projects to operate after they are built. And Mr.
    Hartman, can you talk about the differences between how these
    certain tax credits work and some of the positive/negatives
    associated with these policies?
        Mr. Hartman. Sure. So, on one hand, most of the economic
    literature--for example looking at the investment tax credit
    versus the production tax credit for clean-energy
    technologies--most of that research, you know, shows that the
    investment tax credits skews things toward capital-intensive
    technologies, which, of course, if we are using it as a back-
    door approach to correct for the pollution externality, what we
    actually care about is displacing emissions. We don't care
    about building it, per se.
        So that is where some of the economic literature says the
    production tax credit is better. However, when we get into the
    actual production profile of it, it lowers the effective cost
    of operating these plants. And I have seen this because I have
    had access to some privileged information in my years that has
    clearly shown that these resources do offer negativity into
    these markets and that does result--especially in areas where
    there is transmission constraints on the grid such as in the
    Midwest, we will see a lot of those prices go negative for
    sustained periods and that artificially distorts these markets.
        Mr. Olson. Dr. Zycher, do you want to comment, sir, within
    30 seconds? I am sorry for the time crunch, but just about the
    tax policies how they differ between building and then after
    its built getting some----
        Dr. Zycher. Yes. There is no question that the investment
    tax credit for solar production provides weak incentives for
    actual output of power and powerful incentives for simply
    building facilities. A good example of that is the Ivanpah
    Solar Power plant in the California Mojave Desert, the
    performance of which has been vastly smaller than was
    advertised. The production tax credit provides incentive to
    produce excessively expensive power, particularly if we do the
    accounting correctly and it too has its own set of distortions.
    That's right.
        Mr. Olson. Thank you. My time's expired. Don't despair.
    Coach K does not recruit, he reloads. Duke will be back.
        Mr. Upton. The Chair recognizes Mr. Peters. I am sorry, Mr.
    Pallone. I didn't see you come back. I am sorry, Frank. Mr.
    Pallone.
        Mr. Pallone. Thank you, Mr. Chairman. The committee has
    spent a lot of time today talking about markets and how the
    policies we implement can change energy markets. And one of the
    major problems with this discussion is that the fossil fuel
    industry likes to overlook the greatest market distortion that
    exists and that is the public health, environmental costs of
    pollution.
        My colleagues and I on the Democratic side have had to
    remind our Republican counterparts time and again that these
    costs over the course of--well, we have talked about it many
    times in dozens of hearings, and those costs include millions
    of missed work and school days, greater health costs for
    children and the elderly struggling with asthma and other
    respiratory illnesses and higher mortality rates.
        So I wanted to ask Dr. Dinan, do you agree that energy
    generated from burning fossil fuels generates social costs? And
    then maybe tell me what does the CBO estimate those costs to
    be.
        Dr. Dinan. Well, the Congressional Budget Office has not
    actually weighed in on what the benefits of reducing carbon
    dioxide emissions are. We have in previous work indicated that
    there are risks associated with that and that there is a lot of
    uncertainty. So--and we have also talked, but we haven't
    quantified the benefit. We have also indicated that if the most
    cost effective way of reducing those emissions would be to put
    a price on carbon in some way, either by putting a tax on those
    emissions or by enacting a cap and trade program.
        Mr. Pallone. But then these costs are not reflected in the
    price of energy generated from fossil fuels. We don't see that
    either, right, with these costs?
        Dr. Dinan. Yes, we have stated that. It is what we call an
    externality. The prices aren't, the costs associated with, the
    environmental costs aren't reflected in the prices that
    consumers pay.
        Mr. Pallone. And then that means that these firms, you
    know, the fossil fuel industry, the firms have no incentive to
    consider them when making business decisions even though these
    costs weigh heavily on society and fall on the backs of parents
    and seniors or whatever.
        Dr. Dinan. Yes. That is the rationale behind putting a
    price on those emissions is to internalize them and give firms
    an incentive to take them into account when they decide how to
    produce energy and what types of technologies to use, and also
    consumers' incentives to take those costs into account when
    they decide how much energy to consume and what types of energy
    to use.
        Mr. Pallone. All right, thank you.
        Let me ask Mr. Hartman, in your written testimony you
    discuss the existence of pollution externalities. Do you agree
    that pollution from fossil fuels creates externalities that
    distort the market?
        Mr. Hartman. Yes.
        Mr. Pallone. And do you believe that action is necessary to
    correct these externalities so that third parties don't have to
    shoulder the heavy cost of pollution?
        Mr. Hartman. I believe correct action should be taken on
    it. We need to be careful to make sure that the medicine is not
    harsher than the disease and I think that is where we get into
    the question of second, third, and fourth best policy
    mechanisms.
        Mr. Pallone. OK. Now a number of witnesses today have said
    that in recent years renewable energy sources are getting the
    lion's share of tax expenditures. So let me ask Dr. Murphy,
    your testimony claims this amounts to artificial encouragement
    for the renewable-energy sector, which I find interesting given
    that our country has been providing different types of
    artificial encouragement for fossil fuels since before you and
    I were born--a long time ago, in my case.
        Dr. Murphy, yes or no: Do you believe that the PTC provides
    artificial encouragement to the wind sector?
        Dr. Murphy. Yes, I do think the PTC provides artificial
    encouragement. And that is why I focus--I think the negative
    wholesale electricity prices that wind operators are offering
    is a clear signal that that is not a normal market outcome.
        Mr. Pallone. OK. So then, and maybe just yes or no because
    we are running out of time, do you consider percentage
    depletion an artificial encouragement to the oil sector?
        Dr. Murphy. I think it is, I would agree with what Mr.
    Zycher was saying that it is perhaps an artificial tax code
    treatment, but I don't know if the rationale was to encourage
    output.
        Mr. Pallone. All right. What about intangible drilling
    costs?
        Dr. Murphy. Again, it may be incorrect tax policy, but I
    don't know what the rationale was for that.
        Mr. Pallone. All right.
        Mr. Aldy, do you consider percentage depletion and
    intangible drilling costs as artificial encouragement?
        Mr. Aldy. Yes. They distort the investment decision. They
    make it easier for someone to make money off of an oil and gas
    project than if they were to invest in say a new steel mill or
    a new commercial retail facility. So it is clearly distorting
    the investment decision favoring that technology and favoring
    that investment over other options in the economy.
        Mr. Pallone. All right, thank you very much. Thank you, Mr.
    Chairman.
        Mr. Olson [presiding]. The gentleman's time has expired.
    The Chair calls upon the vice chairman of the full committee,
    Mr. Barton, for 5 minutes.
        Mr. Barton. Well, thank you. And Mr. Vice Chairman of the
    subcommittee, I am not a Duke graduate. I am a proud graduate
    of Texas A&M which didn't make anything this year. They didn't.
    We are just proud to be proud, I guess.
        I am going to ask, I guess, Dr. Murphy, is there any
    country in the world that has a better, more diversified energy
    production market than the United States?
        Dr. Murphy. Not to my knowledge.
        Mr. Barton. Not to mine either. We are number three in oil
    production, could be number one. We are number one in coal
    production, number one in natural gas production, number one in
    hydro production; I think we are number two in ethanol. I
    believe Brazil is ahead of us in that. I don't know where we
    are in the solar industry, but we would be in the top five, and
    I believe we are number one in wind production. That is not
    bad.
        So is there anybody on the panel that disagrees with the
    statement that--or let me rephrase it. Is there anyone on the
    panel that thinks we would be better off if we went from a
    free-market, capitalistic energy sector to a government-owned,
    government-controlled energy sector?
        Dr. Murphy. So, if I could just make one comment on that
    related to the earlier question, too, that, yes, all of the
    above from the Institute for Energy Research perspective means
    a level playing field, and let the market determine the
    outcome. So not favoring fossil fuels, not favoring renewables,
    just let markets, consumers, and producers choose the right
    mix.
        Mr. Barton. Right. Well, I can't say that we are a total
    level playing field, there are people on these panels that
    disagree with that statement. But at least we start from the
    premise that we are going to let free market capitalism dictate
    our energy sector, and then the government, both at the State
    level and the Federal level, we tinker around with it with tax
    policy and various research grants and things like that.
        If you will all agree that we are better off having a
    privately owned energy market and energy sector, the next
    question would be, logically, is it appropriate to create
    incentives for various subcomponents of that, incentives,
    subsidies, and on occasion penalties? Anybody have a comment on
    that? Mr. Aldy? Professor Aldy, I guess.
        Mr. Aldy. Yes. Congressman Barton, I believe when we talk
    about a level playing field in a competitive market I think it
    is important, as has already been discussed, for us to fully
    account for the social cost of different kinds of energy. It is
    not a level playing field when we have some technologies that
    don't emit any air pollutions that contribute to premature
    mortality competing with technologies that do cause premature
    mortality but don't have to actually bear those costs, invest
    in technologies to reduce that exposure to the elderly and to
    children around the country.
        So I think it is important when we think about a
    competitive marketplace that we are ensuring that the market is
    actually delivering what is in everyone's social best interest.
    If I could go out and buy clean air in the market I would go do
    some of that and the market would help deliver it, but the fact
    that you can't do that makes it very difficult.
        Mr. Barton. I didn't postulate that our energy policy is
    absolutely a level playing field. I haven't said that. I admit
    that we do, you know, I happen to think it is OK to subsidize
    or at least incentivize through the tax code some oil and gas
    exploration and production. I don't buy into this concept of
    social cost of energy. A cost is a cost. A dollar monetized,
    either produce it or transport it and then what it costs to
    consume it, so I am not a fan of that.
        Dr. Zycher?
        Dr. Zycher. Yes, Zycher. I really have to take issue with
    most of the other people on the panel and with some of your
    colleagues up on the dais. The argument that the externalities
    created by fossil fuel production and use have not been
    internalized simply ignores the entire framework of the
    Environmental Protection Agency regulation. Those regulations
    reduce, or at least ostensibly require, a national ambient air
    quality standard that protects the public health with an
    adequate margin of safety.
        If people want to argue that the EPA regulatory framework
    for any given pollutant is insufficient, fine, make that
    argument. I have not heard that. And then there is the further
    argument that somehow wind and solar power are clean. No, they
    are not. Because of the backup units required to maintain
    system reliability, you actually get more pollution rather than
    less, however defined, because of wind and solar power. That is
    what the Bentek study of Colorado and Texas found, and it is
    really rather obvious. We don't talk about that, but the
    premise here is really quite wrong and----
        Mr. Barton. My time has expired. I agree with what you
    said. I also think that you need to have a regulatory framework
    because free market capitalism sometimes does not account----
        Dr. Zycher. Right.
        Mr. Barton [continuing]. For some costs in the
    environmental area that need to be regulated at the State and
    Federal level. And with that I yield back, Mr. Chairman.
        Mr. Olson. The gentleman's time has expired. The Chair
    calls upon the acting vice chairman, Mr. Peters from
    California, for 5 minutes.
        Mr. Peters. Thank you, Mr. Chairman. I have to say also I
    am a Blue Devil, and the only two good things are we beat
    Carolina 2 out of 3 in the ACC championship, and we are less
    distracted than we would be typically this time of year, so we
    can pay attention to this hearing.
        Mr. Aldy. I would rather be distracted.
        Mr. Peters. Yes, me too. I thought Mr. Hartman did a great
    job of sort of laying out the classical economics of the free
    market that would drive good competition and ultimately low
    prices for consumers. And what I was curious about, though, is
    whether CBO--maybe Dr. Dinan has looked at if you wiped out all
    these preferences in theory, would you understand what the
    effect would be on domestic job creation, because I suspect
    that other countries might be subsidizing.
        Dr. Dinan. Looking at the effects of reducing tax
    preferences on jobs is a very challenging task because there
    are, you know, for example, studies that look at how much jobs
    would be created in the wind energy, you know, associated with
    the tax preference don't look at what would have happened in
    the absence of that.
        Mr. Peters. Right.
        Dr. Dinan. So where would employment have been greater in
    the absence. And so CBO has not taken a careful, has not yet
    looked at the effect of say a cap and trade program on jobs and
    individual industries, although we have said that in total
    putting constraints on the economy can result in a small
    reduction.
        Mr. Peters. I don't want to labor it because I don't have a
    lot of time, but that wasn't my question. My question was about
    if you just removed all the tax expenditures related to energy
    to level the playing field in a really clean way along the
    lines of what Mr. Hartman did, is there an understanding of
    what the effect would be on job creation in these energy
    sectors? But I am going to leave that to maybe follow up on
    because it sounds like it would be a difficult thing to assess.
        I did want to say that Mr. Hartman's statement acknowledges
    that a targeted tax preferences for--I am sorry--that pricing
    externalities is the most efficient policy for dealing with
    this. Do you have a suggestion for us? I know there has been
    some criticism of the social cost of carbon. Do you see that as
    an appropriate way to calculate the externalities of carbon, or
    how would you do it if not that?
        Mr. Hartman. I think generally the approach in theory is
    absolutely the appropriate way to go. Right, the idea is to
    quantify all the damages, you know, going forward and that is
    definitely the basis. Now I think when we start getting into
    the methodology behind it, it gets very difficult. So, in a
    large part, the damage valuation of climate change largely
    comes down to the choice of discount rate because most of the
    folks that are hurt by this are our future generations.
        Mr. Peters. Right.
        Mr. Hartman. And also potential catastrophic effects
    associated with climate change and figuring out what the
    triggers of those are there is an immense load of scientific
    uncertainty on that front. And so it is very hard to even get
    good estimates with an order of magnitude, but I think it is a
    worthwhile exercise to try and perform it.
        Mr. Peters. And you have to set it somewhere. You have to
    make some assumptions about what is going to happen so that you
    can actually provide a cost for this externality if you are
    going to recover it, right?
        Mr. Hartman. And doing the sensitivity analysis just gives
    us a sense of what we know and what we don't know as well, and
    I think that is still very helpful.
        Mr. Peters. Finally, I want to ask, I think, Mr. Aldy about
    something I have come across called the Conservative Case for
    Carbon Dividends from James Baker, George Shultz, Hank Paulson,
    and some other renowned Republicans. I don't know if you are
    familiar with this, but the idea is that you would have a
    gradually increasing carbon tax. You would do dividends back to
    Americans with what you collected and you would do border
    carbon adjustments. And there is some argument that you could
    roll back regulations as well. Have you evaluated this plan? Do
    you have a view on how it would work?
        Mr. Aldy. I do. I think it is an excellent plan. I have
    also put out a proposal for how you could think about taxing
    carbon and returning revenues back to the economy. The idea
    that everyone would get a check every month is, I think, a
    really important way to ensure that families aren't adversely
    impacted by a carbon tax. There is a concern that it will
    increase energy prices.
        But if you have energy prices in a world in which you are
    getting a check every month that dividend, then that allows you
    to have the freedom to figure out what are the most effective
    ways to use those monies, whether it is to become a little bit
    more energy efficient or for other things that matter to your
    family. So I think it is an excellent idea and worthy of
    serious consideration.
        Mr. Peters. And in 10 seconds, Mr. Hartman, I don't know if
    you have a reaction to that approach.
        Mr. Hartman. I would emphasize that the dividend approach
    is probably the most if not the least efficient way to
    redistribute that revenue. I think you are better off going
    after distortionary taxes especially capital.
        Mr. Peters. OK. Thank you very much. My time has expired. I
    appreciate it.
        Mr. Olson. The gentleman's time has expired. The Chair
    calls upon the subcommittee chairman of the Digital Commerce
    and Consumer Protection, Mr. Latta, for 5 minutes.
        Mr. Latta. Well, thank you very much, Mr. Chairman, and
    thanks very much for our panel for being here, as you have
    probably heard that we have a couple of hearings going on two
    committees today, or subcommittees.
        But if I could ask, is it Dr. Dinan? I want to make sure I
    pronounce your name properly. Would a comprehensive evaluation
    of the cost effectiveness take into account costs and benefits
    to consumers in the economy?
        Dr. Dinan. Yes. In general, well, a cost effectiveness
    measure is just looking at how much it costs producers and
    consumers or taxpayers to achieve a given goal. It is not
    measuring that goal that cost against the benefit. So
    generally, a cost effectiveness measure when we compare
    different policies you are saying does this get a reduction in
    a certain pollutant or say an increase in domestic production
    at a higher cost or a lower cost in an alternative policy.
        Mr. Latta. Maybe that follows up with my next question. How
    do you measure whether the consumers are benefiting from a
    particular tax treatment then when you are talking about the
    different types of measurements then? How would that measure
    for the consumer then if they are benefiting from that?
        Dr. Dinan. So are you referring to the measures that we
    talked about in my testimony about the cost of the greenhouse
    gas emission reductions?
        Mr. Latta. Right.
        Dr. Dinan. OK. In that case it was looking at how much
    additional dollars--I am sorry. Yes, how much additional cost
    is imposed on the economy to get the reduction in greenhouse
    gas emissions, so it is not explicitly taking into account the
    cost, the benefits to consumers of achieving that which is why
    you would compare it with something like the social cost of
    carbon. In particular that measure was looking at cost, lost
    foregone revenue associated with achieving that outcome.
        Mr. Latta. Thank you.
        Dr. Zycher, if I could ask you how has the tax code
    affected consumer choice?
        Dr. Zycher. Well, I think the primary impact of the current
    tax treatment of various energy forms is to allow given States
    to mandate market shares for renewable power, wind and solar
    power, and the production tax credit and the investment tax
    credit allowed those States to shift a substantial number of
    the amount of the costs of those policy choices onto taxpayers
    in other States.
        And so I think that, to answer your question, consumers are
    constrained to consume an energy mix that is more expensive
    than would otherwise be the case because of the tax policies
    that I have just mentioned.
        Mr. Latta. Thank you very much. Mr. Chairman, I yield back.
        Mr. Olson. The gentleman yields back. The Chair calls upon
    Ms. Castor from Florida for 5 minutes.
        Ms. Castor. Well, thank you, Mr. Chairman. This is a very
    important hearing the day after the Trump administration has
    begun to unwind the Clean Power Plan and our carbon pollution
    reduction goals. In the face of overwhelming evidence of the
    need to reduce carbon pollution and the need to generate
    electricity in cleaner ways, the Trump administration is
    instituting an energy policy that is more suitable to 50 years
    ago in America.
        It is not a policy for innovation. It is not a policy to
    keep the boom in clean-energy jobs going. It is a policy that
    will keep costs on our kids and future generations. See,
    America needs carbon pollution reduction goals and we also need
    a tax policy and tax incentives to help address the rising
    costs of the changing climate.
        I represent the State of Florida and there has been a lot
    of talk about cost, are costs factored in when you consider
    energy policy? And let me share with you some of the costs we
    are facing in Florida. And Florida is not unlike other States,
    but we have a lot at risk. We anticipate significant cost
    increases in flood insurance. We anticipate significant costs
    in property insurance, whether that is what happens on the
    coast or from extreme weather events. We are already seeing
    rising costs of beach renourishment.
        The economy in Florida is quite dependent upon clean water,
    clean air, and our beautiful beaches. People will probably have
    to start paying more in property taxes as local governments
    begin to repair their water infrastructure and wastewater
    infrastructure. Already in Miami-Dade County they are doing a
    lot of that. Not to mention air conditioning bills as the
    number of oppressively hot days continues to increase. In fact,
    the Florida League of Cities said that because Florida has more
    private property at risk from flooding than any other State,
    climate change could cost 69 billion in coastal property damage
    by 2030, and 152 billion in damage to coastal Florida
    properties by 2050.
        So Ms. Dinan, for the nonpartisan Congressional Budget
    Office as you are preparing to give advice and analyze the cost
    of certain tax incentives as the Ways and Means Committee
    begins to discuss tax reform, do I understand it that these
    type of costs will not be factored in when we ask the CBO for
    cost analysis of fossil fuel tax incentives or the production
    tax credit or the investment tax credit?
        Dr. Dinan. Just to be clear, it is the Joint Committee on
    Taxation who estimates the cost of those tax expenditures so we
    rely on their estimates, and those estimates really just
    reflect the foregone revenue that is associated with them.
        Ms. Castor. So they wouldn't include property insurance,
    flood insurance cost to consumers at home?
        Dr. Dinan. When they estimate the cost of the tax
    expenditures? No. That would be something that we would do in
    part of a broader analysis.
        Ms. Castor. What would you do that broader analysis? What
    would trigger a broader analysis?
        Dr. Dinan. Well, in general we do these longer term, more
    complicated studies at the request of either a ranking member
    or a chair of a relevant committee.
        Ms. Castor. OK. Mr. Clemmer, is that a good way to really
    estimate the cost to families back home when we are trying to
    make decisions on tax expenditures and tax policy?
        Mr. Clemmer. No. And I think you bring up a really good
    point which is the cost of climate change. Even though there is
    some uncertainty about what they are going to be, there is a
    cost and it is significant, and there have been a lot of
    studies out there that have shown that. And some of the
    comments that were made earlier about discount rates in the
    future, you know, those are actually taken into account in the
    social cost of carbon estimates that the Government was using
    with a wide range of costs.
        But the other point I want to make, as you are pointing out
    in your comments, is that we are already seeing some of the
    costs of climate change. While you can't put any, on one
    particular storm you can't associate with climate change, we
    have seen an increase in drought, in wildfires, in coastal
    flooding and storm surge, and that is having a real cost on
    those communities and the trend has been increasing over time
    and those events have been increasing over time. And so we need
    to--as we have been discussing on this panel--need to fairly
    account for those externality costs.
        In my testimony, I mentioned the DOE. There have been a
    bunch of DOE studies recently that tried to quantify the
    benefits of renewables in terms of reducing those costs from
    CO2 emissions and from other pollutants and the public health
    impacts associated with it. And what they found was that the
    benefits were two to three times greater than what the
    production tax credit is, so I would urge people to take a look
    at that.
        Ms. Castor. Sure, thank you.
        Mr. Olson. The gentlelady's time has expired. The Chair
    calls upon gentleman from Mississippi, Mr. Harper, for 5
    minutes.
        Mr. Harper. Thank you, Mr. Chairman, and thanks to each of
    you for being here. Dr. Zycher, I would like to ask you a few
    questions if I may. And one thing that just amazes me when we
    look at intangible drilling costs more particularly, how that
    enables independent producers across the country to take what
    is a very high risk business. What is your view or take on IDC?
        Dr. Zycher. Well, conceptually, labor costs incurred in the
    creation of a capital asset should be depreciated not expensed.
    At the same time, the deduction for intangible drilling
    expenses is allowed, basically R&D expenditures, everywhere,
    and so it is not really a subsidy for the oil and gas sector.
    It may be inefficient economically, but it is not a subsidy
    that is specific to that sector.
        And so I would be perfectly happy if--and it is not
    available, I guess, or it is available in limited formed
    integrated oil companies if I recall correctly. So I would be
    perfectly happy and I think it would be efficiency-inducing if
    Congress were to eliminate it across the board, but simply
    eliminating it for one sector, I think, would not be
    appropriate.
        Mr. Harper. All right. There has been discussion here of,
    you know, certainly cap and trade or more recently carbon tax.
    Give me your views on the carbon tax, what that does to the
    economy, what that means as far as tax policy.
        Dr. Zycher. Yes. The carbon tax is really a terrible idea.
    And the study from the Climate Leadership Council that one of
    your colleagues mentioned earlier, I actually wrote a paper on
    that. It was published on the AEI Web site 3 weeks ago. It is
    deeply unserious. The carbon tax provides incentives for the
    Government to maximize revenue rather than optimize the level
    of emissions.
        The argument that Congress will simply send an equal check
    to every American is preposterous. The losers will have to be
    compensated more heavily than others. The carbon tax adjustment
    at the border is unworkable because of the supply chain
    phenomenon across countries, et cetera. The predictability
    argument made by Mr. Shultz and Mr. Baker refutes itself. They
    argue that the policy is predictable, but then they argue that
    after 5 years there should be a blue-ribbon commission to
    recommend whether there should be an increase in the tax. That
    proposal even among the several carbon tax proposals that have
    been made, that particular proposal from the Climate Leadership
    Council is deeply unserious and really ought not be paid too
    much attention to.
        A regulatory framework, surprisingly enough, is more
    efficient than a carbon tax in this context because it does not
    provide incentives for Congress to impose overly and stringent
    goals in terms of emission restrictions because of the
    availability of the revenues.
        Mr. Harper. OK. You know, some have argued obviously that
    tax subsidies are necessary to correct market failures.
    Generally speaking, how well has the Government predicted those
    so-called market failures and has the tax code done a good job
    correcting them?
        Dr. Zycher. I don't think so. The tax code subsidizes wind
    and solar power heavily despite the fact that they are
    polluting on that because of the need for backup generation
    that has to be cycled up and down. I made that point several
    times here today. EPA probably has incentives to overregulate
    because of the ideological and budget maximization incentives
    of the bureaucracy. But because of the power under the
    Congressional Review Act and possibly a REINS-type act, I think
    that that problem is being addressed by the current Congress.
        More generally, in the context of climate change, all the
    assertions here that we have heard about how the effects of
    increasing greenhouse gas concentrations are becoming
    increasingly serious ignore the fact that there is simply no
    evidence in support of that. If you look, the temperature data
    are ambiguous, the correlation between increasing greenhouse
    gas concentrations and temperatures is actually very, very
    poor. The Arctic and Antarctic sea ice data provide conflicting
    stories. There is no evidence in the U.S. that flooding is
    correlated with increasing greenhouse gas concentrations.
        If you look at the data on wildfires from the National Fire
    Interagency Program in Boise, Idaho, there are no trends since
    1985. The Palmer drought severity index shows no trends since
    1895. There is simply no evidence that increasing greenhouse
    gas concentrations are having serious effects either in the
    U.S. or nationally. If you look at the cyclone data, the
    satellite data on cyclones, there is no trend since the early
    1970s. Since 1954, there is no trend in tornado activity that
    is correlated with increasing greenhouse gas concentrations in
    the U.S. The assertions we have heard today from a number of
    people that there is a crisis because of increasing greenhouse
    gas concentrations is simply not supported by the evidence.
        Mr. Harper. Thank you, Dr. Zycher. My time has expired. I
    yield back.
        Mr. Olson. The gentleman's time has expired. The Chair
    calls upon the gentleman from New York, Mr. Tonko, for 5
    minutes.
        Mr. Tonko. Thank you, Mr. Chair. I agree we should hope to
    have a level playing field and was discouraged that many worthy
    emerging technologies were left out of the December 2015 ITC
    extension. Those included concepts like fuel cells, CHP,
    geothermal, and distributed wind. We should correct that and
    give these technologies ITC parity. I think it is a looming
    correction that needs to be addressed.
        With that said, wind and solar PV accounted for over two-
    thirds of new electricity generating capacity installed in
    2015. Undoubtedly, tax policy has played a role, but is far
    from the only factor bringing these technologies online.
        So Mr. Clemmer, do you believe State Renewable Portfolio
    Standards requirements have played a role in bringing more
    renewables into our energy mix?
        Mr. Clemmer. Yes, definitely. We have done a lot of
    research on that and there has been a lot of research from the
    national labs on that. And yes, they are one of the key
    drivers. They are actually in some ways more effective in the
    sense that they provide more long-term certainty of the
    industry. There has been lots of cost-benefit studies done on
    those showing that the cost impacts are very minimal. And as I
    mentioned in my testimony just a few minutes ago, one of the
    studies about the benefits from those being two to three times
    greater has to do with State renewable standards.
        I wanted to just quickly make a comment about what Dr.
    Zycher keeps bringing up, this issue of renewables being more
    polluting than fossil fuels, which is ludicrous.
        Dr. Zycher. Well, that is not what I said, Mr. Clemmer.
        Mr. Clemmer. And in fact the--well, you said it makes more
    generation to back up renewables that increases pollution.
        Dr. Zycher. Yes.
        Mr. Clemmer. And the study he is referring to has been
    thoroughly debunked. It was a long time ago, and there have
    actually been dozens of studies by regional transmission
    organizations, utilities, the national labs that have all shown
    the amount of balancing that is needed for renewables is fairly
    small and the cost is actually fairly small too, on the order
    of five to ten percent of the wholesale price of electricity.
    So I completely disagree with what he is saying.
        Mr. Tonko. Thank you for that clarification. I think it is
    good to have on the record. I would point out that when I--my
    last workplace before this was at NYSERDA, the State Energy
    Research & Development Authority, and we saw tremendous efforts
    made in our renewables with the portfolios, and as an example
    we have set a goal of 50 percent of electricity in New York
    coming from renewable sources by 2030.
        Again, Mr. Clemmer, what about corporate procurement
    policies and consumer preferences for clean energy, what role
    do they play?
        Mr. Clemmer. I think in the past few years they have been
    playing a huge role. We have seen a lot of large corporations
    directly purchasing and having power purchase agreements with
    renewable-energy developers and renewable-energy facilities,
    which is another indication that renewables are becoming more
    cost effective and the fact that it is good for consumers. They
    wouldn't be doing this if it wasn't good for them and it wasn't
    affordable and cost effective for them to do it, as well as
    lining up with their corporate views about the environment and
    things like that.
        So I think there has been an enormous trend for both wind
    and solar in that way in the last couple of years.
        Mr. Tonko. Thank you. And since 2008, land-based winds cost
    has decreased by 41 percent and there has been a 64 percent
    decrease for utility scale PV. Has the increasing cost
    competitiveness of renewables, much of it due to technology
    improvements, played a role in their proliferation?
        Mr. Clemmer. Yes. I think that the two main factors have
    been, you know, for wind it has been a combination of capital
    cost reductions due to some more economies of scale with that
    technology, but it has also been due to increasing levels of
    output or capacity factors as we often refer to it. In the best
    sites in the country right now, capacity factors for wind
    turbines are above 50 percent and the increase in output due to
    taller towers, longer blades, and more sophisticated power
    electronics have all helped boost capacity factors and made it
    viable for wind projects to be sited in areas of the country
    that were previously thought not to be cost effective for the
    technology. So innovation has played a key role.
        Mr. Tonko. Thank you.
        And again, Mr. Clemmer, many people have been using cost
    estimates looking at 2016 to 2020. Doesn't that ignore the fact
    that only some of these credits are permanent and have existed
    for many decades and will continue to do so long after 2020?
        Mr. Clemmer. Yes. It ignores that aspect, but it also
    ignores the historic treatment of different technologies. And
    in my testimony I give an example of looking back to basically
    1950, and the amount of subsidies that have gone to wind power
    between that time frame and 2015 have been about three percent
    of the Federal subsidies, whereas fossil fuels have provided
    almost two-thirds and nuclear power about 20 percent.
        Mr. Tonko. If we looked at a snapshot from 2016 to 2066,
    for example, we would probably get a different portrayal,
    right, of the impact?
        Mr. Clemmer. Yes. But I think that would be very uncertain
    to look at that given, you know, the uncertainty about what is
    going to happen with policy and so forth. But if you were to
    just look at it from a snapshot of right now going into the
    future and the provisions that are going to get sunset at a
    certain point in time would be one way to do it, then you would
    see a much different picture.
        Mr. Tonko. OK, thank you. I believe my time has expired so
    I yield back.
        Mr. Olson. The gentleman's time has expired. The Chair
    calls upon the gentleman from West Virginia, Mr. McKinley, for
    5 minutes.
        Mr. McKinley. Thank you, Mr. Chairman. We have spent over
    the last numbers of years quite a bit of time in this committee
    with panels coming in about grid reliability and how we
    maintain our industrial might in this country. My concern a
    little bit is that let's just say if we could just imagine an
    elementary level, if we were to do away with all of our fossil
    fuels and we were totally reliant on the wind, solar primarily,
    what would our grid look like? Would we have a reliable grid to
    be able to maintain our might if we had a complete reliability
    on renewables?
        Dr. Zycher, if I could get your view on that.
        Dr. Zycher. Yes. Is your question if we had a hundred
    percent grid powered by wind and solar power?
        Mr. McKinley. Right.
        Dr. Zycher. Well, then we would have an extreme version of
    what happened in West Germany and the U.K., highly unreliable
    and highly expensive, devastatingly expensive electricity
    delivery system. And I don't think, I really rather doubt that
    if people who argue----
        Mr. McKinley. So if that were correct, and I don't disagree
    with you on that coming from a coal State, but if that is
    correct, then why are we having policy that is moving us in
    that direction?
        Dr. Zycher. Well, I am not really a political expert on why
    we are subsidizing what we are subsidizing. I only can talk
    about the effects, most of which are adverse. What I really do
    find amazing is the argument simultaneously from the proponents
    of wind and solar power that, A, they are now competitive in a
    cost sense with fossil fuel generation; and, B, we should
    continue the subsidies. You really can't make both of those
    arguments simultaneously. If they are competitive, they don't
    need the subsidies, and if they need the subsidies, they are
    not competitive.
        Mr. McKinley. OK. Well, I am not opposed to wind and solar.
    I think it is unique. I think it's something that makes it
    truly part of all of the above. I am willing to support that.
    My concern is that we keep subsidizing an industry that I think
    has matured to a level that perhaps it is unnecessary to
    subsidize it, especially if it gives us and under the extent,
    degree, it is an unreliable grid that we develop by pursuing
    this policy.
        And so Dr. Murphy, I would like to get back to a question
    you said or you put in your paper and that was about how wind
    can actually get into the market into the PJM when they go to
    market on getting power at a virtually negative rate and still
    can make money on that because of the subsidy. Could you
    explain that on an elementary level, how you can actually bid
    in negatively or almost at cost and still make money with it?
        Dr. Murphy. Sure, yes. So I should mention that there are
    cases where that might actually be sensible, like if a nuclear
    plant doesn't want to completely shut down. So it is not that
    this is only possibly due to this one factor, but I think if
    you look at the data, the frequency with which these negative
    wholesale prices, so yes, they are legitimately negative prices
    where producers of electricity are paying people to take their
    product from them.
        And so I think a main reason that we have seen a prevalence
    of this increase is the production tax credits. So you are an
    operator, if you own one of these things, for every megawatt
    hour that you sell your tax bill goes down $23. And so, as long
    as the marginal costs of production aren't that high, you would
    be willing to even sell at a negative price, because all things
    equal to you individually you make money doing that because it
    reduces your tax bill.
        Mr. McKinley. OK, and just in the closing let me just make
    sure I understand, Dr. Murphy, your statement you make in your
    written testimony. And you may have made it in verbal, I might
    have missed that but there was talk about the Federal support
    for the wind and solar now is in the, particularly solar, let's
    just focus on solar, is somewhere, I believe you listed it. It
    was $231 a megawatt and coal is at 57 cents. Am I reading your
    statement correctly?
        Dr. Murphy. Yes. Well, what that was, yes, that was from
    the written testimony and that was for looking at fiscal year
    2013. EIA had looked at the total Federal support, so that
    included direct grants not just tax preferences and then we
    adjusted it for a per megawatt hour basis.
        Mr. McKinley. OK. So given the difference between $231 and
    57 cents, how can anyone in good conscience say that we are
    trying to not pick winners and losers here in Washington?
        Dr. Murphy. Well, right, I agree with you. And I also think
    like some of the other comments made reflect that, that talking
    about how historically there hasn't been much support for wind
    and solar and, right, and that is why we haven't seen any real
    generation from wind until very recently. So I think that
    underscores the point that the expansion of wind thus far is
    driven by the tax code and other mandates.
        Mr. McKinley. I know I am over time, but just would you
    agree that that would provide, if we were to become more
    reliant on wind and solar that we would have an unreliable
    grid?
        Dr. Murphy. I think so, just obvious common sense that wind
    is intermittent. So, even in areas where it does make economic
    sense, you wouldn't want to have your whole grid just dependent
    on that, because sometimes the wind is not blowing.
        Mr. Olson. The gentleman's time has expired. The Chair
    calls upon the gentleman from Iowa, Mr. Loebsack, for 5
    minutes.
        Mr. Loebsack. Thank you, Mr. Chair. This has been pretty
    fascinating. I used to teach at a small college and not
    economics, political science, but we had a lot of theoretical
    discussions. There has been a lot of theoretical discussions
    today. There have been a lot of, I think, false choices
    presented to us. I am one as a strong supporter, for example,
    of wind and solar, but I completely agree that we are never
    going to get to the point where we can depend completely on
    wind and solar. We simply probably will never have enough
    storage capacity for one thing to do that without relying upon
    some other forms of energy. So I think we have a situation here
    where we have false choices often get presented to us and I
    think that is unfortunate.
        And I kind of want to bring this back to the real world of
    Iowa and my home State, where some of you may know that our
    electricity generation--there is about 40 percent now from wind
    energy, and that is supported on a bipartisan basis in the
    State of Iowa. We have a Republican Governor who is for this,
    we have a Republican senator, Chuck Grassley, who is
    essentially the father of the production tax credit. And I am a
    Democrat, the only Democrat in the Federal delegation who
    pushes really hard for this. There is nothing partisan about
    it. It is about making sure that we create great jobs in Iowa.
    It is about making sure that we do the best we can to have as
    clean energy sources as we possibly can.
        You know, we have seen the production tax credit, the
    benefit that it has provided in terms of jobs, in terms of our
    rural communities as well where these turbines get sited, the
    leases that are important there for those farmers in a
    situation where, you know, we have low corn prices, people are
    depending on other sources of income often and this is one of
    them. So in the State of Iowa this has been, I think, a boon in
    many ways. It has been very beneficial not only for the
    environmental effects but for the economic effects as well.
        And we know what is going to happen to the production tax
    credit over a 5-year period. I would like to ask Mr. Clemmer,
    if we had not had the PTC in the past it is difficult to know,
    but maybe you might have some idea of what that might have done
    in terms of the jobs that would have been lost. I realize that
    we would have had other jobs in other parts of the energy
    industry because we would have electricity coming from other
    parts of the industry, the energy industry. But do you have any
    idea what that might have meant in terms of jobs if we had not
    had the PTC in the past?
        Mr. Clemmer. Yes. Well, generally speaking, I think I can
    answer that.
        Mr. Loebsack. Right.
        Mr. Clemmer. You know, one point to make is that as you
    said Senator Grassley is the father of the PTC passed in 1992,
    it really did not have much of an effect actually until the
    early 2000s. And in part it was the combination of the
    technology improving, it was also due to some of the State
    renewable standards that got put in place and Iowa was one of
    the early States that had one of those.
        And both of those policy mechanisms, which in a lot of the
    States these were places that didn't have fossil fuel resources
    in their State and the economic benefits to them were even
    greater by fostering those industries, but as I said in my
    testimony, the effect was by stimulating development when they
    were in a nascent early phase and then the effects of driving
    down the cost to make them more cost effective is what has
    started to lead to the growth recently and all the jobs that
    have followed along with it.
        And I think if we wouldn't have had--one of the things I
    said in my testimony and my oral comments was the domestic
    sourcing of wind turbines has gone from about 20 percent in
    2007 to about 50 to 85 percent depending on what part of the
    technology you are talking about. And that has been a
    tremendous success story that would not have happened without
    the PTC.
        Mr. Loebsack. Right. I have two blade manufacturers in my
    congressional district, one in Newton and one in Fort Madison.
    I have a turbine, the structural tower manufacturers in my
    district as well in Newton, Iowa, and they have been great
    jobs. They are jobs that you know I hope aren't going to go
    away. You know, the PTC is going to go away at this point. We
    will see what happens down the line.
        But then on solar as well, I have a lot of hog farmers in
    my district who are putting solar panels on top of those hog
    confinement facilities. I don't have the number off the top of
    my head, but if it weren't for that investment tax credit that
    wouldn't be happening because we have a matching tax credit in
    the State of Iowa as well. If we didn't have the Federal tax
    credit we wouldn't have the tax credit in Iowa. And we can talk
    all we want theoretically about the distortion of the market
    and all the rest, but I can tell you there are tangible,
    positive effects in my State from both the PTC and the ITC, and
    I am personally glad that we got those extensions on those.
        Thank you, Mr. Chair, and I yield back. Thanks to the
    panel.
        Mr. Olson. The gentleman yields back. The Chair calls upon
    the gentleman who flew combat missions in F-16 Falcons built in
    Fort Worth, Texas, Mr. Kinzinger from Illinois, for 5 minutes.
        Mr. Kinzinger. It wasn't an F-16, but it was still out of
    Texas. Well, thank you, Mr. Chairman, and I want to thank you
    for holding this hearing. Obviously we all recognize we have an
    opportunity for once in a lifetime, maybe in my lifetime, tax
    reform, and especially for energy we have to keep in mind that
    changes can either be a boost or a hindrance and so this is a
    very important hearing to have.
        Mr. Hartman, often the argument is that new technologies
    need support to scale up and become viable commercially and it
    often comes from the tax code. How do we determine when a
    technology has become viable and it no longer needs
    preferential treatment, in your mind?
        Mr. Hartman. Well, first off that sort of gets into the
    infant industry argument. I think that that argument has small
    shreds of validity, but on the whole I disagree with it as an
    argument to support a technology in later stage either pre-
    commercial or early commercial development. I don't find it
    convincing. However, in this context of saying if we are going
    to make tax credits more targeted to scale these resources up,
    typically what we see is that the per unit cost of production
    is very high at low production levels. And then at a certain
    point economies, as you ratchet up production you hit economies
    of scale.
        And there are, you know, economic analyses that can be done
    on various technologies that suggest where economies of scale
    points are for a given technology, and thus if we are committed
    to providing tax credits for infant industries it is better to
    have an objective criteria like that to help phase those out.
        Mr. Kinzinger. OK, so yes, then it is not based just on the
    politics in the moment, I guess, in terms of when and where.
    And how have subsidies for renewables negatively impacted other
    sources like nuclear, for example?
        Mr. Hartman. That question is for me?
        Mr. Kinzinger. Yes.
        Mr. Hartman. I think that is very region specific, even
    subregion specific. So, for example, in Illinois, part of what
    we see is Illinois is a very heavy nuclear State, there is also
    a lot of wind development, and some of those negative pricing
    events are contributing factors on the whole. Now I think that
    sometimes the question of whether a price is negative or it is
    zero or slightly positive is a little bit blown out of
    proportion.
        I think overall when you look at it we are subsidizing a
    technology that when it sets price regardless of where it is
    market prices are below where the competitive levels would be.
    So, for a technology like nuclear, because there are a lot of
    transmission constraints at times where these nuclear plants
    are located, the cost of wind sets the marginal cost, which
    means its price effect is more pronounced in an area like
    Illinois than, say, in an area where you don't have a high
    level of wind production or transmission constraints.
        But overall I would stress that the economics of nuclear,
    especially from independent power producers, is overwhelmingly
    driven by inexpensive natural gas.
        Mr. Kinzinger. And let me ask you too on a bit of a
    different issue. You discuss how a lack of information and
    misaligned incentives can cause consumers to underinvest in
    energy efficiency. Could you elaborate on why that is and some
    potential solutions to encourage continued investment in energy
    efficiency?
        Mr. Hartman. Sure, absolutely. So, from just informational
    asymmetry perspective, one thing I would point out is that a
    lot of times in a whole variety of studies, whether this is
    something like an inefficient furnace consideration or it is,
    you know, retrofitting homes with more energy-efficient
    appliances or insulation, usually your everyday consumer
    doesn't fully understand the net benefits calculation going
    back. And so there is definitely an information shortage that
    can lead to suboptimal investment behavior.
        Most of the economic literature that looks at that suggests
    that there is an underinvestment associated with it. My concern
    with providing tax credits for it is that a lot of those tax
    credits go to support behavior that would have otherwise
    occurred in which there is no actual additional behavioral
    improvement, or in some cases the degree of information
    deficiency is very, you know, person- or household-specific,
    and using a blunt instrument like a tax credit doesn't really
    correct for that deficiency well.
        Mr. Kinzinger. OK. With 40 seconds left I will yield back.
    Thank you.
        Mr. Olson. The gentleman yields back and the Chair wants to
    take the time to correct his previous comments. My colleague
    wanted to fly F-16 Falcons built in Fort Worth, Texas.
        [Laughter.]
        Mr. Olson. The Chair now calls upon a Texas neighbor, Mr.
    Green, for 5 minutes.
        Mr. Green. Thank you, Mr. Chairman and Ranking Member, for
    holding the hearing, and thank our witnesses for being here. If
    you can't tell my accent, I am also from Texas.
        Since the turn of the 20th century, the United States
    Government has recognized the importance of energy-related
    industries in our economy and our national security. It is
    under this rubric that both conservative and liberal
    administrations and Congress has offered energy-related
    industries preferential treatment. As our needs have
    transitioned, so have fields of power generation and fuel
    production. At one time, to start up oil, gas, chemical
    industries required the assistance of the Federal Government
    and I am proud to say that Texas has benefited.
        Now we have new industries that harness the wind, the sun,
    rivers, oceans, and biomass that will help power the next
    generation. By the way, Texas produces more wind power than any
    other State in the country. The truth is, the majority of the
    investment, tax credits, and directed research has benefited
    the United States economy and national security. The U.S.
    economy is the largest and most productive in human history.
    The free market principles upon which it is founded have
    created vast sums of wealth that have never been seen before.
        However, there are gaps in the system. Basic elementary
    research and development is not covered by the free market.
    Initial stages of development are risky and oftentimes not
    subject to immediate commercializations. Private wealth and
    investment are not incentivized to take risks on these new
    industries that haven't been vetted or proved out in some
    capacity. That is the Federal role, the Government's basic job.
    The United States Government has funded new industries that
    have revolutionized our country--hydraulic fracking, alcoholic
    fuels, and nuclear power. These chemical fuel and power sectors
    and many, many more have benefited from the tax policy and
    basic funding and directed research of the U.S. Government.
        Rather than pointing fingers let's look forward and focus
    on where our interests lie and where our money is best spent.
    There are some cases where incumbent technologies where we can
    make a big difference like enhanced oil recovery and carbon
    sequestration and others that may be new, innovative industries
    like energy storage that would benefit with a little help. The
    future of U.S. energy will mix traditional and new power
    generation and fuel production and let's embrace that reality
    and keep the ball moving forward. I have--thank goodness, my
    time didn't get taken up.
        Ms. Dinan, in current and previous testimony the
    Congressional Budget Office stated that the basic research and
    development conducted by the Department of Energy is difficult
    to quantify. Why are the benefits so hard to calculate?
        Dr. Dinan. Well, in general, the reason why kind of the
    economic rationale for funding such basic research is that it
    creates what is called spillover benefits and those benefits
    are very dispersed. So that they could, they are not captured
    by an individual firm in the form of profits, so you might
    create some basic knowledge that is used by various, by a
    multiple, many different industries and they could be, those
    benefits could occur over time.
        So it is hard to follow the threads from the initial
    research to capture all of the benefits that flowed from it. So
    there is a study that people rely on that is fairly old that
    indicates that the benefits from basic research have more than
    paid for themselves, but as I said it is very difficult to
    measure them just by definition of what those benefits are.
        Mr. Green. Well, if the Federal Government has difficulty
    in finding the benefits in basic research, it would seem it
    would be even more so for the private sector because the
    Federal Government has so many more resources and I guess it,
    is the private sector inclined to take risk associated with
    unknown results?
        Dr. Dinan. In general, I think the incentives for the
    private sector to undertake such research gets greater as the
    technology gets closer to the marketplace because they are more
    likely to be able to capture that. So that is why we have said
    in the past that the rationale for government funding of
    research is much greater when it is very early in the
    technology process or at the very basic level precisely because
    firms are less likely to undertake that on their own, but it
    can create benefits for society as a whole.
        Mr. Green. Well, I would probably estimate that we wouldn't
    have developed hydraulic fracking, although there is a lot of
    folks who did that without some of the tax incentives that the
    industry would have been able to use. I am not a big one on
    ethanol because I am from Texas, but we only believe in
    drinking and eating our corn.
        [Laughter.]
        Mr. Green. But my colleague from Iowa is not here, but they
    also helped in the creation of ethanol and the research for
    that. I appreciate your response. My last 13 seconds for the
    panel, this is for everyone on the panel: Why would we have
    decided that tax policy is the best means for advancing policy
    initiatives? Do you want to just go down the----
        Dr. Murphy. Yes, if I understand, I would say it is in that
    I think that tax policy--if the Government needs to spend
    funds, then, yes, they have to have taxes to get them, but that
    they should try to do so without by distorting what would
    otherwise happen in a market outcome as little as possible.
        Mr. Hartman. Correct. And I think we have just seen a lot
    because it is an easier mechanism to implement reform.
        Mr. Aldy. Congressman, I would say that you have an array
    of instruments at your disposal--tax instruments, spending,
    regulation--and you have to be thoughtful and review and
    analyze what is the most cost effective way of delivering on
    your social goals using each of these instruments and
    accounting for the potential interactions between these
    instruments.
        And you may find that tax policy in some cases may be the
    most effective way to deliver on our social goals, but in
    others it may be better through authorizing new activities
    through the Government through spending or through regulatory
    actions.
        Mr. Green. Thank you, Mr. Chairman, for the time.
        Mr. Olson. The time has expired. The Chair calls upon the
    gentleman from the Commonwealth of Virginia, Mr. Griffith, for
    5 minutes.
        Mr. Griffith. Thank you very much, Mr. Chairman. I
    appreciate it greatly. Let me say that yesterday the President
    signed the executive orders related to energy. From my district
    which has lost thousands of jobs in the war on coal, his
    declaration that the war on coal was over and that saved
    thousands of jobs that would be direct and indirect, but he
    said the war on coal is over and I am glad to hear that.
    Unfortunately, in the past many people on the other side of the
    aisle wanted to say there was no war on coal. They would always
    cite the price of natural gas, which is true has been a market
    problem for selling coal, but more important, regulations, et
    cetera, have been a real problem for us.
        And I noted in a political argument on their site yesterday
    related to the President's executive orders that Brian Deese,
    former Obama energy advisor, noted that stock prices for coal-
    related companies are down, underperforming the market by
    several percentage points, which he sees as a sign that the
    U.S. economy's transition to cleaner energy sources is firmly
    enough underway that this administration cannot fundamentally
    change that dynamic. And that, he argued, is partly because of
    the Obama team's efforts not only on the regulatory side, but
    also with respect to research and commercialization, tax
    incentives, and otherwise. I think it is pretty clear there was
    a war on coal when your energy advisor can make those kind of
    comments after the fact.
        Now what we want to try to do is come up with a tax policy
    that makes sense, free market sense, let the market determine
    where we should go. I believe in all of the above. I think
    there have been some great things with wind and solar but we
    have to move forward. Now one of the interesting comments that
    came up earlier--and I understand there was a dust-up when I
    was out meeting with constituents a little bit earlier, a dust-
    up over some of your comments, Dr. Zycher, in regard to backup
    energy being necessary in the case of renewables.
        And I wondered if you wanted to, A, explain what kind of
    backups are necessary in relationship to renewals, would that
    also apply to natural gas in certain times of the year in
    crisis situations? And I understand that the study you were
    relying on, its accuracy was impugned. If you would like to
    respond that I will give you this opportunity.
        Dr. Zycher. Well, I mean, there are two different questions
    there. One, what are the backup requirements for wind and solar
    power? You know, I wrote a book on this issue, or on the
    economics of renewables, about 5 years ago. And my estimate of
    the cost of backup power given the capacity factor, usage, and
    the cycling on it was about $370 per megawatt, and it was
    really quite striking.
        With respect to the pollution effects of renewables
    combined with the need for their backup power that Mr. Clemmer
    and I seem to disagree on, he is referring to a bunch of
    studies that in effect are looking at systems in which the
    market share renewables is really rather low. It is when
    renewables approach ten percent or higher in terms of the
    market share that you start to get this very, very serious
    problem with cycling of the backup units up and down and the
    increased pollution that results from it.
        There is simply no question in the Bentek study of Colorado
    and Texas done about 5 or so years ago and other studies that,
    once renewable market shares reach about 10 percent, depending
    on local conditions, the cycling problem results in an increase
    in the emissions of pollutants, conventional pollutants, and
    greenhouse gases rather than a reduction, which is not what the
    clean-energy proponents would have you believe.
        Mr. Griffith. All right, I appreciate that. I also thought
    it was of some interest because--just something I read about a
    number of years ago that you mentioned, that the Mojave solar
    project had not produced as much power. I would like for you to
    touch on that. But also, if you have any knowledge--at the time
    they were putting that in, there was a real environmental
    concern that they were going to destroy the ecosystem under the
    crust of the desert. And if you have any information on that, I
    would appreciate that, as well.
        Dr. Zycher. Well, there are no more deserts, there are only
    fragile deserts. I don't know what fragile means, but any
    newspaper article, anything that talks about the desert,
    deserts are always described as fragile. The Ivanpah plant was
    supposed to produce roughly a million megawatt hours a year
    starting with its operation about 2 years ago. It has only
    produced about 650,000 megawatts a year. A spokesman attributed
    that--and I am not kidding--to some light conditions that were
    lower than years of studies had suggested to them. That is what
    they claim, which is a little like the argument from Gosplan on
    Soviet agriculture. Seventy years of bad harvest were created
    by 70 years of bad weather. That was essentially their
    argument.
        There actually is, you could argue that there is a
    statistical distribution of sunlight conditions at any given
    site and they just happened to get unlucky that the first
    couple of years they had more clouds than is normally the case.
    But if you wait enough years, everything will revert to the
    mean and so they will produce more power. Another theory, which
    is the one I think is much more likely to be true, is that they
    overestimated sunlight conditions at the site in order to get
    the Section 1705 DOE loan guarantee of 1.6 billion, et cetera,
    et cetera. I don't think that plant is ever going to operate as
    advertised.
        And with respect to your last question, what has happened
    to the ground beneath the heliostats, I don't know the answer
    to that. That I have not seen.
        Mr. Griffith. All right, and I appreciate that. I yield
    back, Mr. Chairman.
        Mr. Olson. The gentleman yields back. The Chair calls upon
    the gentleman from my parents' home State of Vermont, Mr.
    Welch, for 5 minutes.
        Mr. Welch. Thank you very much, Mr. Chairman. I thank all
    of the witnesses. It is a timely hearing given the decision by
    President Trump to roll back the Clean Power Plan. The question
    of tax incentives is all in the eye of the beholder depending
    on where you are from if your industry is given an advantage or
    not, but bottom line, they seem to be a tool that Congress uses
    pretty frequently for better or for worse.
        I think it is no question that tax incentives affect
    behavior, whether the outcome is good or bad is always a
    debate. But my understanding is we have had significant tax
    incentives for oil and gas production for about a hundred years
    and it is a very profitable industry. I do believe, and this is
    a policy question. There is some debate on it in this committee
    that we do have to move to a much lower carbon footprint in our
    economy, and I also happen to believe that the more we double
    down on that effort we can actually create some jobs.
        Dr. Zycher, I will ask you. I probably disagree with most
    of what you say, but I want to ask your opinion as to whether
    or not there are external expenses associated with carbon fuels
    that are not priced into the cost of a gallon of gas.
        Dr. Zycher. If you believe that EPA regulations, as
    promulgated in coordination with the States, have reduced
    emissions or have achieved national ambient air quality
    standards in particular for the six criteria pollutants that
    protect the public health with an adequate margin of safety,
    then in that case emissions of those pollutants have been
    reduced to a level that is efficient in which the marginal cost
    of reducing them----
        Mr. Welch. All right, yes. But----
        Dr. Zycher [continuing]. Equals the marginal benefit of
    doing so. If you don't believe that, fine, then the EPA is
    violating the terms of the Clean Air Act.
        Mr. Welch. Yes. I don't want to spend too much of my time
    on this, but I was in Delhi and you couldn't breathe there, and
    Beijing and you couldn't breathe there, and there is enormous
    health consequences. I mean, do you dispute that?
        Dr. Zycher. Do I dispute that there are serious pollution
    problems overseas? Of course not.
        Mr. Welch. Right. And some of those pollution problems are
    related to the effects of significant carbon emissions.
        Dr. Zycher. Sure. Those pollution problems in China and
    India and, indeed, in Europe are created by policies that do
    not satisfy U.S. standards.
        Mr. Welch. Let me go on, because I only have 2 minutes, but
    thank you very much. I am working with Mr. McKinley who is from
    a coal State, but he and I have an efficiency bill that
    actually with Mr. Barton we had success getting out of the
    House several terms ago. But it would provide a rebate for
    homeowners who demonstrate a 20 percent energy savings, and 40
    percent energy savings would get a $5,000 rebate. That is
    taxpayer money that is going to make a difference for folks.
        Mr. Aldy, do you have any view on that, an approach like
    that?
        Mr. Aldy. Well, I think one important question to ask about
    how using taxpayer monies for something like this is, What is
    going to be the incremental impact of that subsidy? And if we
    think we really are changing people's behavior in a fundamental
    way, we are getting investment in new energy technologies, that
    is fantastic. I will note there are a number of States that
    have programs as well.
        And I think this is why as I noted in my testimony and
    earlier, reviewing the effectiveness of these policies is
    really important and it is that transparency on the efficacy of
    the policy that is really lacking on the tax provisions in
    contrast to how we address----
        Mr. Welch. And I agree with that. I mean any of us who
    supported use of the tax code to achieve a result have to be
    willing to actually calculate what the results are and it can
    be very expensive, oftentimes much more so than direct
    investment. And the other issue that is a debate here is
    regulation because you can overdo it as a regulator and get it
    wrong.
        So I, as a person who thinks that regulation in the right
    circumstances and properly done is an effective tool to get a
    policy outcome, am willing to review those regulations to see
    if it is working. I mean, is regulation a tool that should be
    used to achieve a policy outcome in your view, Mr. Clemmer?
        Mr. Clemmer. Yes, absolutely. I mean that is, you know, as
    Dr. Zycher is talking about with EPA, some of the regulations
    that are in place to reduce SO2 emissions, mercury, that is----
        Mr. Welch. Didn't it really work with SO2? There was not a
    big cost to the taxpayer, it was regulation that worked?
        Mr. Clemmer. It worked at a much lower cost than what
    industry was saying for sure because of----
        Mr. Welch. Or mileage standards where we are not
    micromanaging. It is a challenge obviously, big engineering
    challenge for the car makers. But if it is a level playing
    field where the goal is out there and then they are given the
    freedom to figure out how best to achieve it, that is not
    costing the taxpayer money but it is achieving a policy of
    trying to lower gas emissions by increasing mileage.
        Mr. Hartman, do you want to comment on that? Then I will
    yield back, thank you.
        Mr. Hartman. Sure, so you raised a variety of energy-
    efficiency policies there. And I think most studies on energy-
    efficiency policies are very specific to the set of
    circumstances and that particular policy and what technologies
    we are looking at. Mr. Aldy referred to some State programs,
    and I think State programs have done a much more of a drill-
    down approach to it and I think have revealed that in some
    cases there are positive net benefits. But in some cases,
    especially in cases where it gets tied into a mixture of social
    policy that strays from the original objective function, you
    tend to see cost well above benefits. I think it is very policy
    and situation specific.
        Mr. Welch. All right, thank you. Thank you very much.
        Mr. Olson. The gentleman's time has expired. The Chair
    calls upon the gentleman from Ohio, Mr. Johnson, for 5 minutes.
        Mr. Johnson. Thank you, Mr. Chairman.
        Mr. Hartman, this doesn't directly relate to tax policy,
    but in your testimony you say that to truly level the
    competitive playing field and to enhance market performance
    wholesale electricity market reforms and market enhancing
    reforms at the FERC level must take place. Can you please
    elaborate on what those reforms might be?
        Mr. Hartman. Sure. So I think we can begin with some
    pending rulemakings that are currently on hold while FERC does
    not have a quorum at this point. Generally, you want price
    formation of wholesale electricity markets to fully reflect
    market fundamentals. Now because there is a whole variety of
    very nuanced market failures in electricity systems largely
    stemming from the need to balance supply and demand
    instantaneously amongst some other factors, there is a need for
    the visible hand in terms of the design and the rules of these
    markets to facilitate the invisible hand of markets to go to
    work. And so there is a lot of nuanced rules that we need to
    address. Just to bring up a couple that have been more in the
    spotlight, I would say the price formation initiative at FERC
    is a very good example of a well-intended focus to make sure
    that in this case all short-run marginal costs are incorporated
    into the pricing structure within the regional transmission
    operation systems.
        Mr. Johnson. OK. Well, in your opinion, what should happen
    first, taking a look at wholesale market reforms or addressing
    some of the other issues that impact the energy markets outside
    of FERC jurisdiction like leveling energy-tax preferences and
    regulatory reform?
        Mr. Hartman. I think we could, at the risk of biting too
    much off at the same time, I think we can simultaneously
    address quite a few. In some cases we see regulatory reform
    barriers in licensing, whether that is hydro or some of the
    advanced, you know, modular nuclear reactor designs as well,
    you know that falls under a very different jurisdiction and set
    of actors than we see at FERC. So I think it is possible to
    provide a nudge in all those directions simultaneously.
        Mr. Johnson. Do you have an opinion on which of these are
    most pressing in terms of market distortions and why?
        Mr. Hartman. I think that is a bit challenging to answer
    overall. The things I would actually stress first and foremost
    are that we see public policy support competitive market
    reforms, ones that focus on enhancing market access. So in some
    cases a lot of these electricity systems were designed around
    large, central thermal plant generation and what we are seeing
    with a lot of unconventional technologies becoming more
    economical is that we don't have a system that fully provides
    access on a nondiscriminatory basis to all resources in some of
    these markets.
        And so I think that is a good area to approach while making
    sure we don't cross the road into preferential treatment for
    these resources and instead make sure we focus on enhancing
    competitive market outcomes.
        Mr. Johnson. OK, all right.
        Dr. Zycher, understanding the various factors influencing
    energy markets and predicting how market will respond to tax
    treatments is very complex and difficult process, so how much
    confidence should we have in the ability of the tax code to
    produce a desired outcome?
        Dr. Zycher. Well, certainly in directionally if you
    subsidize something you are going to get more of it and the
    question then becomes how much more and is it worth the cost,
    and that is something that Congress has to decide. The purpose
    of the tax code, and I think others have made this point, is to
    raise revenues while creating, while distorting economic
    activity as little as possible. If Congress wants to subsidize
    activity X it really ought to do it on the spending side of the
    budget not the tax side, at least in principle.
        The narrow answer to your question is it is very difficult
    to estimate in advance how much a given tax provision will
    affect the level of a given economic activity. We can get
    testimony about it, we can experiment, we can see what
    experience provides, but Congress really has to operate in some
    degree in the dark when it estimates how much a tax provision
    will affect the activity that it is trying to encourage.
        Mr. Johnson. OK. Dr. Murphy, where are the greatest
    inefficiencies in our energy markets? Is there anything that we
    have not talked about here this morning that you would like to
    highlight?
        Dr. Murphy. Well, I think that we have discussed in general
    all of these aspects, but in particular, yes, I would just say
    that I would caution policymakers regarding things like the
    social cost of carbon that even stipulating the physical and
    science and chemistry and so on, it is not an obvious exercise
    to go from that to this is the dollar figure that we should
    then implement in the policy.
        So just to motivate it, you asked a hundred physicists how
    hot is the surface of the sun they are all going to give you an
    answer that is pretty close. You ask a hundred economists what
    is the social cost of carbon, the answer is going to be all
    over the place.
        Mr. Johnson. Well, in terms of the temperature of the sun,
    as long as you are close it is not going to matter that much,
    right?
        Dr. Murphy. Right, right.
        Mr. Johnson. OK, all right. Thanks a lot. Mr. Chairman, I
    yield back.
        Mr. Olson. The gentleman's time has expired. The Chair
    calls upon the acting ranking member of the subcommittee, Mr.
    Sarbanes, for 5 minutes.
        Mr. Sarbanes. Thank you, Mr. Chairman. I want to thank the
    panel. Mr. Aldy, I want to thank you for your testimony today.
    In your view, have fossil fuel tax subsidies undergone the kind
    of rigorous scrutiny here in Congress that you think makes
    sense when you think about the taxpayers' investment on our
    energy policy or could we do better on that?
        Mr. Aldy. I think we could go a lot better on that. I think
    the fact that they are permanent makes it very difficult to
    motivate that kind of analysis to get people who have the
    knowledge and the analytic tools to bring to bear to assess
    what impacts they have. When we look at what has been done in
    terms of academic research, we find that those subsidies are
    for the most part transferring taxpayer monies to these oil and
    gas companies and to some extent coal companies with very
    little impact on their production.
        Mr. Sarbanes. Well, I agree with you. And I have a theory
    about it, so let me talk for a moment about why I think
    Congress has not done the kind of heavy lifting on scrutinizing
    these subsidies that I think it should do. Last election cycle
    the oil and gas industry alone pumped over a hundred million
    dollars into Washington, and that wasn't to build a refinery
    down the street. That went into spending on campaign
    contributions and lobbying here in DC, and it was done, I
    think, primarily to protect their special interests.
        Now I know we don't have any lobbyists here. Everyone here
    is an intern, I think, in the audience. But this is a problem.
    And Dr. Zycher, you talked about the, quote, ideological and
    budget maximization incentives of the bureaucracy. I confess I
    am not exactly sure what you were talking about, but it was
    elegant phrasing so I wanted to borrow it a little bit and talk
    about the ideological and profit maximization incentives of the
    oil and gas industry.
        The industry has a huge incentive to pour money into
    campaign contributions and lobbying and put an army of people
    up here on Capitol Hill, but it is a very smart investment. I
    don't blame the industry for doing this. There is a 2014 study
    out there that estimates that for every $1 that the fossil fuel
    industry invested in campaign contributions and lobbying, it
    got $59 back when you look at the subsidies that they benefit
    from here in Washington. That is a 5800 percent return, so it
    would be crazy for the industry not to invest those kinds of
    dollars up here in Washington.
        But the fossil fuel industry has not just bought its way
    into a permanent subsidy from the American people, they have
    bought a whole new discipline over the last few decades of fake
    science practiced by politicians who deny climate change. The
    studies show 97 percent of climate scientists agree that
    climate change is a real threat to the planet; that fossil fuel
    pollution is a root cause. Eighty percent of Americans want
    Congress to do something about this.
        But we saw what the Trump administration did yesterday and
    we have seen an inability here in Washington to address the
    issue of climate change and today we are talking about
    continuing these permanent subsidies to the fossil fuel
    industry using American taxpayer money. Mr. Aldy, do you think
    it makes sense for all the current oil and gas industry
    subsidies that we have currently in the tax code to be made
    permanent?
        Mr. Aldy. No.
        Mr. Sarbanes. No. We talk about energy independence, but we
    need to start talking about how Congress can free itself of
    dependence on oil industry campaign contributions that have
    distorted our energy policy for decades. We keep talking about
    distortion. That word has been used a lot today in relationship
    to the tax code and whether it distorts or doesn't distort, how
    we make policy in this country, the judgment and decisions we
    make. But the huge sums of money that pour into our campaign
    system from special interest have probably more of a distorting
    impact on making good public policy than just about anything
    else.
        Now that is our issue. That is our problem here. We have to
    fix that. We need to build a whole new way of funding campaigns
    in this country that can free us of the need to turn to special
    interest. We have got to do it. But if we do that I have
    absolute confidence that we will have better public policy not
    just with respect to energy, but with respect to just about
    everything else. So this is task we have to face. And if we can
    do it I think we can have smart, thoughtful energy policy for
    this country that puts the interests of the American people
    first. And with that I would yield back.
        Mr. Olson. The gentleman's time has expired. The Chair
    saved the best for last. I recognize Mr. Walberg for 5 minutes,
    from Michigan.
        Mr. Walberg. I certainly appreciate the chairman's expose
    of the best for last, but I think, frankly, I am the most
    junior member. It is good to be here, though. And we will go
    back on to the energy issue. Mr. Zycher, one issue that has
    been continuously brought to my attention within the tax policy
    and tax reform debate in this area of energy is the importance
    of a deductibility of interest expense. Could you please
    provide some insights on why this is so important to regulated
    electric and gas companies?
        Dr. Zycher. Yes. The issue of expensing of capital
    investments, and therefore to be consistent the elimination of
    the deductibility of interest expense on the financing for
    those capital investments, makes a lot of sense everywhere
    except the regulated utility sector, primarily because
    regulated ratemaking as accrued generalization uses each year's
    accounting costs to determine rates that generate a fair and
    reasonable return.
        And so, if a given utility invests in a capital asset, a
    new generator--pick whatever capital asset you want--and
    expenses it, then rates in that year will be driven down under
    what the green eyeshade accounting types call a normalization
    process, and then the subsequent year it will be driven back
    up. So, because of the nature of regulated ratemaking, the
    substitution of expensing in place of the deductibility of
    interest would create a lot of instability in regulated rates
    for consumers.
        And I think that if Congress in its efforts to adopt a tax
    reform decides to allow the expensing of capital investments
    and therefore the elimination of the deduction of interest
    expense, I think that there needs to be some sort of provision
    made for the unique circumstances affecting regulated utilities
    and the ratemaking process.
        Mr. Walberg. OK. Mr. Murphy, what components, I guess
    continuing on from that what components of the tax code work
    best for electric and gas companies and their customers, which
    is important?
        Dr. Murphy. Well, sure. So yes, just to follow on, I think
    I am coming from a slightly different angle. My position on
    this matter, so yes, economists they are concerned that right
    now the income tax, corporate income tax, by allowing the
    deductibility of interest payments of a company raises money by
    issuing bonds then they can write that expense off, but not if
    they issue stock.
        And so my point is simply, though, if you got rid of that
    deductibility but kept it as an income tax, then that means the
    companies that have a lower net income are getting taxed at a
    higher rate if they happen to have, be capital-intensive. So
    yes, it is things like utilities that are very capital-
    intensive what seems to be an arcane manner of tax policy could
    have a huge impact.
        And as Dr. Zycher was saying, it might get passed on more
    to consumers because of the way that their prices are set,
    their ratemaking, and it will show their costs. So I would just
    caution that if there is going to be tax reform but it is still
    going to be an income tax to make sure a company is being taxed
    on its genuine income.
        Mr. Walberg. OK. Mr. Zycher, if utilities are unable to
    deduct interest costs for infrastructure projects they will
    ultimately pass these costs along to consumers, they indicate,
    resulting in higher costs for American families. Do you believe
    that this rise in electricity prices will have a
    disproportionate impact on lower income customers and small
    businesses? And finally, will this rising cost hurt the global
    competitiveness of energy-intensive industries like American
    steel and manufacturing?
        Dr. Zycher. Well, with respect to lower income individuals
    and families that depends on the, what an economist would call
    the income elasticity of demand for electricity and whether or
    not electricity demands rise less, equal to, or more than
    proportionate with income and that is not clear. But certainly
    in the narrow context of those in lower income classes it would
    be a burden. That is certainly true.
        In terms of driving up power prices that would affect
    competitiveness in international goods markets adversely, that
    is certainly true as well. I think the major problem is what I
    mentioned before, the creation of instability in regulated
    ratemaking over time because of a substitution of expensing in
    place of the deductibility of interest over time. And I think
    Congress needs to be very careful about that.
        Mr. Walberg. OK, thank you. I yield back.
        Mr. Olson. The gentleman's time has expired. The Chair
    wants to announce that the first round of questions is over, it
    is time for Round 2. I am just kidding. Seeing that there are
    no further members wishing to ask questions of the first panel,
    I would like to thank all of our witnesses again for being here
    today. Before we conclude----
        Mr. Sarbanes. Mr. Chairman, just ask unanimous consent to
    introduce these documents into the record: a statement from the
    American Institute of Architects; comments from Doug Koplow,
    president of Earth Track, Inc.; written testimony from U.S.
    Wind, Inc.; a statement from Lake Erie Energy Development
    Corporation; and a statement by the Biomass Thermal Energy
    Council.
        Mr. Olson. Without objection, so ordered.
        In addition to those statements I would like to introduce a
    statement for the record from the American Public Power
    Association; and Matthew Godlewski, the president of the
    Natural Gas Vehicles for America. And we got the one from the
    Architects and Earth Track, correct, and Biomass? We are all
    covered. Without objection, so ordered.
        [The information appears at the conclusion of the hearing.]
        Mr. Olson. And pursuant to committee rules, I remind
    Members that they have 10 business days to submit additional
    questions for the record, and ask the witnesses to submit their
    response within 10 business days upon receipt of the questions.
    Without objection, the subcommittee is adjourned.
        [Whereupon, at 12:58 p.m., the subcommittee was adjourned.]
        [Material submitted for inclusion in the record follows:]

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