[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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26-902 PDF WASHINGTON : 2017
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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:]
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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:]
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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:]
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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:]
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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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