[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



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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:]
    
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  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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