In spite of the popularity of the idea of market-driven innovation, one of the most effective tools the United States has in its arsenal to spur growth of a given sector is the tax credit or subsidy.
The energy sector is no exception. The Obama administration’s 2011 budget proposal includes a number of provisions involving taxes and credits that are designed to increase manufacturing of renewable energy technology, reduce some heavy benefits currently awarded to oil, gas and coal industries, and create much needed jobs.
In a House Ways and Means Committee hearing Wednesday, the battle lines over those proposed changes were clear: Those to the right of the Congressional aisle insist that government should not be in the business of “picking winners and losers” on the path toward the nation’s energy future, meaning that the status quo domination of coal, oil and gas would continue. Those to the left tended to aim their tax incentive ammunition toward clean energy in the hopes that a government boost would help the country catch up to China, a country currently pulling away in the race toward a low-carbon economy.
“As much as we’re doing, it seems to me we need to take a quantum leap forward … to be able to compete with the Chinese and others that are making enormous national investments in this area,” said Rep. Chris Van Hollen (D-Md.).
Rolling Back Fossil Fuel Credits
Michael Mundaca, the Treasury Department’s assistant secretary for tax policy, laid out some of the energy tax incentives in the president’s budget proposal for the committee, starting with repealing existing policies that in effect already pick winners: credits and deductions for coal, oil and gas.
“These tax subsidies are not designed to correct an existing distortion or market failure and therefore lead to an over-allocation of investment resources to these industries and an under-allocation to others,” Mundaca said.
Among the proposed rollbacks of those fossil fuel handouts are an enhanced oil recovery credit, a credit for oil and gas from marginal wells, and a rule that allows companies to deduct up to 25 percent of income from some oil and gas wells. Repeal of that last deduction alone would raise $10 billion through the 2020 fiscal year, he said.
Similar credits and deductions exist for the coal industry, and the 2011 budget proposal would cut many of those as well. For example, repealing a rule allowing 10 percent of income from a coal deposit to be deducted would raise more than $1 billion through 2020.
The goal of removing these special interest bonuses would be to effectively even the playing field for other sources of energy, Mundaca said.
Republicans at the hearing disagreed with that approach. They insisted that by repealing tax incentives for these industries, the economy would suffer.
“It won’t just be the direct jobs in the oil and gas industry, and there are tens of thousands of those, but it will be the indirect effect on energy intensive industries that employ hundreds of thousands of Americans,” said Republican Dave Camp of Michigan.
“I think I see a problem with taxing what 85 percent of America needs to grow our economy in this way,” he said, citing Energy Information Administration data showing that 85 percent of the energy demand in the U.S. was supplied by fossil fuels in 2008.
T. Boone Pickens, the chairman of BP Capital and an energy entrepreneur, also testified before the committee and clearly advocated that the government pick a winner from that fossil fuels menu: natural gas.
Pickens’ energy plan, which currently takes the form of the NAT GAS Act in the House, would provide tax incentives to develop natural gas production and to transition toward the use of the cleaner fossil fuel in vehicles, helping with Pickens’ main goal of moving away from huge investments in foreign oil.
“When do we stop investing in OPEC and start investing in America?” he asked the committee. “The only way we can solve the OPEC oil threat is by replacing their expensive dirty fuel with cleaner, cheaper natural gas.”
“Let the free markets work, they say,” Pickens said. “If you think OPEC is a free market, you’re a sap.”
Biofuels and Renewables Manufacturing
The 2011 budget also proposes extending a number of other tax laws, including a $1 per gallon credit for the production of biodiesel and a $0.45 per gallon credit for ethanol. The former was allowed to expire at the end of 2009, while the ethanol credit is set to expire at the end of this year.
There is little question that the ethanol credit is a clear example of the government “picking a winner” in the biofuels realm, and many environmentalists have since come out against the credit amid evidence of rising food prices and little greenhouse gas reduction.
Jeffrey Sachs, director of the Earth Institute at Columbia University, told the committee that while alternative fuels should be pursued, the first generation biofuels, largely corn-based ethanol, were “a disaster” because of the shifting of farmland from food to fuel.
The government also picked winners with last year’s Recovery Act, which provided $2.3 billion in tax credits for manufacturing facilities of clean energy such as wind turbines and solar panels.
Mundaca said that the Treasury Department and Department of Energy had no problem finding 183 projects to fund with that money, but the cap on funding resulted in two-thirds of the worthy projects being left behind. The president’s new budget proposal would add $5 billion more to that pool, and the existing pipeline of technically feasible projects that were previously rejected could provide a quick economic and jobs boost.
Not everyone likes the idea of extending a $5 billion line of tax credit to the renewables industry, though.
“I support having a cleaner, greener, more energy efficient economy, but it ought to be market driven, not government directed,” said Rep. Sam Johnson (R-Texas).
When Did We Not Pick Winners?
The idea that the government should not choose — and generally has not chosen — one energy source over another is misleading at best. Oil and gas tax breaks started back in 1916, and coal received subsidies in 1932.
“The United States has been in the business of picking winners and losers starting with the transcontinental railroads," said Rep. Earl Blumenaur (D-Ore.). "And it looks like our effort at betting on a green economy is paying some dividends right now in terms of diversity of energy supply and creating jobs."
The message of the 2011 budget proposal does seem to betray the Obama administration’s choice of winners, in that the money would move generally from the fossil fuel industry toward renewables.
Joseph Romm, a senior fellow at the Center for American Progress and former assistant secretary of the DOE in the Clinton administration, insisted such choices are crucial.
“The trick is not to pick winners and losers, the trick is just to pick the winners,” he said. “And we know what the winners are: The winners are the technologies that give us clean air and clean water, and that get us off of oil.
"At some point, governing is about making choices. And I think we want to choose clean air, and clean water, and clean energy jobs.”