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The Agenda

NRO’s domestic-policy blog, by Reihan Salam.

President Obama on Taxing the Energy Sector



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Andrew Restuccia of The Hill reports the following:

“The tax code currently subsidizes oil and gas production through tax expenditures that provide preferences for these industries over others,” the plan says. “The Framework would repeal tax preferences available for fossil fuels.”

Among other things, the plan would repeal the expensing of intangible drilling costs and percentage depletion for oil and natural gas wells.

Robert Bryce, author of Power Hungry, has a different take on intangible drilling costs (IDC):

Various studies—including one done in 2009 by Tudor, Pickering, Holt & Co., a Houston-based, energy-focused investment bank—predict that eliminating the deduction for intangible drilling costs could increase natural gas prices by 50 cents per thousand cubic feet. Their reasoning is simple: As the industry sees its costs increased and cash flow reduced, it will drill fewer wells and recover less gas. Given that the U.S. burns about 23 trillion cubic feet of gas per year, simple arithmetic shows that eliminating the deduction could mean an increased cost to consumers of $11.5 billion per year in the form of higher natural gas prices.

Changing the tax rules could also slow the surprising resurgence of the U.S. oil industry. After decades of declining production, domestic drillers are increasing their oil output because they are tapping shale deposits with the same new techniques that have helped increase gas production. The result: Domestic oil output could jump by as much as one million barrels per day by 2015, according to the analytics firm Bentek Energy.

To return to Restuccia for a moment, the Obama administration seems to object to providing a preference for the oil and gas industry over others. But it doesn’t object to subsidizing existing wind and solar power technologies:

Obama’s tax framework also calls for making permanent the production tax credit for renewable energy, which is set to expire at the end of the year.

The move would “provide a strong, consistent incentive to encourage investments in renewable energy technologies like wind and solar,” according to the plan.

The renewable energy industry says an extension of the production tax credit, which provides a credit for each kilowatt-hour of electricity that is produced, is essential for wind and solar power to flourish.

Does this policy make sense? At The American, Ted Nordhaus and Michael Shellenberger argue that it does not:

Federal subsidies for shale gas came to an end, and so should federal wind and solar subsidies, at least as blanket subsidies for all solar and wind technologies. In many prime locations, where there is good wind, proximity to transmission, state renewable energy purchase mandates, and multiple state and federal subsidies, wind development is now highly profitable.

If federal investments in wind and solar are really like those in unconventional gas, then we ought to set a date certain when blanket subsidies for wind and solar energy come to an end. Imposing a phase-out of production subsidies would encourage sustained innovations and absolute cost declines. We might want to extend continuing support for some newer classes of wind and solar technologies, those that are innovating new technological methods to generate energy, or those that are specifically designed to perform better in lower wind or marginal solar locations. But in the ’80s and ’90s we did not provide a tax credit to all gas wells, only those using new technologies to recover gas from new geologic formations—and we should not continue to provide subsidies to wind and solar technologies that are already proven and increasingly widely deployed with no end in sight.

There is a potential compromise, which was advanced early last year by Jeffrey Leonard:

If President Obama wants to set us on a path to a sustainable energy future—and a green one, too—he should propose a very simple solution to the current mess: eliminate all energy subsidies. Yes, eliminate them all—for oil, coal, gas, nuclear, ethanol, even for wind and solar. It will be better for national security, the balance of payments, the budget deficit, and even, believe it or not, the environment. Indeed, because wind, solar, and other green energy sources get only the tiniest sliver of the overall subsidy pie, they’ll have a competitive advantage in the long term if all subsidies, including the huge ones for fossil fuels, are eliminated. And with anti-pork Tea Partiers loose in Washington and deficit cutting in the air, it’s not as politically inconceivable as you might think.

This could be a political winner for the president. But one gets the impression that the Obama administration is far too keen on subsidizing the renewable energy sector to embrace this approach. And given that I think the expensing of IDC is good policy, it’s not obvious to me that conservatives should try to outflank the president by embracing Leonard’s position. 



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