The
Department of Energy's Energy Information Administration predicts
that, if energy production continues to grow at a rate comparable
to that of the last decade, the growth in energy demand will
increasingly outpace U.S. production within the next 20 years. Such
an imbalance would threaten America's economy, national security,
and standard of living. More than a year ago, President George W.
Bush released a comprehensive energy plan to correct the imbalance
of supply and demand. Since then, the House and
Senate have passed their respective, and different, versions of
energy legislation. As they meet in conference
to reconcile the substantive differences between the two bills, it
will be critical that Members of Congress promote free-market
policies that will enhance--not suppress--energy supplies. Any
compromise that fails to do so should be soundly rejected.
Responsible energy policy must be
balanced, fuel-neutral, and market-based. Regrettably, a number of
provisions in the energy bills as currently written would interfere
with free-market principles, discourage competition, and raise the
cost of energy for the nation's families and businesses. Major
provisions that are inconsistent with promoting a balanced,
fuel-neutral, and market-based national energy policy include a
mandatory renewable energy portfolio standard (RPS), a government
subsidy for ethanol, energy-suppressing climate-change titles, and
the expansion of the role of government in the electricity
marketplace. To fulfill their
responsibility to the nation, taxpayers, and consumers, the
conferees should strike these measurers from the final bill. In
addition, they should authorize a critical energy-producing
provision, allowing oil and gas exploration in the Section 1002
area of the Arctic National Wildlife Refuge.
An Irresponsible and Inefficient
Renewable-Energy Mandate
Since 1978, the U.S. Department of Energy
has spent over $11 billion of taxpayer money on research and
development of renewable energy. In addition to these
subsidies, renewable-energy sources receive generous taxpayer
subsides through tax credits and incentives. These subsidies
represented over $1 billion in federal government outlays in fiscal
year 1999 alone. Yet, despite two decades of
billion-dollar taxpayer subsidies, renewable energy accounted for
only about 9 percent of total U.S. electricity generation in the
year 2000. That percentage is
substantially lower (just 2 percent) if only favored renewables
(solar, wind, geothermal, and biomass) are represented for 2000. These
particular non-hydroelectric renewable energy sources are projected
to increase to no more than 3 percent of total generation and
electricity sales in 2020. In fact, it is estimated
that renewable fuels, including hydroelectric sources, will remain
minor contributors to the nation's electricity supply throughout
the next 18 years, increasing from 367 billion kilowatt hours of
generation in 2000 to only 464 billion in 2020. Renewable energy sources
have failed and will continue to fail to capture a significant
market share because they are not cost-efficient. The costs of
generating electricity from renewable sources generally exceed the
cost of generating electricity from traditional sources such as
coal and natural gas, and hydropower. For example, on a
tax-equalization basis, today's natural gas technology can produce
electricity at half the cost (or less) and with more flexibility
and reliability than power generated from well-sited wind farms. The
competitive gap between solar and natural gas is even greater, with
the cost of solar power being triple, or more, the cost of
well-sited wind.
In
addition to being more costly on a per-unit basis, wind and solar
power have low capacity factors and are site-constrained and
intermittent. To compensate for the
unreliability of these renewables, back-up capacity is needed,
adding to the cost of production.
Another significant cost factor is
transmission. The cost of transmission access is often not included
in the levelized cost of energy from wind
and other renewable sources because these costs are site-specific
and hard to estimate. The cost of transmitting
electricity produced by renewable energy, however, is often higher
than that of transmitting electricity generated from fossil fuel
because the best renewable energy sites are far from urban areas. The
expense of installing dedicated lines to a single wind farm, for
example, can be very high and can increase the effective cost of
the installed plants by as much as 50 percent.
Notwithstanding this dismal record of
market penetration and high costs, the U.S. Senate recently voted
to require retail electricity suppliers (utilities, excluding
municipal and rural electric cooperatives) to obtain a specified
portion of their power production from new renewable energy
resources. The minimum percentage, or
standard, would start at 1 percent in 2005 and increase about 1.2
percent every two years until it reaches 10 percent in 2020. This
one-size-fits-all mandate, referred to as a renewable energy
portfolio standard (RPS), applies regardless of market demand.
Electricity suppliers can meet this RPS in
any one of the following ways:
- Produce
the specified minimum with high-cost eligible renewables (solar,
wind, biomass, geothermal, and incremental hydropower);
- Purchase "tradable credits" from
entities that produced electricity from eligible renewable energy
sources and are willing to sell the credits; or
- Buy
credits from the Department of Energy (which does not produce
energy) at 1.5 cents per kilowatt-hour (kWh).
Regardless of the way they choose to meet
this mandate, electricity suppliers will pass the costs on to
consumers in the form of a new "tax"--higher monthly electric
bills. Taxpayers will effectively be forced to pay twice for the
electricity they use: once as a government subsidy to favored
renewable energy sources and, again, in the form of higher monthly
electric bills. In fact, the Energy Information Administration, the
independent statistical and analytical agency within the U.S.
Department of Energy, estimates that in 2020 the RPS proposal will
cost about $12 billion a year.
While consumers would be paying higher
utility bills, developers could be enriching themselves with
lucrative tax shelter schemes. As Senator Jon Kyl (R-AZ) noted
during floor debate on this mandate, "[It] will favor the few to
the cost of the many." For example, developers can
escape corporate income taxes by "writing off" their entire capital
cost quickly under a five-year double declining balance
accelerated-depreciation taxpayer-funded subsidy.
Similarly, certain developers currently
receive preferential tax treatment with the federal production tax
credit (PTC). Under this scheme, developers are given $0.017
(adjusted for inflation) for each kWh of electricity produced
during the first 10 years of a project's operation for new
facilities (wind and closed-loop biomass) placed in service by
December 31, 2001. (H.R. 4 extends this
government subsidy for another five years to December 31,
2006.)
Some
of the most ardent proponents of an RPS mandate, however, are
delaying the construction of a wind farm in their own back yard,
claiming that a two-year study by the National Academy of Sciences
is needed before the Nantucket Sound project can go forward. Senator
Edward Kennedy (D-MA), whose family estate would be within view of
the wind turbines, added an amendment to the Senate-passed version
of the energy bill requiring this study. Senator John Kerry (D-MA)
supported the amendment contending, "The issues are not clarified,
and it's important for local communities to be assured something is
not going to be jammed at them." Yet, these same senators
saddled the states with a mandatory renewable energy standard and
opposed amendments that would have given the states more
flexibility regarding renewable energy programs for their
citizens.
A
"who's-who" list of environmental organizations is also fighting
the Nantucket Sound wind farm. Ironically, groups such as
the International Wildlife Coalition, the Humane Society, and the
Ocean Conservancy (which have chosen wind energy as a pet cause) are
fighting against this project alongside the elites who flock to
spend their summers in such resorts as Martha's Vineyard and
Hyannis Port. Clearly, there is a double
standard in play with regard to the Nantucket Sound wind farm
project.
While the nation's economy depends upon
reliable, affordable supplies of energy, research has indicated
that "[Renewables such as solar, wind, and biomass] cannot be
counted on to provide the timely, reliable, inexpensive electricity
resources the U.S. needs." Given these
practicalities--as well as the federal government's dismal record
in choosing fuel "winners and losers"--the conference committee
should strike this mandate from the bill.
Climate Change Titles Inconsistent with
Economic and Energy Security
The
consequences of climate change policies are too important and
far-reaching to be based on distorted representations of the
current state of knowledge in either climate science or
climate-prediction ability. Much more systematic
research is needed to reduce current uncertainties in
climate-change science. Yet, regrettably, despite
the significant gaps in the current scientific knowledge of climate
change, some Members of Congress are treating this issue as if all
of the relevant facts are known. Specifically, the Senate version
of H.R. 4 calls for bureaucratic measures that would drastically
reduce carbon emissions, harm the already weak economy, and raise
the cost of energy for consumers. Given the adverse impact these
provisions would have on the nation, and in light of the scientific
uncertainties surrounding climate change, the conference committee
should strip Titles X, XI, and XIII from the bill. National energy
policy should be based on sound scientific evidence, not the
alarmist rhetoric reflected in these titles.
- Title X:
National Climate Change Policy
The Sense of Congress provisions included
in the Senate-passed bill are not supported by scientific facts.
For example, the "findings" in Section 1001 claim that the
Intergovernmental Panel on Climate Change (IPCC) has "new and
stronger evidence that most of the warming observed over the last
50 years is attributable to human activities" and that "the earth's
average temperature can be expected to rise between 2.5 and 10.4
degrees Fahrenheit in this century." The higher prediction is
not based on new evidence or information of the relationship
between greenhouse gases and climate change but on unwarranted
assumptions regarding future population growth, economic growth,
and the use of fossil fuels and sulfate aerosols.
Nor does this section's reference to the
National Academy of Science's (NAS) conclusions about the IPCC's
findings provide a rationale for government action to reduce
greenhouse gases. In fact, Dr. Richard S.
Lindzen, one of the 11 scientists who prepared the NAS report,
noted that the report makes clear, "There is no consensus,
unanimous or otherwise, about long-term climate trends and what
causes them." He further stated, "The NAS
panel essentially concluded that the IPCC's Summary for
Policymakers does not provide suitable guidance for the U.S.
government."
In addition to embracing a series of
unbalanced and misleading findings, Title X calls for the United
States to participate in international negotiations for a new,
binding climate change treaty. This provision would replace the
Byrd-Hagel Resolution that is currently the congressional stance on
such an agreement. Given the myriad
uncertainties within climate science, this principled position
should not be changed. In fact, the United States should reject any
accord that would suppress energy use and, hence, economic
growth.
Title X also mandates the Bush
Administration to develop a National Climate Change Strategy, based
on specific criteria delineated in the bill, and to submit a report
on the plan to Congress within one year. It dictates that the
Administration's strategy must incorporate "four key elements," one
of which calls for "interim emission mitigation levels" and
"specific mitigation approaches" to stabilize greenhouse gas
concentrations, making this plan more stringent than even the
"fatally flawed" Kyoto Protocol. In fact, this provision
could necessitate immediate actions to reduce greenhouse gas
emissions, resulting in severe economic consequences associated
with such reductions. American consumers deserve
a more responsible policy than a disguised forced carbon-reduction
mechanism that will increase the cost of energy.
Other measures in this title create
various new climate offices and direct the NAS to assess the
adequacy of the Administration's strategy and to report its
findings and recommendations to Congress within a prescribed time
period. The federal government already funds multiple
climate-change science activities including: the U.S. Climate
Change Research Initiative (CCRI), established by President George
W. Bush "to study areas of uncertainty and identify priority areas
where investments can make a difference"; a high-level Committee on
Climate Change Science and Technology Integration (CCCSTI), also
created by President Bush and representing 14 federal agencies, to provide
the President with recommendations on climate science and
technology as well as funding and programs; the National Science and
Technology Council (NSTC) that coordinates research pursuant to the
Global Change Research Act of 1990; and the newly established
Joint Climate Change Science Program Office to review all programs
that contribute to climate-change science. This is only a partial list
of government entities addressing climate science. Congress
should be streamlining climate change programs for optimum
efficiency rather than adding layers to an already complex and
fragmented federal bureaucracy.
The goal of Title X is more than merely
the "stabilization of greenhouse gas concentrations," as posited.
Rather than mandating capping greenhouse gas emissions at current
levels, it would require dramatic reductions in the current level
of the nation's greenhouse gas emissions. An energy-suppressing
provision such as this will impede, not enhance, energy security:
It has no place in responsible energy policy and should be stricken
from any bill sent to the President.
- Title XI:
National Greenhouse Gas Database
Although it is purported to be merely a
voluntary greenhouse gas (GHG) emissions reporting measure, Title
XI of the Senate-passed version of H.R. 4 is nothing short of a
domestic form of the Kyoto Protocol. The conferees should soundly
reject this title.
This provision would force energy-using
entities to submit to the Department of Energy and the
Environmental Protection Agency annual reports documenting their
"direct"
and "indirect" GHG emissions or face fines
of up to $25,000 per day. Although participation in this reporting
registry is initially voluntary, if the registry represents less
than 60 percent of the all of the nation's GHG emissions after a
five-year period, reporting would become mandatory.
Proponents of this provision claim that
widespread participation by the utility and auto industries, along
with some industrial participation, would easily achieve the
requisite reporting levels. However there are many who
doubt this assumption and believe reaching the required level of
reporting would necessitate widespread industrial and manufacturing
reporting and the participation of commercial operations ranging
from offices and apartment buildings to hospitals. Many small
entities such as homeowners and commercial facilities most likely
would not report their GHG emissions, thereby triggering the
mandatory reporting scheme.
A mandatory registry would create
regulatory uncertainty by raising the possibility that carbon
dioxide emissions could be regulated in the future. Such
uncertainty could cause many major capital investments in the
energy sector to be withdrawn, resulting in setbacks in rebuilding
of the nation's energy infrastructure.
A mandatory registry would also impose
burdensome reporting requirements on businesses that would, in
turn, pass on the additional costs of measuring, recording, and
reporting emissions to consumers through higher prices for energy,
manufactured goods, and services.
To say the least, this provision is
redundant. Established under section 1605(b) of the 1992 Energy
Policy Act (P.L. 102-486), the U.S. Department of Energy's Energy
Information Administration (EIA) already manages the Voluntary
Reporting of Greenhouse Gases program. EIA's Voluntary Reporting of
Greenhouse Gases 2000 contains reports from 222 corporations,
associations, and individuals. Of these, about half are
"entity" (corporate-wide) reports, in addition to 1,882
project-level greenhouse gas and sequestration reports. On
February 14, 2002, President Bush directed the Secretary of Energy,
in consultation with other department and agency heads, to propose
improvements in this program. This process will culminate in new
guidelines by January 2003 (for reporting 2003 data). Given that
an emissions program already exists and that, at the direction of
the President, it is being improved, the arbitrary and costly
congressionally-mandated reporting requirement in Title XI should
be stricken from the bill.
- Title XIII:
Climate Change Science and
Technology
Title XIII of the Senate-passed version of
H.R. 4 authorizes spending billions of additional taxpayer dollars
throughout the next decade for a plethora of climate-related
research and development activities. To name only a few, the
Senate-passed version of this bill authorizes $755 million for
fiscal years 2002-2006 for DOE climate change research programs,
including climate modeling, carbon cycle research, and ecological
processes research; $240 million during the same years for
Department of Agriculture carbon sequestration research; $900
million over nine years for an international energy technology
deployment program; and nearly $1.4 billion over four years for
coastal ocean observation systems.
Furthermore, in June 2001, President Bush
announced the establishment of the U.S. Climate Change Research
Initiative (CCRI) to "study areas of uncertainty and identify
priority areas where investments can make a difference" in
climate-change science and technology. The President's fiscal year
2003 budget requests $40 million for this initiative alone. In
addition to this funding, the President requested $1.7 billion for
the U.S. Global Change Research Program (USGCRP) for fiscal year
2003.
These represent only two of the many climate change programs funded
by the federal government.
Throughout the past 10 years, the United
States has invested some $45 billion in funding research on climate
change.
Scientific facts gathered over the past decade do not support the
notion of catastrophic human-made warming as a basis for drastic
carbon dioxide emission cuts. In fact, the best available
scientific evidence shows that, without the drastic reductions in
greenhouse gas emissions called for under the Kyoto Treaty,
globally averaged temperatures will rise by only about one degree
Centigrade by the year 2050. Implementing the Kyoto
emissions reductions would result in just a slightly (but
insignificantly) lower temperature trend. The difference between the
trends with and without mandated emissions reductions is merely
six-hundredths of a degree. In other words, the
temperature rise expected to occur by 2050 (one degree Centigrade)
is projected to occur by 2053 even if emission cuts are enacted. Simply
put, the amount of warming likely to occur over the next several
decades will be trivial, if not beneficial, and it would not be
significantly reduced by mandated emissions reductions.
As Danish statistician, Bjorn Lomborg has
pointed out, "We should not spend vast amounts of money to cut a
tiny slice of the global temperature increase when this constitutes
a poor use of resources and when we could probably use these funds
far more effectively in the developing world." He continues, "Resources
squandered to solve what the best science says is a small effect
that may appear in the distant future has the certainty of
increasing human suffering and environmental harm in the near
present." Given that "the most
substantial authority--science--has weighed against the fear of
potential human-made global warming," the conferees should stop
excessive spending on climate change, strike Title XIII of the
Senate-passed energy bill, and allocate taxpayer dollars more
responsibly.
An Attempt to Re-Regulate--Not
Deregulate--Electricity
Technology improvements, changes in the
economics for generating electricity, and new federal laws and
regulations have changed the nature of electric generation and
created markets for electricity. As a result, widespread
competition is occurring on the wholesale level and more than half
of the states are moving toward retail competition. The
Senate-passed energy bill purports to further this trend toward
competitive electric markets. However, deregulation involves more
than substituting a new regulatory regime for the old one: It
involves removing impediments to competition. Clearly, deregulation does
not mean expanding the role of regulatory agencies, dictating
specific structures for important market institutions, or imposing
burdens on incumbents solely for the purpose of "leveling the
playing field." The role of the government
should be reduced, not simply redirected. Government should permit
market institutions to evolve in response to market forces.
Regrettably, the Senate-passed energy bill
fails on this important point. Not only does Title II expand the
Federal Energy Regulatory Commission's (FERC's) authority over the
bulk power market, it also authorizes new regulatory programs for
the Department of Energy, the Federal Trade Commission, and a
number of other agencies. At the same time, it
increases regulatory uncertainty, fails to provide the incentive
structure needed to maintain and expand the nation's electricity
infrastructure, and makes it more difficult to provide reliable,
low-cost electricity to consumers. In short, Title II does not
deregulate the electricity market. The conferees should replace its
re-regulatory provisions and marketplace manipulation with measures
that promote competition and provide consumers with more reliable
and less costly energy.
An
example of the damage caused by government interference with the
market is seen in the mandatory purchase requirement provisions of
the Public Utilities Regulatory Policy Act of 1978 (PURPA, P.L.
95-617) that force utilities to enter contracts in which they pay
high prices for power they do not need. These noncompetitive PURPA
contracts have impeded the development of competitive electricity
markets and should be repealed. The Senate version of H.R.4
makes the repeal of this mandatory purchase requirement
"conditional" on the satisfaction of specified market and
regulatory conditions.The bill does no more than
incorporate additional regulations in an anti-competitive and
anti-consumer law.
Likewise, the Senate bill fails to reduce
the role of a number of regulatory agencies. Specifically, the bill
expands FERC's role in the review of mergers and other asset
transfers, directs the Department of Energy to administer a
renewable portfolio standard and implement a program of tradable
renewable energy credits, and significantly increases the consumer
protection role of the Federal Trade Commission. The government should stop
interfering with the marketplace and allow it to evolve in response
to market forces.
The
Senate bill does not limit the subsidies and preferential treatment
of municipal utilities and rural cooperatives. Nor does the bill
privatize the federally owned utilities such as the Tennessee
Valley Authority, whose favored status gives them an advantage over
private competitors. If Congress is serious about deregulating the
electricity industry, it should eliminate such anti-competitive
advantages.
Regulation is an inadequate substitute for
market forces. In the words of one of the chief proponents of
deregulation, "Competition is not just better than bad regulation.
Competition is better than good regulation. Regulation at its best
cannot provide the incentives to efficiency, innovation, and
economic progress that are inherent in competition." It is time
for Congress to unleash these competitive forces in the electricity
sector.
An Environmentally Sound and Energy-Wise
Plan to Tap ANWR Reserves
In
August 2001 the U.S. House of Representatives wisely voted to
enhance America's energy security by authorizing oil and gas
exploration in Section 1002 of the Arctic National Wildlife Refuge
(ANWR), located in the upper northeast quadrant of Alaska. This
area has been described as "the largest unexplored, potential
productive onshore basin in the United States" and could produce oil
equivalent to half of all U.S. imports from Persian Gulf countries
for 30 years. Moreover, only a mere 2,000
acres would be needed to tap into this source--leaving a full 99.99
percent of the 19 million acres of ANWR untouched by exploration.
The
majority leadership in the Senate, however, applied its chamber's
arcane rules of procedure to deny its members a fair up-or-down
vote on ANWR. Fearing that there were
enough votes to approve this measure in the Energy and Natural
Resources Committee, the majority leadership yanked the bill from
the committee and had it secretly crafted behind closed doors to
exclude ANWR. This forced proponents of ANWR exploration to secure
60 votes on the floor to proceed to an actual vote on opening a
small sliver of ANWR to oil and gas exploration. Given the majority
leadership's manipulation of Senate rules, it is not surprising
that the proponents failed to obtain the requisite number of votes
to proceed.
The
hotly debated drilling in Section 1002 of ANWR would not entail the
destruction of one of America's national treasures. The Arctic's
magnificent mountains, beautiful lakes, and precious wildlife will
not be disturbed. Nor should lawmakers be wary of enriching oil
companies. Irresponsible federal policies and the indifference of
policymakers to the growing domestic shortages of oil--not the
actions of oil companies--have made the United States dependent on
foreign oil sources for nearly 50 percent of its supplies, which
are subject to price volatility. The issue at hand is whether or
not to use a mere 2,000 acres of flat, treeless tundra out of 19
million acres in ANWR to enhance the nation's energy security. The
conferees should follow the House's principled lead and include
ANWR exploration in the final energy bill.
Ethanol Subsidies: A Hidden Gas Tax on
Consumers
The
Senate-passed version of H.R. 4 also calls for increased
fuel-ethanol subsidies. Ethanol is a corn-based
additive that serves as a fuel oxygenate. Fuel oxygenates are
required in certain areas of the country under the Clean Air Act.
Ethanol is not environmentally safe, nor
does it necessarily reduce poisonous emissions. While oxygenates
such as ethanol do reduce emissions of carbon monoxide (CO) and
other volatile organic compounds (VOCs), they could lead to
increased emissions of nitrogen oxides (NOX)--a main source of smog
pollution. In addition, ethanol can
increase the likelihood that toxins found in gasoline, such as
benzene, could seep into groundwater.
The
Senate ethanol mandate would nearly triple the use of ethanol by
2012.
Manufacturers of ethanol already enjoy a generous
5.3-cent-per-gallon exemption from the federal excise tax on motor
fuels.
This represents an effective taxpayer subsidy of 53 cents per
gallon of pure ethanol. Currently, the use of
ethanol costs states in excess of $1 billion annually in highway
funding.
Tripling the use of ethanol will only divert more funds from the
Highway Trust Fund, thereby depriving states of funds for new
roads, bridges, and other important infrastructure projects.
In
addition, ethanol must be denatured by gasoline during the course
of its production.This raises production
costs, significantly devalues ethanol as a renewable resource, and
contributes very little to enhancing the nation's energy security.
Moreover, a recent study by Cornell University scientist David
Pimentel shows that producing ethanol from corn actually requires
more energy than the fuel produces, thereby making the United
States more fossil-fuel dependent, not less.
Mandating the increased use of fuel
ethanol is unnecessary and amounts to a new gas tax for consumers.
It gives more taxpayer subsidies to a handful of companies that
currently produce ethanol. Furthermore, the bill's Renewable Fuels
Safe Harbor provision relieves these companies from any liability
related to the ethanol they produce. In short, the Senate-passed
version of H.R. 4 is nothing short of "corporate welfare"
legislation, with big business emerging as the winners and
consumers as the losers.
Conclusion
At a
time when experts are predicting that current levels of energy
production will fail to meet the nation's ever-growing demand for
energy, the Senate chose to suppress energy production. The
Senate-passed version of H.R. 4 (Energy Policy Act of 2002) would
not enhance crucial supplies of energy. What it would do, however,
is harm the U.S. economy and raise the cost of energy for
consumers. These results are unacceptable and reckless. As Members
of the House and Senate meet in conference to craft their final
energy legislation, they should soundly reject a bill that would
cause such consequences. If they fail do so and do not present an
energy policy that is balanced, fuel-neutral, and market-based to
President Bush, the President should veto the bill. It is better to
have no energy bill than to be burdened with one that suppresses
vital energy supplies and denies consumers reliable, affordable,
and sufficient supplies of energy.
--Charli E. Coon, J.D., is
Senior Policy Analyst for Energy and Environment in the Thomas A.
Roe Institute for Economic Policy Studies at The Heritage
Foundation.