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Baucus Energy Tax Overhaul is Doubling Down on Bad Policy

Next year is due to be Senator Max Baucus’s last year in Washington, solidified by his recent nomination to be the next ambassador to China; and it’s no secret that the Democrat from Montana has his sights on overhauling the tax code before he leaves. With the business of 2013 quickly coming to a close, details have begun to emerge as to what exactly the Senator is cooking up. Some of the details leaked so far specify how the Senator’s plan changes the way that the tax code regulates the energy industry. Unfortunately, if Baucus’s ideas on energy policy are any indication of whatever else he has up his sleeve, his exile to Beijing cannot come soon enough.  

Senator Max Baucus

For the better part of the last 50 years, the federal government has been tampering with energy market through a myriad of different subsidies, grants, and regulations. Designed to create a green and sustainable American, these programs have only served to leave a nation with some of the world’s largest reserves of oil, natural gas, and coal and access to preeminent nuclear technology in a state of perpetual concern about energy security. While the recent shale gas boom has relieved some of the pressure, Americans are still paying electricity bills and pump prices that are, in real terms, some of the highest in history.

Many had hoped, across all industries including the energy sector, that Senator Baucus’s long-awaited fixes would lighten the heavy hand of the tax code on the economy. While the plan does significantly reduce the number of federal tax programs that have destabilized markets by tugging them in all different directions, the overall theory behind the federal approach to energy policy does not change. The plan is merely a consolidation of flawed theory and a double down on failed policy.

Presently, production tax credits (PTCs) for renewable resources like wind power are wreaking havoc with electricity grids. Not only do these programs help introduce unstable and inefficient power sources to the grid, but the subsidies also encourage renewable utilities to ignore market signals, sell their power at a negative price, and flood the grid with supply even when demand doesn’t exist. Production tax credits are more of an adversary to American energy security than the dictators of OPEC.

Instead of recognizing these inherent problems with renewables and perverse incentives like PTCs, Baucus’s plan proposes an industry-wide PTC of up to 2.23 cents per kilowatthour tied to emissions of greenhouse gases such as CO2. On top of this new universal PTC, the Baucus plan extends existing PTCs through 2016.

In-effect, this would double the billions worth of federal support currently afforded to inefficient renewables. This is of particular concern given that these extant renewable PTCs, created in the early 90s, were originally slated to expire in 1999. Here we are ready to ring in 2014.

With powerful industry groups defending these handouts tooth and nail, what’s to stop another extension of these programs beyond 2016 and letting the renewable industry double dip into the taxpayers’ and ratepayers’ wallets ad infinitum?

Renewable biofuel manufacturers, currently bolstered by a federal mandate, also get in on the PTC game under Baucus’s plan with a $1 per gallon incentive. Not only is this redundant, but this proposal ignores the issues that have been revealed by increased biofuel usage under the mandate, such as engine damage, higher pump prices, and depletion of fuel efficiency.

Yet, the most egregious offense of Baucus’s leaked plan is its pathway to the dreaded carbon tax. While an outright tonnage tax on carbon emissions is not a part of the package, a call for initial investigations into the feasibility of such a program is included. Moreover, a universal PTC, such as the one in this plan, which is tied to carbon emissions, is effectively a carbon tax. Using government authority to increase the marginal cost of producing power based solely on a measure of carbon emissions is, undeniably, a carbon tax.

The “rearranging the deck chairs on the Titanic” metaphor isn’t entirely appropriate here. The Baucus plan is more akin to throwing some of the deckchairs overboard in hopes of lightening the ship; just ignore the gaping hole in the side of it. The bundle of reforms that the retiring Senate fixture is offering are entirely cosmetic and only compound upon failed policies that already exist. If Washington is serious about energy security, then the Baucus plan should be dead on arrival before the Senator’s departure.