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Press Release

    Energy Battle Brewing

    02/26/2002

    The Senate tackles a number of important issues this week, and the debate over energy policy may be one of the most important. While the economics of energy may lack the scandal-tinged allure of campaign finance reform, the decisions Congress makes about energy this week will have a much greater impact on the average American than Washington’s self-touted efforts to clean up politics. Political reform is a perennial issue and it is questionable to expect politicians to pass laws that would make their lives more difficult. As Ronald Reagan noted, “Politics is supposed to be the second oldest profession. I have come to understand that it bears a very close resemblance to the first.” Energy, on the other hand, is vital to virtually every good and service we purchase; what happens in the Senate this week could mean big changes that affect all Americans.

    Last August, the House of Representatives passed an energy bill supported by the White House that included controversial plans to open a small part of the Arctic National Wildlife Refuge (ANWR) to oil exploration. The legislation also included the stuff of Washington—tax breaks and programs for favored industries—intended to promote the development of a more dynamic energy market that includes alternative and renewable sources of energy.

    The debate over ANWR has been contentious and Sen. Tom Daschle (D-S.D.) has relied on procedural tactics to avoid a vote on this important issue. In response, the Democrat-controlled Senate has come up with an alternative energy bill that stripped out the ANWR provision and added a proposal by John Kerry (D-Mass.) to increase the fuel efficiency standards for automobiles to 35 miles per gallon by 2013—including minivans and sport utility vehicles. Frank Murkowski (R-Alaska) has rallied Republicans for a floor fight to include ANWR in the Senate bill and strike the fuel efficiency requirements.

    Washington Giveaways
    Like any good Washington solution, the Senate energy bill provides plenty of benefits and breaks to special interests. Perhaps the largest item will be a $14.5 billion worth of tax provisions passed by the Senate Finance Committee. These provisions are doled out liberally across the entire energy industry, promoting renewable energy, “green technologies,” and energy efficiency programs in an attempt to boost conservation.

    While increased conservation may be an important goal, the Department of Energy has spent tens of billions of dollars on such programs with very little to show for its effort. And most analysts agree that renewable technologies, such as solar and wind power, are not sufficiently developed to provide a viable alternative to current energy sources. With respect to solar power, for example, the Energy Information Administration (EIA) states, “The technology is still in the early stages of development, with relatively high costs and uncertain performance, and inadequate solar conditions east of the Mississippi River limit its potential market.” On wind power, the EIA states, “wind resources are often far from electricity customers, and if the wind is not blowing the resources may not be available during peak daily or seasonal loads.”

    The bill also provides an interesting example of the convoluted logic that results from special interest politics. Both the House and Senate bill include tax credits promoting the use of animal waste for fuel. However, some electricity companies would not be eligible for a tax credit because they are already tax exempt, such as rural cooperatives and municipal utilities. The politician’s solution? Allow the tax exempt companies to sell their tax credits to companies that are trying to lower their tax bill. While such creative solutions may lower the government’s tax take, they do so in a way that distorts the tax code even further and makes fundamental tax reform that much more difficult. A simple, flatter tax code would be fairer and would avoid diverting resources simply to find a tax shelter.

    As Lee A. Sheppard writes in Tax Notes, “We would not want to tie our story up by saying that transferable energy credits are a load of pig poop insofar as tax credits are concerned, but they are. And the farm-state senators who inserted this little gem in the energy bill will have no one to blame but themselves. If Fortune 100 corporations buying their way out of tax liability on the backs of innocent livestock starts to look bad on the front page above the fold, the senators won’t be able to say that the Treasury sneaked it into the bill, or the fairies put it there in the middle of the night.” (Tax Notes, February 25, 2002).

    Aside from fiddling with the tax code, the proposed legislation includes a number of items that may have a direct impact upon consumers. These range from energy efficiency standards for appliances to requirements that electricity providers include a minimum portfolio of renewable energy.

    Exploration and ANWR
    Clearly, the most controversial element of the energy bill addresses the question of drilling in ANWR. Democrats stripped this provision from an earlier version of the bill and Sen. Kerry has promised a filibuster if Sen. Murkowski moves forward with an amendment to open ANWR to oil exploration. The area in question represents less than 8 percent of the 19 million acres that comprise the entire refuge (which is roughly the size of South Carolina). And while exploration and drilling in ANWR would not eliminate our need for foreign oil, the area does represent the largest untapped reserves in the United States, and would provide up to 16 billion barrels of domestically produced oil. By comparison, total proved U.S. reserves in 1999 were only 21.8 billion barrels, according to the Energy Information Administration.

    Moreover, oil exploration and drilling does not have to be incompatible with environmental protection. Clearly, any exploration that does occur will be under the watchful eye of federal regulators. And new technologies in seismic imaging and drilling leave a much smaller footprint, which means wildlife and oil exploration can co-exist. However, excessive regulations and restrictions on energy exploration have artificially increased the costs of energy production and refining within the United States relative to the world market. Allowing exploration in ANWR would be an opportunity to alter this balance and improve our ability to provide energy from domestic sources.

    Democrats also see ANWR as a project that will only make compliance with a global warming treaty more difficult. Rather than a shift to energy sources that do not emit carbon dioxide and other greenhouse gases, ANWR simply increases the availability of fossil fuel. International efforts to reduce greenhouse gases require the consumption of less fossil fuel, effectively rationing fuel use in order to meet emission levels set in the treaties.

    For Democrats, then, ANWR is out of place in an energy bill they view as a vehicle to address concerns about climate change. However, it must be remembered that despite the media hype and political posturing, human-induced global warming and climate change remain open questions. Evidence of man-made global warming comes from computer modeling exercises, not real world empirical evidence. (For more information see CSE’s “Global Warming: A Verdict in Search of Evidence”) Yet, even these climate models have been challenged in recent years for their inability to capture real world trends. At the same time, empirical evidence continues to raise even more questions about human-induced global warming. Two new studies have found that Antarctica is actually cooling and its ice sheet expanding.

    Efforts to use the energy bill as a vehicle to address climate change could be costly to consumers. While the science is far from resolved, the economics of global warming is certain. Restricting energy consumption is a costly venture for the U.S. economy. The Clinton Department of Energy estimated the costs of compliance to be over $400 billion per year. Other nations have begun to pay closer attention to compliance costs as well and nations such as the United Kingdom and Canada are beginning to realize that the costs of the international global warming treaty may be considerable. For the Senate to use the energy bill to rush forward with efforts to comply with a costly yet questionable global warming treaty would be a considerable burden for consumers and an economy just beginning to recover from a recession.

    Fuel Efficiency Standards and Consumer Choice
    The biggest showdown over the use of fossil fuel may be when Sen. Kerry moves forward with an amendment to raise fuel efficiency standards to 35 miles per gallon by 2013. This would apply to all vehicles, from cars to light trucks to sport utility vehicles and vans. Proponents of such standards often claim that the new standards will reduce our dependency on foreign oil. In fact, these standards were first adopted in response to the oil shocks of the 1970s. Yet a cursory glance at energy use demonstrates that fuel efficiency standards have had no effect on our consumption of foreign oil. The United States imports more oil today than it did before the standards were first proposed.

    Beyond questions of where energy is purchased, fuel efficiency standards raise legitimate economic and safety questions. Professor Andrew Kleit of Pennsylvania State University found that Congress would achieve the same reductions in gasoline consumption by imposing a 31 cents gas tax—which is a significant cost to the economy. However, the fuel efficiency standards to be addressed by the Senate are even more expensive. A gas tax directly reduces the use of gasoline. The fuel efficiency standards, however, work indirectly and would force automakers to change their production lines to meet the new standards. In fact, Professor Kleit finds the new fuel standards are 11 times more costly to the economy than even a 31 cent gas tax. (See Andrew Kleit)

    Moreover, building more fuel-efficient cars forces manufacturers to build lighter and smaller cars, which are not as safe as larger cars. As Sam Kazman at the Competitive Enterprise Institute states, “The fuel economy program has already proven to be deadly because it forces the downsizing of automobiles. Higher [fuel efficiency] standards will only claim more lives. Regardless of one’s viewpoint on the advisability of making [fuel efficiency standards] more stringent, its safety effects must be acknowledged as a high costs of this program.”

    The energy bill is an important debate about the direction our economy is heading. One option is to focus on eliminating regulatory barriers that inhibit energy production and limit consumer choice. This includes expanding domestic exploration in regions such as ANWR, where significant reserves may exist. A market-based strategy would also avoid excessive fuel efficiency standards that restrict the consumer’s choice of automobiles. Consumers have unique needs and requirements; different needs mean different vehicles.

    Finally, energy policy should not use the tax code to promote costly technologies that have yet to generate a return on taxpayer dollars. Conservation and new sources of energy are important issues, but markets tend to promote these activities more efficiently. Price signals send important information about energy; the cutbacks and changes made by Californians during their energy crisis demonstrates the role prices can play. Tax breaks and subsidies alter prices and distort decisions by both producers and consumers, making it difficult to determine the optimal mix of energy sources and consumption.

    The second option is to rely on government to allocate our nation’s energy resources. Through regulations, taxes, and subsidies, government can play a greater role than consumers and producers in the energy market. Many of the proposals raised by the Senate appear to favor a greater government presence in the energy market, through new restrictions on consumer choice as well as limitations on energy producers. The government’s past record in the energy market has been abysmal; it was only in the last 25 years that consumers have seen real benefits as the government extricated itself from large portions of the energy market. As Washington wrestles with energy policy that can shape our future, it is important to remember its past.