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Picking Winners: Obama Budget Shifts Tax Incentives Toward Renewables

By Dave Levitan

Apr 15, 2010

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 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 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 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.

Do we really know which technologies are the winners?

You quote Joseph Romm as saying:

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.

Has Romm blocked out from his memory the 1950s, when everybody thought that they knew that nuclear power was a "winner", or more recently, when biofuels were deemed "winners"? Policy makers don't exactly have a strong record of supporting particular technologies in anything resembling the rank order of their likely pay-off to society as a whole (though perhaps to specific key regions or constituencies). And such a view begs the question of how much support, and how to design it so that it can be phased out in a timely manner?

For that reason, I would rather quote the

Policymakers should focus on taxing the “bad” instead of subsidising the good and on creating the virtuous circle that produces positive externalities. Although some subsidies may be needed, say, to support basic R&D, removing environmentally harmful subsidies, particularly for fossil fuels and agricultural production, should be a priority to reduce pollution and stress on our natural resources. There are other economic instruments, including emissions trading and taxes, that could help us put the right price on the source of the problem: carbon.

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