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S. HRG. 113–643 

REFORMING AMERICA’S OUTDATED 

ENERGY TAX CODE 

HEARING 

BEFORE THE

COMMITTEE ON FINANCE 

UNITED STATES SENATE 

ONE HUNDRED THIRTEENTH CONGRESS 

SECOND SESSION 

SEPTEMBER 17, 2014 

( 

Printed for the use of the Committee on Finance 

COMMITTEE ON FINANCE 

RON WYDEN, Oregon, Chairman 

JOHN D. ROCKEFELLER IV, West Virginia 

CHARLES E. SCHUMER, New York 

DEBBIE STABENOW, Michigan 

MARIA CANTWELL, Washington 

BILL NELSON, Florida 

ROBERT MENENDEZ, New Jersey 

THOMAS R. CARPER, Delaware 

BENJAMIN L. CARDIN, Maryland 

SHERROD BROWN, Ohio 

MICHAEL F. BENNET, Colorado 

ROBERT P. CASEY, Jr., Pennsylvania 

MARK R. WARNER, Virginia 

ORRIN G. HATCH, Utah 

CHUCK GRASSLEY, Iowa 

MIKE CRAPO, Idaho 

PAT ROBERTS, Kansas 

MICHAEL B. ENZI, Wyoming 

JOHN CORNYN, Texas 

JOHN THUNE, South Dakota 

RICHARD BURR, North Carolina 

JOHNNY ISAKSON, Georgia 

ROB PORTMAN, Ohio 

PATRICK J. TOOMEY, Pennsylvania 

JOSHUA SHEINKMAN, Staff Director 

CHRIS CAMPBELL, Republican Staff Director 

(II) 

(III) 

C O N T E N T S 

OPENING STATEMENTS 

Page 

Wyden, Hon. Ron, a U.S. Senator from Oregon, chairman, Committee on 

Finance .................................................................................................................. 1 

Hatch, Hon. Orrin G., a U.S. Senator from Utah ................................................. 2 

WITNESSES 

Nickles, Hon. Don, president and CEO, The Nickles Group, LLC, Washington, 

DC .......................................................................................................................... 4 

Augustine, Norman R., retired chairman and CEO, Lockheed Martin Corporation, Bethesda, MD .............................................................................................. 6 

Metcalf, Gilbert E., Ph.D., professor of economics, Tufts University, Medford, 

MA ......................................................................................................................... 8 

Zindler, Ethan, head of policy analysis, Bloomberg New Energy Finance, 

Washington, DC ................................................................................................... 10 

Kreutzer, David W., Ph.D., research fellow in energy economics and climate 

change, Center for Data Analysis, The Heritage Foundation, Washington, 

DC .......................................................................................................................... 12

ALPHABETICAL LISTING AND APPENDIX MATERIAL 

Augustine, Norman R.: 

Testimony .......................................................................................................... 6 

Prepared statement .......................................................................................... 31 

Responses to questions from committee members ......................................... 38 

Hatch, Hon. Orrin G.: 

Opening statement ........................................................................................... 2 

Prepared statement .......................................................................................... 43 

Kreutzer, David W., Ph.D.: 

Testimony .......................................................................................................... 12 

Prepared statement .......................................................................................... 46 

Responses to questions from committee members ......................................... 59 

Metcalf, Gilbert E., Ph.D.: 

Testimony .......................................................................................................... 8 

Prepared statement .......................................................................................... 62 

Responses to questions from committee members ......................................... 72 

Nickles, Hon. Don: 

Testimony .......................................................................................................... 4 

Prepared statement .......................................................................................... 74 

Responses to questions from committee members ......................................... 79 

Wyden, Hon. Ron: 

Opening statement ........................................................................................... 1 

Prepared statement .......................................................................................... 82 

Zindler, Ethan: 

Testimony .......................................................................................................... 10 

Prepared statement .......................................................................................... 84 

Responses to questions from committee members ......................................... 104 

COMMUNICATIONS

Algae Biomass Organization (ABO) ....................................................................... 109 

American Farm Bureau Federation ....................................................................... 114 

The American Institute of Architects ..................................................................... 116 

Biomass Thermal Energy Council (BTEC) ............................................................ 118 

Page

IV 

Ceres ......................................................................................................................... 120 

Comfort Systems USA Energy Services ................................................................. 127 

Energy Recovery Council ........................................................................................ 130 

Energy Tax Savers .................................................................................................. 135 

Harling, Karen ......................................................................................................... 137 

Lake Washington Partners ..................................................................................... 139 

National Association of Energy Service Companies (NAESCO) .......................... 141 

National Association of Manufacturers .................................................................. 145 

National Biodiesel Board (NBB) ............................................................................. 150 

National Rural Electric Cooperative Association .................................................. 166 

Renewable Energy Markets Association (REMA) ................................................. 168 

Solar Energy Industries Association (SEIA) ......................................................... 170 

Tampa Bay Trane .................................................................................................... 174 

(1) 

REFORMING AMERICA’S OUTDATED 

ENERGY TAX CODE 

TUESDAY, SEPTEMBER 17, 2014 

U.S. SENATE, COMMITTEE ON FINANCE, Washington, DC. 

The hearing was convened, pursuant to notice, at 10:22 a.m., in 

room SD–215, Dirksen Senate Office Building, Hon. Ron Wyden 

(chairman of the committee) presiding. 

Present: Senators Stabenow, Nelson, Cardin, Bennet, Casey, 

Hatch, Grassley, Crapo, Enzi, Cornyn, Thune, Isakson, and 

Portman. 

Also present: Democratic Staff: Ryan Abraham, Senior Tax Counsel; Michael Evans, General Counsel; Jocelyn Moore, Deputy Staff 

Director; Kevin Rennert, Senior Advisor for Energy; and Joshua 

Sheinkman, Staff Director. Republican Staff: Chris Campbell, Staff 

Director; Jim Lyons, Tax Counsel; and Mark Prater, Deputy Staff 

Director and Chief Tax Counsel. 

OPENING STATEMENT OF HON. RON WYDEN, A U.S. SENATOR 

FROM OREGON, CHAIRMAN, COMMITTEE ON FINANCE 

The CHAIRMAN. The Finance Committee will now come to order. 

Around the world, countries driven by tough global competition, 

dramatic demographic shifts, climate change, and an investment 

boom in clean technology are ripping up the 20th-century energy 

playbook and laying out a new path forward. Our country—with a 

long tradition of innovation and entrepreneurship—has the opportunity to lead the way. 

In order to lead, our challenge is to guarantee that outdated energy policies do not pull America back into the pack. And on our 

watch, leading the pack on energy—and striving for American energy exceptionalism—means leading the pack on tax reform. Here 

are a few examples of what leadership will look like. 

For the first time, our tax code must take the costs and benefits 

of energy sources into account. Our committee—on a bipartisan 

basis—needs to be part of a robust conversation about how best to 

determine costs and benefits. I believe the list of factors must include considerations that do not always figure in today, such as energy efficiency, affordability, pollution, and sustainability. 

Second, it is past time to replace today’s crazy quilt of more than 

40 energy tax incentives with a modern, technology-neutral approach. Let us clear the hurdles that slow down America’s energy 

innovators, and let us introduce a new level of competition and 

fairness into the marketplace. 

2 

* For more information, see also, ‘‘Present Law and Analysis of Energy-Related Tax Expenditures,’’ Joint Committee on Taxation staff report, September 16, 2014 (JCX–100–14), https:// 

www.jct.gov/publications.html?func=startdown&id=4667. 

Third, the disparity in how the tax code treats energy sources— 

and the uncertainty that it causes—has to end. Traditional sources 

benefit from tax incentives that are permanently baked into law. 

But clean energy sources are stuck with stop-and-go incentives that 

have to be renewed every few years. 

The Congress has developed a familiar pattern of passing temporary extensions of those incentives, shaking hands, and then 

heading home. But short-term extensions cannot put renewables on 

the same footing as the other energy sources in America’s competitive marketplace. 

Clean energy projects take time to plan, and they take time to 

finance. The facilities and machinery take years to get up and running, especially with sources like hydropower, geothermal, and biomass. Predictable, level-playing-field tax policies could clear the 

way for America’s clean energy sector to thrive at home and outmatch the global competition that hungrily eyes the multi-trilliondollar market for energy goods and services. 

It is important to recognize, finally, that better tax policy alone 

does not address all of America’s energy needs. Yet energy tax reform has to be part of an overall strategy that moves our country 

towards a cleaner energy future. That cohesive, overall strategy for 

American energy is what is lacking today. 

That is what, on a bipartisan basis, this committee has to 

change. I see energy tax reform as a way for the Finance Committee to come together to drive America’s energy policy towards 

a modern, level-playing-field approach. Today’s hearing is an opportunity for us to begin to map out the road ahead.* 

[The prepared statement of Chairman Wyden appears in the appendix.] 

The CHAIRMAN. As is our tradition, we are going to do this in a 

bipartisan way. Senator Hatch has been very constructive in advancing that. Senator Hatch, why don’t you make your opening 

statement? 

OPENING STATEMENT OF HON. ORRIN G. HATCH, 

A U.S. SENATOR FROM UTAH 

Senator HATCH. Thank you, Mr. Chairman. I appreciate you for 

holding today’s hearing. Discussions about our Nation’s energy policy are always timely. 

It has always been my position that, when it comes to energy 

policy, we need an all-of-the-above approach. Indeed, there is no 

such thing as too much energy. We need to encourage energy production across the board, and we need to do so in an effective, costefficient manner. 

Sadly, this is not the approach we have seen under the current 

administration. President Obama claims that he supports an all-ofthe-above approach to energy policy. However, the truth is that the 

Obama administration’s real energy policy boils down to a belief 

that fossil fuels are bad, and that the Federal Government should 

enact policies to punish the production and use of fossil fuels. 

3 

Just ask the coal miners and consumers of electricity negatively 

affected by the Obama administration’s war on coal. And just look 

at the administration’s Fiscal Year 2010 Treasury Green Book. Regarding the administration’s proposal to repeal the provision in our 

tax code for intangible drilling costs, it states: ‘‘To the extent expensing encourages overproduction of oil and gas, it is detrimental 

to long-term energy security and is also inconsistent with the administration’s policy of reducing carbon emissions and encouraging 

the use of renewable energy sources through a cap-and-trade program.’’ 

This approach, in my view, represents a backwards view of our 

Nation’s energy policy. Instead of discouraging the domestic production of oil and gas, we should welcome the recent production increases that we have seen. Increases in the domestic production of 

oil and gas reduce our dependence on foreign oil and create many 

high-paying jobs. That being the case, the energy boom in places 

like the Bakken shale region, as well as the Uintah Basin in Utah, 

and areas down in Texas that have just been discovered, is something to be supported, not punished. 

President Obama’s first misguided effort to transform our energy 

policy came in the form of cap-and-trade. In 2008, talking about his 

cap-and-trade plan and in a refreshing moment of candor, Candidate Obama stated: ‘‘Under my plan of a cap-and-trade system, 

electricity prices would necessarily skyrocket.’’ 

After the 2008 elections, Speaker Pelosi rammed President 

Obama’s wrongheaded cap-and-trade proposal through the House, 

and nothing further was done with it. Proponents of a cap-andtrade approach have, for the most part, acknowledged that this 

proposal is dead. However, instead of admitting failure and moving 

on, they are repackaging cap-and-trade by calling it a carbon tax. 

I am no marketing expert, but if you could not sell the American 

people on a bad idea, adding the word ‘‘tax’’ to it is not going to 

make it look any more appealing. Raising the price of electricity, 

natural gas, and gasoline does not sound like a good idea to most 

hard-working, middle-class Americans. Yet, that is precisely what 

a carbon tax would do. 

My view on this is simple: if you really want to pursue a policy 

that ships jobs overseas, enact a carbon tax. If we purposefully 

enact policies to make energy—something every business needs— 

more expensive, American businesses and jobs will go to China, 

India, and elsewhere. It is just that simple. 

Cap-and-trade and the carbon tax are not the only bad ideas out 

there. In addition, over the last few years, we have seen the administration’s continued refusal to approve no-brainer energy projects 

like the Keystone Pipeline. Our entire pipeline infrastructure needs 

to be updated and enhanced, yet the Obama administration continues to sit on its hands. 

In December 2014, then-Chairman Baucus put forward an energy tax proposal that he claimed was technology-neutral. However, by picking carbon emissions as the standard for judging 

whether a technology would get Federal dollars or not, the proposal 

is biased against fossil fuels such as coal, oil, and natural gas. 

Now, as we all know, many of our Nation’s energy tax issues are 

addressed in the tax extenders package, which is one of the many 

4 

reasons why it is so important that Congress act as soon as possible to pass that legislation. I hope we can do it in the lame duck 

session. 

We did our work on the extenders package here in the committee. I will not go into the particulars of what happened on the 

floor with that bill—if I did, we would likely be here all day. Instead, I will just say that we need to set partisanship and political 

gamesmanship aside and get the extenders package across the finish line as soon as possible. 

Ultimately, when we turn to tax reform—hopefully soon—I believe we need to examine all existing tax provisions, including energy tax provisions, under President Reagan’s three criteria for tax 

reform: fairness, simplicity, and efficiency. 

Looking at the witnesses, it is clear that we have a good representation of different viewpoints about the various energy 

sources addressed throughout the tax code. My hope is that this 

hearing will contribute to our tax reform efforts. 

I want to thank you, once again, Mr. Chairman, for holding this 

important hearing, and I really look forward to hearing what this 

panel has to say about all these things. 

The CHAIRMAN. Senator Hatch, thank you, and you make a number of important points. I especially want to support the urgency 

that you are conveying with respect to the extenders package. 

[The prepared statement of Senator Hatch appears in the appendix.] 

The CHAIRMAN. Colleagues, as you know, this was something we 

did in a bipartisan way in the committee. Just this past Monday, 

we had scores of businesses all across the country—because they 

had to make another quarterly tax payment—in effect, making an 

interest-free loan to the government because it has not been possible to do what Senator Hatch talked about, which was to get this 

extender package passed and signed into law. So I appreciate your 

making those points and look forward to working with you. 

We have an excellent panel of guests, including the Honorable 

Don Nickles, president and CEO of the Nickles Group here in 

Washington; Mr. Norman Augustine, retired chairman and CEO of 

Lockheed Martin in Bethesda; Dr. Gilbert Metcalf, professor of economics at Tufts; Mr. Ethan Zindler, head of policy analysis for 

Bloomberg New Energy Finance; and Dr. David Kreutzer, research 

fellow in energy economics and climate at the Heritage Foundation. 

We welcome all of you. 

You can see there is substantial interest among Senators. We 

would like you to try to keep your opening remarks to 5 minutes 

or so. We will make your prepared remarks a part of the hearing 

record in their entirety, and it will leave us plenty of time for questions. 

We now have a veteran of this committee, appropriate to begin 

with. Mr. Nickles, welcome. 

STATEMENT OF HON. DON NICKLES, PRESIDENT AND CEO, 

THE NICKLES GROUP, LLC, WASHINGTON, DC 

Senator NICKLES. Mr. Chairman, thank you very much. It is a 

pleasure to be before this committee with you and other former colleagues as well as new Senators whom I did not have the pleasure 

5 

of serving with. I think it is the best committee in the Senate, and 

I served on a lot of them. I enjoyed this committee more than any 

other. 

Issues before this committee are actually why I ran for Senate 

back in 1980. Congress passed a bad law called the Windfall Profits 

Tax. That motivated me to run for Senate more than anything else, 

and probably made the difference in my election. It basically taxed 

domestic production but did not tax foreign imports, and therefore 

it encouraged imports and discouraged domestic production. It was 

really a bad, bad idea. It took 9 years, but we eventually repealed 

it—I was very proud of that. Tax policies matter, and this committee can make a difference. 

Mr. Chairman, you mentioned having a tax policy that is neutral 

among fuels, and I have to take issue with that a little bit. You 

cannot afford to make fossil fuels’ tax equal to the enormous subsidy that wind currently receives. Everybody knows wind receives 

a credit—it says in your report 2.3 cents per kilowatt hour. What 

your report does not say is, that is equal to 40, 50, even 60 percent 

of the wholesale price of electricity. 

If you wanted to have something comparable for oil, you would need a $50 or $60 a barrel subsidy for oil. You do not want that— 

or $2 for gas—we cannot afford it, and nobody asked for it. So 

there is no comparison. The 1-year extension of the Production Tax 

Credit is $13.3 billion. That is enormous, and it is too much. 

I was here when the PTC passed. I remember people saying it 

would jumpstart the industry. Well, the industry has been jumpstarted. It has done quite well. Some people say it can stand on its 

own. It is time for it to stand on its own. Enough is enough. 

And who benefits from the PTC subsidy? Mr. Buffett—who is a 

big wind investor—has said of wind energy: ‘‘We get a tax credit 

if we build a lot of wind farms. That is the only reason to build 

them. They do not make sense without the tax credit.’’ 

His MidAmerican Energy Company is collecting wind subsidies 

based on their installed capacity. If they operate at 30 percent of 

capacity, then this year alone he will receive $138 million in tax 

credits. That is 1 year. Over 10 years, that is more than a billion 

dollars. I will bet you that, over 10 years, that number is a lot closer to $2 billion. Well done Warren Buffett, a good investor taking 

advantage of an over-generous tax credit that Congress passed. But 

enough is enough, and the PTC does not need to be and should not 

be extended forever. 

The credit has been on the books for 22 years. I was here when 

people said, ‘‘It will be temporary. We just need a jumpstart.’’ I do 

not fault that reasoning, but the jumpstart has occurred. 

To make matters worse, when the PTC was extended 2 years 

ago, Congress lessened requirements to qualify for the tax credit. 

Instead of a wind farm placed in service to qualify, all you had to 

do was start construction. Then the IRS came up with a new regulation and said you only have to invest 3 percent to qualify for the 

PTC. So you invest 3 percent and you are going to get 10 years’ 

worth of tax credits. Wow. This is an enormous, way too generous 

subsidy. It is crowding out a lot of other fuels. 

I know some of the proponents say that it creates a lot of jobs. 

For every job that it creates, it is costing more jobs in other energy 

6 

sectors: natural gas, coal, or nuclear power. Wind blows in some 

areas where they do not need the energy, but wind producers—selling not to the marketplace but only for the tax credit—and other 

energy producers actually receive negative prices. 

You cannot start and stop a nuclear power plant. Gas plants are 

not made to stop and start every few hours. It really is absurd how 

wind is distorting the electric grid and the marketplace. 

I mentioned the idea of having tax parity—well, do the oil companies have unfair advantages? No. Intangible drilling costs are 

out-of-pocket expenses. That is not a subsidy. That is not Uncle 

Sam writing a check. Most of that is wages. Any business, in my 

opinion, should be able to deduct wages in the year they occur. I 

do not look at that as a subsidy. 

The other big subsidy is section 199. That is a differential on 

manufacturing taxes. Wait a minute. Oil and gas companies actually pay a higher corporate tax rate than all other manufacturers. 

When Congress passed a differential tax on manufacturers, I argued against it. I think we should have one uniform corporate tax 

rate. Right now you have a 35-percent rate for most corporations, 

32 percent for manufacturers, and 33 percent for oil companies. It 

should be uniform. 

Mr. Chairman—I compliment you for this—you have been working on reforming the tax code for a long time. I do hope that this 

Congress will work together to really reform the tax code. It needs 

to be reformed if we are going to be competitive internationally. It 

needs to happen. 

One other little piece of advice—I compliment the chairman— 

when you marked up the extenders bill, you had a markup. Members on both sides offered amendments. That is the way it is supposed to work. That is the way it happened when I was on this 

committee, and it worked. 

We also amended bills on the floor. Tax bills, budget bills, and 

so on were allowed amendments on the floor. I think if that is 

done, it would restore comity in the Senate. I think it would restore 

respect to the Senate. All members would get to participate and 

have an opportunity to voice their ideas. The amendment process— 

the democratic process, quite frankly—would work, and the Senate 

would no longer be the dysfunctional group that I am afraid that 

it has turned out to be the last few years. 

I encourage you to take bills to the floor and offer ample opportunities for all sides to offer amendments. I think it would really help 

the system. 

The CHAIRMAN. Thank you very much. I know we are going to 

have questions in a moment. 

[The prepared statement of Senator Nickles appears in the appendix.] 

The CHAIRMAN. Mr. Augustine? 

STATEMENT OF NORMAN R. AUGUSTINE, RETIRED CHAIRMAN 

AND CEO, LOCKHEED MARTIN CORPORATION, BETHESDA, MD 

Mr. AUGUSTINE. Well, thank you very much, Mr. Chairman and 

members of the committee. My remarks today will be based on the 

work of the American Energy Innovation Council, of which I am a 

member. We refer to it as the AEIC. I appear as an individual 

7 

today. I believe my views, though, do represent those of the other 

members of our council. 

The AEIC has a somewhat interesting background. About 5 

years ago, seven of us, who were then CEOs or former CEOs of 

major non-energy companies, were discussing our concern over the 

Nation’s energy situation and concluded that we had—in our careers—to make some tough decisions and that perhaps we could be 

helpful in making suggestions with regard to energy. We have been 

supported by the Bipartisan Policy Council founded by colleagues 

of yours, Senators Baker, Daschle, Dole, and Mitchell. We represent no other organization. We are just a group of individuals 

who are very informal. Our membership is listed in my written 

statement. 

The focus to date has been on research and development, which 

is where the answers to so many of the questions in energy production reside. The search for answers to those questions certainly depends on an enlightened tax policy. I would emphasize that I am 

an engineer, not an economist. Tax policy is not my forte. On the 

other hand, the members of our group are business persons who, 

of course, have had some experience in the practical aspects of tax 

matters. 

Very few issues have greater importance for the Nation’s wellbeing than our energy policy, whether it be the impact of foreign 

sources of energy making us vulnerable to geopolitical coercion in 

peacetime, the impact on open conflict, the impact on the natural 

environment, and certainly the impact on the economy as a whole, 

especially including jobs. 

The AEIC has published two reports and a number of case studies. The first of those reports pointed to the need for greater investment in energy R&D. Today that is less than 1⁄2 of 1 percent of the 

Nation’s energy bill, which makes it clearly an outlier as compared 

with other disciplines. The second report dealt with the role of the 

government in resolving these energy challenges. Aside from the 

more conventional roles such as regulation and enforcement, the 

government has an especially important role in energy in terms of 

providing certain kinds of funding, participating in some efforts 

itself, and assisting in the implementation of many of the new concepts that have been brought out. 

We particularly emphasize the importance of the government 

supporting basic research and also helping corporations get 

through the two valleys of death that financial folks refer to when 

trying to introduce new ideas through technology. The first of these 

valleys of death would be the time between the discovery of new 

knowledge and the proof of principle and a prototype. The second— 

which is particularly important in the energy area—is the matter 

of going from a prototype, a feasibility prototype, into a full-scale 

viability demonstration, including the economics of the concept. 

The second is particularly challenging in the energy area because 

of the major costs of new infrastructure and the longevity of that 

infrastructure. 

With regard to tax policy, there are certain features that we believe are important. One is that—clearly—we encourage the development of clean, affordable, sustainable domestic energy sources. 

The second is that we seek to be technology- and energy sourceVerDate Mar 15 2010 19:58 Jun 04, 2015 Jkt 000000 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 R:\DOCS\94550.000 TIMD
8 

sensitive in our tax policy—that is, focused on outcomes, not on 

input constraints—and not de facto favor any particular source or 

technology. 

We think it is very important that our tax policy be predictable. 

If there is anything people in business dislike, it is uncertainty. We 

believe, on the other hand, that tax policy should not be permanent 

in this area. It should be open for review, but without sudden 

changes. 

Energy tax modification, in our view, takes place best in an environment of overall tax reform. That is so that we can avoid nonoptimized tax policies. 

In conclusion, as you might suspect, my colleagues and I on the 

AEIC are very strong proponents of the free enterprise system. At 

the same time, there are some things that the free enterprise system cannot or will not do. Among those in the energy area, certainly, is investing in very high-risk, very long-term, uncertain payoff research. That is a role where the government would seem to 

need to intervene. 

The other area would be dealing with these areas referred to as 

valleys of death, where work that is of the public interest needs to 

be accomplished, but the financial markets that exist today simply 

will not permit industry to undertake those projects, all of which 

makes government involvement extremely important, including 

maintaining a stable, unbiased if you will, tax policy. 

Thank you very much. I will be happy to answer any questions 

you might have. 

The CHAIRMAN. Mr. Augustine, thank you very much. 

[The prepared statement of Mr. Augustine appears in the appendix.] 

The CHAIRMAN. Our next witness will be Dr. Gilbert Metcalf. 

Doctor, welcome. 

STATEMENT OF GILBERT E. METCALF, Ph.D., PROFESSOR OF 

ECONOMICS, TUFTS UNIVERSITY, MEDFORD, MA 

Dr. METCALF. Chairman Wyden, Senator Hatch, and members of 

the committee, thank you for the invitation to testify on reforming 

the energy tax code today. I am a tax economist and teach tax principles at Tufts University, so let me began with three design principles for thinking about reforming the energy tax code. 

First, energy tax policy should address the unequal playing field 

that results from not recognizing the social cost of pollution in energy tax production and consumption. A tax on pollution internalizes the externality so that firms take into account the social costs 

of pollution. This approach implicitly makes clear that pollutiongenerating activities have social benefits as well as costs. An optimal policy must balance those costs against the benefits, and a tax 

is an efficient means of effecting that balance. 

Alternatively, a subsidy to clean energy production can also level 

the playing field between clean and dirty energy in terms of ensuring that the private cost of energy between fuels reflects the differentials due to pollution externalities. 

In addition to using the tax code to level the playing field between clean and dirty energy sources, good policy will provide staVerDate Mar 15 2010 19:58 Jun 04, 2015 Jkt 000000 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 R:\DOCS\94550.000 TIMD
9 

bility and clarity in the tax code, important design principles given 

the long-lived nature of most major energy capital investments. 

Finally, policy should be designed to avoid giving tax benefits to 

firms or individuals for activities they would have undertaken with 

or without the tax incentive. Such inframarginal activities reduce 

the bang for the buck for any given policy. 

So let me address these design principles in the context of greenhouse gas emissions, given the important role the energy sector 

plays in contributing to those emissions, and given the importance 

of addressing climate change. Economists associated with both the 

Republican and Democratic parties have long advocated using a 

carbon tax to reduce greenhouse gas emissions. In a recent analysis, I modeled a $20-per-ton carbon tax and esti- mate that it would raise roughly $100 billion dollars annually in 

the initial years. This would provide sufficient revenue to lower the 

payroll tax by roughly 11⁄2 percentage points or the corporate income tax by 8 percentage points. 

These examples highlight that carbon revenue provides fiscal 

flexibility to contribute to a comprehensive tax reform package focusing on efficiency and equity improvements while maintaining 

overall budget neutrality for the Federal government. The fiscal 

benefits are clear. However, as they say in the late night infomercials: ‘‘But wait, there’s more.’’ 

With the carbon tax in place, the various renewable energy tax 

preferences could be eliminated, as could oil and gas preferences 

including, among other things, percentage depletion and expensing 

of intangible drilling costs. Eliminating these subsidies provides 

another $30-plus billion over a 5-year budget window that could be 

used to finance further reductions in marginal tax rates or other 

tax reform initiatives. 

But wait, there’s more. A stable and well-designed carbon tax 

would make the EPA’s Clean Power Plan unnecessary. This would 

provide additional administrative and efficiency cost savings. 

All taxes involve dead-weight loss, and a carbon tax is no exception. We live in a world in which we require tax revenue to fund 

important government activities. When given a choice between taxing goods—capital and labor—or taxing bads—pollution—I favor 

the latter. A wealth of economic analysis supports this view. In 

general, reputable studies of carbon taxes, including the Energy Information Administration’s various analyses, find modest and negligible economic losses from a well-designed carbon tax. 

Despite the efficiency benefits, as well as the revenue benefits of 

a carbon tax, it is clear that this policy would be a major political 

lift in Washington right now. Given that fact, well-designed tax 

preferences for clean energy production are a reasonable secondbest policy to level the playing field. 

A preference-based energy tax reform should consist of two elements. First, the tax preferences for coal, oil, and gas should be repealed. Repealing these incentives would level the playing field between oil and gas and coal assets and other physical assets. In 

other words, we would apply income tax principles to these goods 

and services. 

Second, a tax credit for clean energy production or investment 

should be based on principles of technology neutrality. And here 

10 

the Senate Committee on Finance chairman’s staff discussion draft 

from last December takes a number of important steps in the right 

direction, by reducing the number of incentives; focusing on measuring results rather than rewarding particular technologies; and 

eliminating the policy uncertainty that results from the need to reauthorize tax preferences regularly, while ensuring that clear and 

transparent benchmarks are set so that the policies may phase out 

as they are no longer needed. 

Such an approach would provide greater clarity and rationality 

to the current tax code. While an improvement, it is not as efficient 

as a carbon tax, but, given that we are operating in a second-best 

world, this approach would likely provide significant gains in lowand no-carbon energy provision at a cost-effective price. 

Thank you for this opportunity to speak, and I look forward to 

your questions. 

The CHAIRMAN. Thank you very much. 

[The prepared statement of Dr. Metcalf appears in the appendix.] 

The CHAIRMAN. Mr. Zindler, welcome. 

STATEMENT OF ETHAN ZINDLER, HEAD OF POLICY ANALYSIS, 

BLOOMBERG NEW ENERGY FINANCE, WASHINGTON, DC 

Mr. ZINDLER. Good morning. Thank you, Chairman Wyden, Senator Hatch, and the committee staff, for this privilege today. It is 

truly an honor to be before you and offer my thoughts. 

I join you today in my role as an analyst with Bloomberg New 

Energy Finance, which is a market research division of Bloomberg 

LP focused on the transitions underway in the global energy markets. Our firm’s clients include financiers, energy equipment 

makers, independent power producers, utilities, oil majors, nongovernmental organizations, and government agencies in over 50 

countries—in short, folks who want to make money investing in 

new energy technologies. 

My remarks today represent my views alone, not the corporate 

positions of either Bloomberg LP or BNEF. I invite the committee 

to review the accompanying slides I have submitted as I read my 

remarks. I will focus my comments today on how the two largest 

U.S. non-hydro renewables sectors, wind and solar, are impacted by 

their respective tax credits. I recognize there are a number of other 

intriguing ideas on the table about reforming the tax code, including the Baucus white paper from last year and the ideas that Gib 

just mentioned as well. I look forward to talking about these during 

the Q&A. 

Let me start by making two basic assertions. First, the energy 

sector is in the midst of a fundamental transformation. How we 

produce, deliver, consume, and even think about energy are all 

changing rapidly and, I would argue, irreversibly. And second, 

these trends, which began in the last decade and picked up steam 

in the past 5 years, are going to continue over the next 2 decades. 

This is inevitable thanks to incredible advancements in natural gas 

extraction, declines in solar module prices, improvements in wind 

turbine technology, and greater connectivity and intelligence of 

electricity-consuming devices and of the grid itself—to name just 

four changes. 

11 

Since 1992, the Production Tax Credit has played a vital role in 

subsidizing and spurring the construction of U.S. wind projects. 

The PTC’s current $23 per megawatt-hour benefit coupled with accelerated depreciation benefits has allowed wind capacity to grow 

nearly ninefold since 2009. The PTC’s importance has been illustrated each time Congress has allowed it to lapse. Each time, installations have fallen sharply. Last year we saw the sharpest fall 

of all. 

Today, the PTC remains officially off the books, meaning that 

new greenfield projects generally do not qualify for the project. 

However, due to a critical change in the 2012 Taxpayer Relief Act, 

the credit continues to have important market impact. That change 

effectively allows most projects that began but did not complete 

construction before the credit sunset to still qualify. This adjustment has helped to sustain the wind industry this year and will 

continue into 2015. In all, we anticipate 15 gigawatts of new capacity will be installed in the U.S. in 2014 and 2015, marking a significant rebound from last year, when just 1 gigawatt was installed. 

So, what happens if Congress does not extend the credit? In our 

view, the market will, as it has in the past, experience a sharp decline in activity, potentially resulting in layoffs for manufacturers 

with operations on U.S. soil. A somewhat similar cliff now looms 

for the solar sector, which enjoys the benefit of the Investment Tax 

Credit allowing developers to receive a credit equal to 30 percent 

of their project’s capital expenditures. 

The ITC is now due to sunset at the end of 2016. At that time, 

when the ITC steps down to 10 percent, we anticipate another drop 

in solar installations similar to what we have historically witnessed 

with wind. One option that has been proposed has been for the ITC 

to adopt the same placed-in-service language as the PTC. Such a 

move would—in our view—help sustain the solar industry longerterm. 

Critics charge that these tax credits provide little motivation for 

these nascent sectors to improve their economics and become pricecompetitive. But recent evidence suggests that the wind and solar 

industries are rapidly reducing costs, in large part, to compete with 

natural gas-fired generation. 

In the case of solar, the cost of a photovoltaic panel today is 50 

cents a watt approximately, by our calculation, compared to over 

$3 a watt as recently as 2008. This has created areas in the U.S. 

where so-called ‘‘socket parity’’ now exists for new solar. That 

means, for a new homeowner or a business owner, it can actually 

make more economic sense to put a system on their roof in the long 

run than to pay the utility for the power that they would otherwise 

receive. 

In the case of large-scale solar projects which are connected into 

the utilities, we have seen prices associated with power contracts 

decline recently in the last few years. There is a slide associated 

that demonstrates that. The main reason for this has less to do 

with technology and more to do with economies of scale, as the PV 

industry is now 10 times the size it was just 5 years ago. Similarly, 

wind generation costs have dropped in recent years, though in this 

case the reasons have more to do with technological advancements. 

12 

Further improvements are coming, in our view. These technologies will not stop evolving, and their costs will not stop declining. For this reason, we project that wind and solar will ultimately 

account for at least 20 percent of all capacity in the U.S. by 2030. 

This may sound ambitious, but on a generation basis, which is the 

actual number of megawatt-hours that get generated, we anticipate 

that coal, gas, and nuclear will still meet the large majority of demand by 2030. And no, I should point out, our forecast does not 

assume that these tax credits are extended. We think this is going 

to happen anyway. 

In closing, I would just reiterate my two basic points: (1) major 

changes in the energy sector are upon us, and (2) these are going 

to continue through 2030 as the trends set in recent years continue. Thus, the question becomes, what role will the U.S. play in 

this revolution? Will the U.S. market follow a smooth or rocky path 

toward clean energy deployment? Will the U.S. be a market-maker 

or price-taker? Will the U.S. primarily be a clean energy equipment 

importer or exporter? 

Inconsistent and unpredictable short-term policy-making will not 

fundamentally undermine the long-term changes underway in the 

energy sector worldwide. These are now inevitable, thanks to technological innovation, economies of scale, and yes, policy support 

coming from many nations around the globe, including, most notably, China. But inconsistent policy-making can impact the role the 

U.S. plays in this change. Thus, the decisions Congress makes on 

certain aspects of the tax code today could have far-reaching implications for U.S. competitiveness tomorrow. 

Once again, I thank the committee for this opportunity, and I 

look forward to your questions. 

The CHAIRMAN. Thank you very much. 

[The prepared statement of Mr. Zindler appears in the appendix.] 

The CHAIRMAN. Dr. Kreutzer? 

STATEMENT OF DAVID W. KREUTZER, Ph.D., RESEARCH FELLOW IN ENERGY ECONOMICS AND CLIMATE CHANGE, CENTER FOR DATA ANALYSIS, THE HERITAGE FOUNDATION, 

WASHINGTON, DC 

Dr. KREUTZER. Chairman Wyden, Ranking Member Hatch, and 

other members of the committee, I want to thank you for giving me 

this opportunity to speak to you today about energy tax policy. 

My name is David Kreutzer, and, at the risk of embarrassing a 

staffer, I want to point out it is ‘‘e’’ before ‘‘u.’’ I only mention it 

because that misspelling grows like kudzu when it gets into 

records, and it is hard to extinguish. 

The CHAIRMAN. David, we will make sure it is expunged. 

Dr. KREUTZER. All right. I appreciate that. [Laughter.] 

I am a research fellow in energy economics and climate change 

at the Heritage Foundation. However, the views I express are my 

own. They should not be construed as representing any official position of the Heritage Foundation. 

I want to make several points regarding carbon taxes. First, carbon taxes do economic damage. As was mentioned by my colleague 

to the right, there is with every tax something called excess burden 

or dead-weight loss. It is true with a carbon tax. 

13 

If you look at the numbers on the carbon tax, when I talk about 

the damage, I am getting these estimates from three analyses of 

carbon taxes: two done by the Energy Information Administration 

and one done by us at Heritage using a clone of their energy model, 

which is described in the appendix of my written testimony. I do not find those impacts to be moderate. In the $20-per-ton 

carbon tax case of the Boxer-Sanders bill that we analyzed at Heritage, the peak year job losses were 400,000; that is, employment 

fell more than 400,000 jobs below the baseline that we would have 

had without a carbon tax. I do not find that moderate or trivial. 

GDP losses for all three analyses of the carbon tax by 2030 

would be measured in trillions of dollars, which comes out roughly 

to, if you want to look at a nominal family of four, in the order of 

$1,000 per year. I do not think that is moderate or trivial. 

And you do not get these losses back. With all of these models, 

the economy recovers at some point. But you have people being employed at worst jobs. If you look even at the EIA’s analysis, even 

going out to 2040, which I think is a bit too far for much belief, 

we still have GDP $140 billion or so below the baseline, which is 

the equivalent of the GDP generated by a million people. So you 

have a million people working for nothing. 

So, carbon taxes do damage to the economy in ways that simply 

cannot be avoided—you cannot slice the pie differently and not 

have those damages. 

Second, I want to point out that I do not think you can justify 

these carbon taxes by the impact they will have on world temperature. The carbon tax that the EIA has analyzed in their Annual 

Energy Outlook 2014 would cut carbon dioxide emissions from 

power generation by about 50 percent by 2050. 

If you look at a carbon tax calculator that has been created to 

look at how much that would affect world temperatures, the best 

guess is it would cut world temperature by the end of this century 

by 1⁄2 of 1 degree centigrade. That would be about .09 degrees 

Fahrenheit, less than one-tenth of a degree Fahrenheit. 

Some people say, well, that is just the first step. Well, if you cut 

it by 50 percent, there is only one step left after that before we 

have to hold our breath. If you are looking at trying to get other 

countries to come in to join us because we are providing some sort 

of leadership, you would only have to look at this week’s Climate 

Summit at the UN to see the leaders who are not showing up from 

India, from China, from Germany, from Australia, from Canada, to 

get an idea of what our leadership is likely to bring. 

Third, I would like to talk about the social cost of carbon. The 

social cost of carbon is generated from three fairly sophisticated 

computer programs that at their core are fundamentally vacuous. 

They are flawed, and they do not give us numbers that are meaningful. 

At the Heritage Foundation, we have installed two of those programs. The third program, the proprietor refuses to allow anybody 

to publish anything on using his model—and that is the PAGE 

model—without the right of co-authorship, which eliminates the 

possibility of having independent analysis. 

The two we looked at—they are used by the EPA to estimate the 

social cost of carbon, which is driving the cost benefit analysis for 

14 

virtually all of their carbon regulations—did not even use the OMB 

guidance for the discount rate that you need. The social cost of carbon estimates look at—supposedly we are able to calculate economic damage from climate warming 300 years down the road, in 

the year 2300. 

I think it is unlikely we know what is going to happen to the climate in 2300, and even less likely that we know what is going to 

happen to the economy because of the climate in the year 2300. 

But they pretend to make that measure anyway. 

It is important to use the right discount rate. The OMB gives 

guidance for 3 percent and 7 percent. The EPA and the interagency 

working group did not use the 7 percent. 

What happens if you use the 7 percent rate? One of the two models that we used, the PAGE model by Richard Tol, actually goes 

negative. So, if you believe the logic here of getting the markets to 

balance things properly, as Professor Metcalf has pointed out, that 

would imply we should subsidize CO2 emissions. Now, I do not 

know that we want to use a tool that cannot decide whether we 

should subsidize CO2 emissions or tax CO2 emissions to drive CO2

tax policy. 

In summary, carbon taxes do damage to the economy. All the 

carbon taxes that I have seen proposed would have, at most, a negligible impact on world temperatures. And the social cost of carbon 

is not a tool that is ready at this point to be used for serious regulatory analysis. 

Thank you very much. 

The CHAIRMAN. Thank you very much. 

[The prepared statement of Dr. Kreutzer appears in the appendix.] 

The CHAIRMAN. Before we get to questioning, colleagues, there is 

an important bit of committee business that needs to be done. 

Senator Grassley turns 81 today. Senator Hatch and I have decided, knowing of his enormous affection for Dairy Queen, we are 

getting him a gift certificate. Some of you may want to honor him 

in different ways, but I just wanted all of our colleagues to know. 

Now, with respect to Senator Nickles’s comments, I want to pursue a different line of questioning before this sparring back and 

forth, with respect to renewables and fossil fuels, goes too far. 

Until recently, I chaired the Senate Energy Committee. I come 

from a State without a drop of fossil fuels. My first hearing was 

on natural gas, which kind of shocked and amazed everybody. The 

reason I did it is that I am not interested in this sparring back and 

forth and back and forth, because I want us to advocate a 

technology-neutral kind of policy. 

Here is what concerns me. Right now, given the fact that the 

wind Production Tax Credit has expired, if you start a new wind 

farm now, you get nothing because the Production Tax Credit has 

expired. If you start a new oil-drilling operation now, you get access to the permanent subsidies. So this is—and, Senator Nickles, 

you are right to say—this is going to be a part of the tax reform 

debate. Senator Hatch and I are going to pursue these issues in a 

bipartisan way. They were central to coming together with Senator 

Coats on the bill. 

15 

So I want to start with the clean energy sector and my comments 

earlier. I talked about something I think we can all come together 

on, and that is America leading the pack in what I call ‘‘American 

energy exceptionalism.’’ I want to apply that principle to the clean 

energy sector. In my statement, I talked about what are we going 

to have to do to thrive at home and particularly to beat the global 

competition, because this is a market for energy goods and services 

that is estimated as a multi-trillion-dollar market. 

Let us start with you, Mr. Zindler, because you come from exactly that field. Looking at the energy markets, looking at the potential—I am going to give everybody a chance to do this, but, if 

you got a chance to look at one policy change that would be 

market-oriented for us to tap the potential for the clean energy sector here at home and around the world, what would it be? You 

start us, Mr. Zindler. 

Mr. ZINDLER. Well, it is a very good question. There are a variety 

of them, I would say. It does strike me that something that tries 

to take into account—let us just back up for 1 second. 

Our perspective globally is, frankly, fairly optimistic, like you see 

here for the U.S. We think we are going to see a lot more adoption 

of clean energy technologies in countries around the world. In fact, 

the rates of adoption in the developing world are probably even 

going to be faster, because some of them have the best natural resources for wind and solar. A number of them have hundreds of 

millions of people who are not on the grid. 

The cost of solar is even more competitive when you are talking 

about literally putting a system on somebody’s roof as opposed to 

having to build a hub and spoke type of delivery system. It is somewhat analogous to what is going on with telecom and with not 

building hard landlines for telephones in a lot of these countries. 

So we think that the opportunity is enormous. The growth rates 

that we are seeing in the developing world are enormous. 

So then the question is, if you want to be a competitive country 

in trying to service these nations and export, what can you do to 

be supportive? I am, sort of, of the view that, to some degree, 

where we are now is a very interesting point and that a lot of these 

technologies are close to competitive on their own without subsidies, but not there yet in many parts of the world. 

So the real question is—and this gets to what Norm Augustine 

was saying—what do we do to support the next generation of technologies, the ones that are going to be down the road, the ones that 

my chart shows taking over the world 5 or 10 years from now? How 

can we support them through greater R&D, whether it is tax credits or whether it is grants or other types of things? From the U.S. 

competitiveness perspective, from my perspective, a lot of what you 

would want to think about in terms of long-term competition are 

things that support technology under development now but also 

technology that will make an impact in about 5 or 10 years from 

now. 

The CHAIRMAN. Why don’t we see if we can get Mr. Augustine 

in on this, and then somebody who disagrees with Mr. Zindler and 

Mr. Augustine. 

Mr. Augustine? 

16 

* The Advanced Research Projects Agency—Energy. 

Mr. AUGUSTINE. Thank you. I would focus on increasing the Nation’s investment in research and development in two ways. 

The first would be to substantially increase the research budget 

that is supported out of the Department of Energy. I would single 

out ARPA–E * as an example. It is badly underfunded for its potential. 

The second thing would be to make the R&D tax credit permanent. Make it outcome-focused rather than having any built-in biases one way or the other in terms of technology resources. 

The CHAIRMAN. Well, there is a lot of interest, as you know, Mr. 

Augustine, in this committee in making the R&D tax credit permanent. 

Nobody is required to disagree with Mr. Zindler or Mr. Augustine. Does anybody want to? 

Dr. KREUTZER. Yes. I just want to add a little bit. I also taught 

economics and tax policy for 26 years at Ohio University and later 

James Madison University. 

The definition of net income or profits that we use in the tax 

code is one that was actually developed for owners and potential 

owners of firms to get an idea of what the situation for their firm 

was. It is not a good definition for tax policy. 

For instance, using an example that Senator Nickles brought up, 

if I buy a ream of paper to use in the office headquarters, I get to 

deduct that 5 bucks from this year’s tax. If I buy a ream of paper 

to use in the printer in the trailer out at the drilling site, then it 

is an intangible drilling cost. If you get rid of that deduction, I have 

to expense that $5 ream of paper that is identical to another one 

used somewhere else in the company for—who knows—15 or 20 

years. 

It makes much more economic, straightforward sense for tax policy, I think, to have expensing for everything. I think that would 

promote all sorts of investment. You would not have to worry about 

whether you get to deduct it in 5 years, or 3 years, or 2 years. You 

get to take it off now. I think people would understand—if I spent $5 buying something, I should be able to take that off of my revenue for this year. 

The CHAIRMAN. I am well over my time. 

Senator Hatch? 

Senator HATCH. Well this has been a very interesting panel, as 

far as I am concerned. Let me ask this question for Dr. Kreutzer 

and Senator Nickles. 

A number of tax policy experts believe that the tax system 

should only be used to raise the revenue necessary to fund a constitutionally limited Federal government, and that we should not 

get involved in social engineering through the tax code. Now these 

experts suggest that energy policy should not be run through our 

tax code as part of the tax reform exercise of lowering tax rates. 

This is one approach to dealing with energy tax provisions. I would 

like to have both of your thoughts on such an approach to energy 

tax reform. 

Senator NICKLES. Well, Senator Hatch, just a couple of comments. If you do really good tax reform, you do not need energy tax 

17 

issues. Let the marketplace work. By that I mean, allow expensing 

where expensing makes sense. Everybody is talking about subsidies, and I keep hearing people mention subsidies for the oil industry. Basically, you are talking about expensing. You are talking 

about expensing out-of-pocket costs that are non-recoverable, most 

of which are wages. 

I have always said—I have said it on both sides of this table— 

everybody in any business should be able to expense their wages. 

They should not, in my opinion, get a tax credit for the wages. That 

is Uncle Sam writing a check. There is a big difference between a 

tax credit and expensing. 

That is what is wrong about the Production Tax Credit. It is a 

tax credit. Uncle Sam is writing a check to enormous investors, 

some of whom are billionaires, to produce products. That is an 

enormous subsidy—absurdly large—in comparison to allowing 

somebody to deduct their out-of-pocket expenses incurred. 

So I hope, when you are doing overall tax reform, you will keep 

that in mind. You can always debate how long we should amortize 

something, whether it is a pipeline, a building, you name it. We 

have different amortization schedules for everything. 

I have always believed that the shorter you can keep that time— 

allowing people to deduct what they wrote a check for—makes good 

sense. What does not make sense is having Uncle Sam write you 

a check that pays 30, 40 even 50 percent of the value of the commodity. Unfortunately, that is what happens with the wind Production Tax Credit. 

Senator HATCH. Dr. Kreutzer? 

Dr. KREUTZER. I think having it done through expenditure is 

probably a little bit cleaner and more up-front. You are seeing the 

dollars actually spent for the various projects. 

I am probably willing to subsidize many fewer things than most 

of the people in the room or on this panel. I agree with Senator 

Nickles. I think the market works pretty well in this regard. I do 

not see many valleys of death that are followed by something other 

than great plains of death and mountains of death on the investment. 

If an investment is a good idea, we see it being made. We see 

George Mitchell for years and years putting his money behind the 

technology that allows us to get to the shale gas, which he did primarily with his own money. 

So I think it is a good idea to simplify the tax. I think if you 

went to straight expensing, you could turn K Street into public 

housing. There would be no need for three-fourths of the lobbyists 

in this town, because so much of it is based on, should we accelerate it 3 years or 5 years or whatever. 

I agree in general. I think it is better to do expenditures for 

things you want to promote instead of trying to jimmy it up. 

Senator HATCH. Let me ask you another question, Dr. Kreutzer. 

What economic effect would a carbon tax have on U.S. workers, 

businesses, and consumers, in your opinion? 

Dr. KREUTZER. As I say in my testimony, it would be negative 

overall. We would see some significant damages, especially in manufacturing, obviously in the energy-intensive sectors. The reason 

for this is that 85 percent of the energy that we get in the U.S. 

18 

is based on hydrocarbons. So a carbon tax is going to hit all of 

them. It will hit coal heavier than petroleum, and petroleum heavier than natural gas, but it is going to hit all of that 85 percent. 

We will see families of four—again, a nominal family of four— facing $1,000 per year of lost income. That does not come back. 

Senator HATCH. I got that. Let me ask this question for everybody on the panel. 

Congress is in the process, once again, of extending certain expiring tax provisions, more commonly known as tax extenders. In the 

context of tax reform, I am curious if anyone on the panel believes 

we should set up a system whereby energy tax provisions are either made a permanent part of the tax code or dropped altogether. 

In other words, should we get out of the business of enacting temporary energy tax provisions? 

Senator NICKLES. I definitely think so. I think they have had 

their time. Enough is enough. Some of these subsidies, as I have 

mentioned, are really not affordable, and they have distorted the 

marketplace in the electric sector significantly. 

I am amazed going through the list of all of the tax provisions 

that are there, absolutely amazed. I know you all have a difficult 

job. I know you have to deal with extenders. I happen to favor expensing. I have already mentioned that. That is one of the extenders. 

I am a small businessman. You could make me amortize that 

computer over 2 years, or my cell phone over 2 years, or the paper 

I buy over 2 years. I am able to expense it. I think that makes good 

sense. I do not look at that as a subsidy. I had to write a check 

for that. I think I should get the deduction, but to receive tax credits for all of these various different energy provisions does not 

make sense. Uncle Sam does not write checks for drilling companies to drill wells. 

I am on the board of a big refining company, Valero. Uncle Sam 

does not write checks for us to be refining. People talk about all 

of these subsidies as if they apply to fossil fuels as well as to renewables. There is a big difference, and I take issue with that. 

Senator HATCH. All right. Mr. Augustine, and then I would like— 

if you could keep your answers fairly short, I would appreciate it, 

because my time is up. 

Mr. AUGUSTINE. Yes, I think it would be proper to reflect the 

views of my group that we would not favor temporary tax provisions in general. We would favor phasing them out over a period 

of time. Sudden changes are disruptive. 

The problem with temporary provisions tends to be that they 

cause management to act in ways that are not optimal in the long 

term. I would point out, though, that there are other investments 

that would be important for the government to make. 

Senator HATCH. Dr. Metcalf? 

Dr. METCALF. So I think you want to fish or cut bait. You want 

clarity and permanence. So I think temporary provisions are not 

good, but whether you have them or not depends on how you want 

to address the problems that we face in terms of the unlevel playing field because of the social cost of fossil fuels. 

One comment on expensing: if we were at a hearing on a consumption tax versus an income tax, I think I would be a great fan 

19 

of expensing as a principle of consumption taxation. But we do 

have an income tax by and large, and one of the principles of an 

income tax is that you allocate the costs as you accrue the revenue. 

So, if I buy a ream of paper for my business and use it this year 

for revenue I earn this year, then of course, I take that as a deduction. But the whole principle of an income tax is that we allocate 

the expenses to match the revenue over time. Of course, a drill rig 

is earning revenue over time, and so proper tax treatment would 

call for amortization. So I think we need to be careful what we are 

calling a subsidy and what we are calling a simple cost of business. 

Senator HATCH. Mr. Zindler? 

Mr. ZINDLER. I guess I would just echo that. I am having a little 

trouble with this parsing between expensing and tax credits. In 

both cases, as I understand as a taxpayer, that means less revenue 

that is coming in for the American government. Is that the bottom 

line? They are both subsidies, right? Unless I am missing something here. 

[Off mic.] 

Mr. ZINDLER. They are not? They do not both result in less tax 

being collected? 

The CHAIRMAN. Let us have Senator Hatch ask the questions and 

see if we can get colleagues some time here. [Laughter.] 

Mr. ZINDLER. I am sorry. 

Senator HATCH. I kind of like that. I like seeing the fight going 

on here. [Laughter.] 

Dr. Kreutzer? 

Dr. KREUTZER. No. Expensing changes when you pay the tax. 

You get a tax credit that reduces how much you pay. 

I think if we have good tax policy, we want it to be permanent. 

I think the reason we see the temporary provisions is that so many 

people think, well, there are a bunch in there that are bad, and I 

would rather have a bad tax policy be temporary than permanent. 

So that is the battle. 

In general, if you have decided on what is good tax policy, there 

is no good argument for having it be temporary and renewable. 

The CHAIRMAN. Senator Stabenow is next. 

I just want to make one point with respect to your comment, Mr. 

Zindler. What will get us out of the parsing business, this back and 

forth, is if we can really advance a policy built around technology 

neutrality. So to the extent any of you can help us do that, that 

will be constructive. 

Senator Stabenow? 

Senator STABENOW. Well, thank you very much, Mr. Chairman. 

This is a very important discussion, I think, in terms of the future 

of our country in so many ways, in terms of jobs and energy. 

Thanks to all of you. 

Don, it is great to see you again. I am still in your old office, and 

it is doing well. So, thank you for that. 

Let me say though—I am going to challenge you. I want to talk 

a little bit about oil, because I think you have kind of made light 

of expensing on oil. The reality is that we have had a permanent 

tax policy since 1916 in some way incentivizing and supporting oil. 

As a manufacturing State, I am sure I would have supported that 

then, and we have seen—at least, in the last 30 years—fossil fuel 

20 

energy companies getting subsidies in some form or other, writeoffs, worth over $166 billion after being adjusted for inflation. So 

that is just 30 years. That is not 100 years. 

So I would argue for folks who have said, we should not pick 

winners and losers—well, as I have said before, we picked a winner, and they won. So now the question is, can we create more competition for different kinds of energy and create a policy that makes 

sense for all of them? We still have, regardless of the amount, stopstart provisions on alternatives, whether it is biofuels, whether it 

is wind, whether it is solar, all of which are very important. 

When we look at all of the pieces from the section 199 manufacturers’ deduction—which I would argue against as a manufacturing 

State; I would question whether that is manufacturing on the oil 

and gas side—we have depletion methods, and expensing and amortization periods, and passive loss limits, and deductions for underground injections, and marginal well tax credits, and enhanced 

oil recovery credits. I mean there are a lot of things that we have 

done in support of one sector of our energy provision industry. So 

I think at this point that it is important that we have certainty, 

even if it is phase-outs, on the rest of it to create a level playing 

field. 

I have to say, Mr. Zindler, you were talking about solar in other 

countries. I just came from a trip to Africa with a number of members where we saw individual solar units way up in the mountains 

of Ethiopia where they are still using an ox and a plow, but they 

have a cell phone and they have solar. It is a very interesting situation, and it is individual units that they are coming in with. 

But when we talk about leveling the playing field, I think an interesting policy—and, Mr. Zindler, I will ask you this—is something called master limited partnerships. Senator Coons has a bill 

that I am pleased to be a cosponsor of that is bipartisan, with Senator Moran and Senator Murkowski, that would take a form of financing that is currently only available for oil and natural gas and 

coal extraction and pipelines—so fossil fuels—and expand it to alternative energy. I am wondering if you might speak to allowing 

clean energy sources to use the same kind of financing structure, 

the MLP structure, and whether or not that would be a good way 

to open up and encourage investment in clean energy. 

Mr. ZINDLER. Thanks for the question. The MLP subject is an interesting one. It is a very complex one, so I will try not to get into 

too many details. 

I will say that the spirit in which that legislation is being pursued, to me, to some degree makes a lot of sense, in the sense that 

the costs of capital for renewable energy products, typically these 

days you could argue, are artificially high, in part because they 

rely on this tax credit system. There are a limited number of players that provide tax equity financing. And in part, that is because 

investors, these retail mom and pop investors, can invest in the 

companies that make these technologies, but if you look at those 

stock valuations, they kind of go up and they go down; they are 

risky. 

There are very few avenues for the sort of mom and pop investors to simply buy a share of an operating wind farm. And those 

are fairly low-risk investments that can offer cash flows that are 

21 

similar to a bond, particularly a high-yielding bond. So the idea of 

a master limited partnership is one that I think makes a lot of 

sense for the industry, in that it could potentially open a new pool 

of capital, make a new pool of capital available to wind and solar 

and other projects. 

One interesting note though is that this idea has been on the 

table now for, I think, 21⁄2 to 3 years, since Senator Coons first announced it. In the interim, interestingly enough, Wall Street has 

found a number of interesting ways to try to sort of replicate this 

in their own way. So there has been this series of so-called yield 

companies that have been floated over the public exchanges. 

What these essentially are are companies that own perfectly 

well-operating wind or solar projects. They simply put them together, and then they IPO them on the stock exchange. Investors 

know that they are not investing in Google, they are not investing 

in Facebook, they are investing in something that will produce a 

reliable, solid dividend for them in much the same way that a bond 

or other types of things would. So we have seen market activity to 

try to actually create an MLP-type world, but there are limits on 

how effective that could be, and the MLPs offer a further option for 

public investors. 

Senator STABENOW. Thank you. I did not mention one other piece 

to this story about looking at solar in Africa, and that is that these 

were individual Chinese units that were highly subsidized and 

being sold for a very small amount. When we look at China investing $54 billion a year in clean energy technologies to win the race, 

I worry that if we are not in the race and providing some solid 

long-term policy, we are going to lose jobs here. We are going to 

lose jobs in the long run. 

So, Mr. Chairman, I know I am out of time. Thank you. 

The CHAIRMAN. Thank you, Senator Stabenow. 

Senator Enzi? 

Senator ENZI. Thank you, Mr. Chairman, and thank you for holding this hearing. As the accountant, I am extremely interested in 

tax reform. A lot of these details are very exciting for me. I do 

think that we can make the tax code a lot fairer and simpler, and 

I am interested in doing that. 

I am glad that this is an energy hearing, because energy is Wyoming. We have every kind of energy in Wyoming. The southern 

part of Wyoming is rapidly growing in wind turbines because Denver is the mile-high city, and you have to go uphill to get to Wyoming. And when you go uphill, you get above the trees. And when 

there are no trees, there is a lot of wind. 

In fact, on the first turbines that were put up there, the rotors 

blew off. They now have them designed so that when the wind gets 

to 80 miles an hour, they turn the blades into the wind, so they 

stop. But if they do not turn fast enough, it blows the whole tower 

apart. So we are big on wind. We have a lot of sunshine, more days 

of sunshine than almost anywhere but Arizona, I think. 

But for a long time, we have been involved in oil and gas and 

coal. In fact, 40 percent of the Nation’s coal comes from my county. 

There are 92 train-loads of 150 cars a day that leave our county 

full of coal. 

22 

So I pay a lot of attention, of course, to what is happening in the 

way of taxes and tax credits. I do blame the oil and gas industry 

for a poor naming of their part of the tax code, because they call 

it intangible drilling costs, which sounds like it really did not happen. But it is real stuff. It is like that ream of paper that Dr. 

Kreutzer mentioned. It is also the pipe that goes down in the hole. 

It is also the cost of getting the lease to begin with, and all of the 

costs associated with that. We do not allow them to deduct any of 

that until they actually have some production. So it is not a deductibility of expenses, and it is even done over a longer period of time. 

One of the things I always caution the committee on is, if we 

eliminate some of these things, first of all, we ought to be sure that 

it is not the same as somebody else is getting, just under a different name. I will use one example that we have talked about a 

little bit which I expect will never happen, and that is elimination 

of the individual’s mortgage deduction. 

If we were to eliminate that overnight—or many of these other 

things that we talk about—we would create a real cash flow problem in the United States. Yes, the government would do really well 

in the year that we did those. 

So I keep talking about transition on any of these. We do have 

a little bit of a transition on the Production Tax Credit, because it 

extends for another 10 years. So that gives people a chance to adjust to it as it disappears. I have talked about transition enough 

that most of the members of the committee talk to me about transitioning—— 

The CHAIRMAN. People need to understand how exciting in the 

tax reform area it is to do the transition work. I mean this is really 

root canal kind of stuff. [Laughter.] 

I just want to commend Senator Enzi for constantly, in all of our 

tax reform discussions, coming back to that point. It is fine to talk 

about how you are going to be somewhere in a few years, but if you 

do not do what Senator Enzi is talking about, which is describe 

how you are actually going to get there step by step, tax reform 

does not come together. So I appreciate my colleague talking about 

that. 

Senator ENZI. I appreciate that, Mr. Chairman. 

I do think that oil and gas development is important, just as important as any of the other energy sectors. One of the tax increases 

the administration wants is changing the deductibility of intangible 

drilling and development costs. Those are comparable, perhaps, to 

research and development, but I think they are more comparable 

to amortization and depreciation. So the loss of this deduction for 

producers would reduce their available capital immensely. 

So, Senator Nickles, can you speak to why this deduction continues to be vitally important to the industry and how the elimination of the deduction would impact the economy? 

Senator NICKLES. Thank you, Senator Enzi. The biggest economic 

boon to this country has been the explosion of oil and gas activity, 

primarily because of fracking. There has been big growth in drilling, and you see oil production going up, gas production going up, 

jobs, severance taxes, you name it. Those are real jobs. Some people do not make the connection that extending the subsidies for 

23 

wind actually works to the detriment of some of those jobs, but it 

does. 

If Congress passed the administration’s proposal on intangible 

drilling costs, you are telling the person who is drilling a well that 

he cannot expense the wages on that well. He has to amortize that 

over 5 years, a portion of it. That, to me, makes no sense. As an 

example, look at Harold Hamm, the biggest developer in the Bakken. He is spending more money than he makes back into that 

field. Why cause him to put a lot less money in that field? You are 

going to have a lot less production. 

The administration’s proposal would dramatically scale down the 

activity in the oil patch. Surely, this Congress is going to look at 

that and say, wait a minute. Uncle Sam is not writing a check to 

Harold Hamm to drill that well. Does he get to expense his costs 

in the year incurred? Yes. Is that Uncle Sam writing a check for 

it? No. Uncle Sam is writing a check to Warren Buffett to produce 

windmills—$138 million. 

There is a big difference. Warren Buffet receives a subsidy. Harold Hamm is allowed to expense something. You can debate over 

how long it should be, but I think people should be able to deduct, 

at least, their wages in the year incurred. 

Senator ENZI. Thank you, Senator. I did have a question on percentage depletion deduction that I was going to ask Dr. Kreutzer, 

but I will submit that in writing. I also have a number of questions 

on the Production Tax Credit, and wind and solar, and I will be 

submitting those questions too. If you would be so kind as to answer them for me, I would appreciate it. It will be helpful in our 

debate about tax fairness. 

The CHAIRMAN. Thank you, Senator Enzi. 

Senator Bennet? 

Senator BENNET. Thanks, Mr. Chairman. Thanks for holding this 

hearing, and thank you to the witnesses for being here. 

One of the things I would add to your list as we think about tax 

reform is the extent to which incumbent interests use the tax code 

to their benefit and to the detriment of innovators in the economy. 

We should be on the lookout for that everywhere in our statute 

books, especially in the context we were having a discussion about, 

which is winners and losers. I think we will have an interesting opportunity to debate that. 

I guess I would start with Mr. Augustine, East High grad from 

Denver, CO. It is nice to see you. When you guys were looking at 

the R&D question, was there a conclusion about why it is such a 

small percentage of the overall energy economy that we spend on 

research and development? 

Mr. AUGUSTINE. There really was not a great discussion of that 

in that particular group. Based on other conversations and studies, 

I think one factor is that, up until recently, the energy economy 

was moving along fairly smartly. We did not realize we had the 

kind of problems we have today. It was somewhat status quo. 

I think also a factor is that the investments in the energy arena 

tend to be very long-lasting. The facilities that are built last a very 

long time. There is not the drive to constantly bring in new technology and update what you have. 

24 

I would cite as an example of the contrary, Intel Corporation. 

The CEO of Intel has told me that of the revenues that Intel receives on the last day of any fiscal year, 90 percent of them come 

from products that did not exist on the first day of that fiscal year. 

Whereas, if you are in the energy business—I was on the ConocoPhillips board for many years—your investments are very high and 

they last a very long time. So you do not have that drive. 

Senator BENNET. Yes. Mr. Zindler, it has been our experience in 

Colorado—and, Senator, it is great to have you here—that we have 

had great growth in oil and gas jobs, and we have had great 

growth in wind jobs. I have not detected that the wind jobs are taking away the oil and gas jobs. 

I wonder if you could talk a little bit more about the effect of the 

on-off switch that has happened with the wind PTC and the damage that would be done to the manufacturing base that relates to 

wind technology in this country if we do not figure out some way 

to stop sending the kind of signal that we have sent. 

Mr. ZINDLER. Sure. Thanks very much. Well first, just to be clear 

on my comments regarding the drilling costs, I am only saying 

these are all subsidies and we should just be honest about it. I am 

not saying one is better. I leave that to all of you to make the value 

judgments on which ones you want to be supportive of, but they 

are all subsidies supporting these—— 

Senator BENNET. You are saying the mechanics of either the government writing a check to somebody or somebody writing a check 

to the government—— 

Mr. ZINDLER. Right. Which, by the way, the government does not 

write a check. They simply expect you to pay less taxes thanks to 

the tax credit. 

Senator BENNET. Right. 

Mr. ZINDLER. Anyway, that aside, both represent supports, and 

arguably, both are very important if you want to pursue what has 

been described as an all-of-the-above kind of policy strategy for 

U.S. energy. I think it is interesting that we have not seen what 

I would call any kind of crowding out—to the best of my knowledge—of the wind industry crowding out the natural gas industry. 

The natural gas industry has been surging. I give full credit to 

George Mitchell and others whose incredible innovations have gone 

on and taken place over the years, as well as the new discoveries 

and the abilities to exploit them in the various shales around the 

U.S. It has really been an incredible thing, and it is helping American economic competitiveness. 

In terms of the wind industry and the potential impact, there are 

approximately 10 gigawatts of potential capacity of manufacturing 

on U.S. soil. We are thinking that about 15 gigawatts are going to 

be built between this year and next. 

So, if you simply were to drop that down very substantially in 

2017, 2018, and beyond, yes, you end up with a situation where 

you might have a considerable amount of built manufacturing capacity that essentially goes idle, similarly to what happened a couple years ago, the last time the industry faced this. 

Senator BENNET. Thank you. Professor Metcalf, one last question 

for you. In your testimony, you talked about the attractiveness of 

so-called technology-neutral tax credits. The chairman has talked 

25 

about that as perhaps the most realistic proposal to energy tax policy. I think I agree with that, but it is important for us to get the 

details right to ensure the policy works as well as existing credits. 

For example, Mr. Zindler was just talking about natural gas. 

Some of us have thought about, well, would you have a standard 

of emissions as a way of making sure that natural gas was a beneficiary as part of this? I just wonder whether you could talk a little 

bit about the details of what would be a sensible neutral credit. 

Dr. METCALF. Thank you. So it is an excellent question. 

Senator BENNET. Finally. [Laughter.] 

Dr. METCALF. So again, I think with all of these policies, we are 

trying to address market failures. And just a quick comment on 

your initial question about R&D: information is a pure public good, 

and we know that private markets under-provide information, so 

providing support for R&D is, I think, quite valuable and in that 

way quite important in the energy sector. 

So what we really want to do is to get the relative price of fossil 

fuels and non-fossil fuels right, taking into account the social cost 

of greenhouse gas emissions. So you need a baseline. Now, whether 

the baseline is the current emissions per million BTUs of natural 

gas or whether it is, say 90 percent of that level, I think that is 

something that is an important question. I do not, quite frankly, 

know what the right number is. Part of it depends on where we 

think that we can incentivize technology in the short run for natural gas to improve their emissions, and it might be around capturing fugitive emissions or other kinds of things like that. 

Once you have that baseline, then you do provide the right incentives, both for natural gas, as well as for wind and solar. It does 

give you the right signal, the price signal. 

And just one last very quick point: we have been talking a lot 

about expensing of intangible drilling costs. I just want to point out 

that the cost to the tax system of percentage depletion is double 

that of intangible drilling costs. We should not forget that either. 

Senator BENNET. I want to apologize for going over, Mr. Chairman. It is the first time ever, but thanks for the great panel. 

The CHAIRMAN. No, not all. Thank you for the important point. 

Senator Cardin? 

Senator CARDIN. Mr. Chairman, first, thank you very much for 

holding this hearing. It is incredibly important that we update our 

tax incentives for the energy realities of today. So I thank you for 

doing this, and I thank you for your leadership. 

I do want to point out that, in the legislation this committee has 

approved, we have already taken, I think, an important step on energy conservation with section 179D. I hope we will get that to the 

finish line. That allows not only the extension of 179D, but the improvements, with your help, that we put in here that deal with 

nonprofits being able to take advantage of the 179D credits. And 

we are working together to deal with pass-through entities and 

how we can make it work for them. I hope we also can get to existing structures using the 179D, because energy conservation is one 

of the easy areas that we should be able to deal with in an energy 

policy in this country. 

I want to spend my time getting answers from the panel on dealing with an area that we have not really focused on, which is tax 

26 

incentives. We spent a lot of energy and time talking about how we 

generate electricity and what we can do to encourage the generation of electricity, but we have not talked about how we can make 

more efficient the transmission and storage of energy in this country. 

There are a lot of new technologies focused on how we can do 

this in a much more efficient manner that could save energy, could 

save costs. I am interested in hearing from the panel their ideas 

on what we can do to encourage a more efficient system. Now, it 

can come from traditional sources, such as coal generating electricity or it could come from our renewable sources, such as solar 

or wind. 

How do we tackle the issue of this country being more efficient 

in the way that we store and transmit energy in America? Who 

wants to tackle that first? 

Yes, sir? 

Dr. METCALF. That is a great question. I have done a fair amount 

of research thinking about our transmission grid in the United 

States, and some thinking as well about storage. They are different 

issues in my mind. 

Storage is really an issue of research and development, coming 

up with technologies to store electricity at a cost-effective price. 

There is a lot of interesting work going on to do that. Of course, 

there is long-term storage. There is short-term storage for smoothing out fluctuations in energy. So I think continued R&D support 

is critical for making advances on the storage side. Of course, we 

have had storage going back a long time. Pump storage for hydroelectricity is a form of electricity storage, though it is less popular 

these days. 

On transmission, I think that we do have a good provision in the 

tax code in terms of accelerated depreciation for transmission. Here 

I think some of the challenges may be more on a regulatory basis. 

We are looking to move electricity great distances from resourcerich areas where we can produce wind to population-rich areas 

where we want to consume it. Often this requires sending that 

electricity across State lines, and then you have federalism issues 

and who gets to write the rules on this. Is it the Federal government? I think some advances were made in recent years on that, 

but that—— 

Senator CARDIN. Mr. Zindler, do you want to jump in here? I 

know there are some concerns about the difficulty of storing and 

transmitting with solar, with wind. I know there are some regulatory issues. There is no question about that, but can the tax code 

be more efficient in helping us deal with this? 

Mr. ZINDLER. It is an interesting question. Thinking about storage and balancing is something that, as you look to the long-term 

future and you see more of these variable sources of energy deployed, you certainly have to take into account. 

As far as the tax code is concerned, it is a good question. I think 

one of the more interesting—it is actually a non-tax solution, but 

in California, they have begun to mandate that the utilities put a 

certain amount of power storage onto the grid. I think that is not 

necessarily a bad idea, given the kinds of new challenges that we 

are facing. 

27 

It is hard for utilities and others to justify some of these investments right now, but the need for storage that will be there 5 or 

10 years down the road sort of calls out, in my view, for policymakers to think about putting in place policies that create the 

right kinds of incentives. 

Senator CARDIN. Does anyone else wish to comment? I have 18 

seconds left, so somebody could take it. 

Dr. KREUTZER. I think the grid operators and utilities should be 

the ones that come up with the money for doing this, unless it is 

basic research on technology that does not exist. But if there is a 

cheap source of energy that is variable and intermittent, then they 

would get the benefit of coming up—— 

Senator CARDIN. I think that point is well-taken. The problem is, 

it is just not being done today. I hear more and more of the generators saying, well, we cannot deal with the storage and transmission, therefore, we are either wasting energy or we are not producing as much as we would otherwise produce. 

Mr. Chairman, thank you very much. 

The CHAIRMAN. Senator Cardin, thank you for bringing up storage, because, obviously, the sun does not always shine, and wind 

does not always blow. The Department of Energy actually—back 

when I was chair—put together a report that came in, essentially, 

at the end of last year, and we are supposed to see soon what they 

have done to actually implement it. So most of the action has been 

on the regulatory side, but I am glad you are raising it here, because clearly this ought to be part of the tax debate too. 

All right. The birthday man of the hour, the recipient of the 

Dairy Queen gift certificate, has arrived. [Laughter.] 

Senator GRASSLEY. Thank you. Mr. Chairman, you probably 

know that while Senator Nickles was in the Senate, we probably 

only disagreed on one thing. 

The CHAIRMAN. I understand that. [Laughter.] 

Senator GRASSLEY. So I never had an opportunity to ask him a 

question where he had to answer. [Laughter.] 

I am not going to go into a lot of this stuff—I got here late—that 

I assume has already been asked dealing with oil and what some 

of us would say would be preferences for one energy, where we 

would like to ask you, why for those and not for others?But I would 

like to make this point and ask you, when it comes to understanding why eliminating one tax preference that you might support might be a job-killing tax hike, while eliminating another is 

ending a subsidy, do you believe that raising taxes on alternative 

energy and raising their cost of doing business will lead to job 

losses, and is there a difference, then, between a job loss in the oil 

and gas sector versus one lost in the renewable energy sector? 

Senator NICKLES. Senator Grassley, it is a pleasure to see you 

and happy birthday to you, and just two or three very quick comments. 

You and I served together for 24 years. You know I do not like 

subsidies, any subsidy. I happen to think there is a difference in 

allowing somebody to deduct an out-of-pocket expense. I do not consider that a subsidy. I do consider it a subsidy, a tax credit, if it 

is refundable, and someone is receiving a check. If not, they are reducing their taxes by a certain amount. 

28 

In energy—as some people in this room know—I led the effort to 

repeal the windfall profits tax. We finally did. I led the effort to decontrol natural gas. We finally did. I want the marketplace to work 

in energy, and it can. It has proven to be effective. 

Credits distort the marketplace, particularly if the credits are 

enormous. In the case of wind—to give a tax credit of 2.3 cents per 

kilowatt hour compared to, let us say an average cost of 6 cents— 

you are talking about a subsidy that is about 40 percent of the 

wholesale price. That is enormous. 

If it was going to be comparable to oil—big oil as you might say, Senator Grassley—that would be roughly $2 per Mcf. Those are 

enormous subsidies. When people talk about parity, I say, you cannot afford parity—you cannot afford to extend the subsidies that 

are in the Production Tax Credit to other forms of energy. It just 

is not doable. 

There is one other comment I would just make. Senator Enzi is 

here. I noticed the CEO of Wyoming Power is building a multibillion-dollar wind farm in Wyoming, and he said he can do it without the tax credits. He says it is market-competitive. I hope it is. 

The PTC has been on now for 22 years and is going to extend 

another 10. That is 32 years. That is long enough. 

I do see an enormous difference between the PTC, which I do 

consider a subsidy, and intangible drilling costs. Another big subsidy for big oil—according to the administration—is section 199, 

the manufacturing rate. I know, Senator Grassley, you will remember that I argued against having a lower manufacturing rate—a 

lower corporate rate. When you all are rewriting this next year, I 

hope you eliminate this disparity between manufacturers and nonmanufacturers. 

In the definition of manufacturers, you have movie production, 

you have Starbucks, you have a whole lot of people that—really, 

those are manufacturers? Oil production, I might say, and—— 

Senator GRASSLEY. Can I interrupt your filibuster, because—— 

Senator NICKLES. Sure. [Laughter.] 

Senator GRASSLEY. My question was, is a job loss in one industry 

any different than a job loss in another? You make the point that, 

if we do away with these, there is going to be job loss in the petroleum industry, in the gas industry. What about job losses in the 

alternative energy industry if we end these? 

Senator NICKLES. I would think that they would be made up by 

other industries. I think wind, particularly, is crowding out other 

sources. It is crowding out a coal plant in Wyoming that shut 

down. It may force nuclear power plants to be shut down prematurely. Those are jobs as well. 

Natural gas is kind of the swing fuel. Right now it is the competitive fuel, because natural gas sells for about $4 per Mcf. So if 

the jobs are not being created in wind, I think they will be created 

or added—not deleted—in the other industries. I would think you 

would not see overall job loss. You may have some reduction in the 

wind sector, maybe not, because Wyoming says it can go on its 

own, but there might be some. My guess is it will be made up in 

other sources. 

Energy needs to be produced. We have a hunger for energy. We 

need to provide it. Our economy depends on it. 

29 

Senator GRASSLEY. Mr. Chairman, you might wonder, with his 

being in the U.S. Senate, how I was able to get the Wind Energy 

Tax Credit passed. [Laughter.] 

The CHAIRMAN. None of us underestimates your incredible legislative prowess. 

Senator NICKLES. Not only were you the father of wind, but you 

were the father and sustainer of ethanol for many years. My compliments to your effectiveness. [Laughter.] 

Senator GRASSLEY. Well, thank you. [Laughter.] 

The CHAIRMAN. Thanks. 

Senator GRASSLEY. You bet. 

The CHAIRMAN. My colleagues are heading to the exit. I just 

want to ask one last question, again, in the interest of trying to go 

forward and not continue just the sparring that we have seen. 

I am sure that you have already picked up that, with respect to 

tax reform, everything has to be on the table, because, if everybody 

walks in and says, look, I am for tax reform except for that one 

thing that is important to me or my constituents and is so incredibly wholesome, you are never going to be able to have tax reform, 

because you will have 100 Senators all doing that. 

Senator Gregg, who was—and Senator Nickles remembers this— 

Leader McConnell’s go-to person on economics, sat next to me 

every week on a sofa for 2 years to produce our tax reform bill, 

which is still the only bipartisan Federal income tax reform bill. 

You do not get everything you want. Then you come into a committee like this and say, everything is on the table, and that is how 

you proceed. 

So in that regard, I want to just ask one last question about the 

technology-neutral approach, which you talked about, Dr. Metcalf, 

and maybe some others would like to as well. Let us say we take 

this crazy quilt of these 40-plus incentives and here—on this point, 

at least, we will not have a riot breakout. Some of them are fossilrelated. Some of them are renewables-related. So we can, sort of, 

start from that point. 

Let us say we decided to, in effect, make a change so that for the 

long-term, the few provisions that we would have would be based 

on performance, not fuel type. Now, from the seat of my pants— 

and I would want to talk with you all and others—it strikes me, 

for example, that natural gas would probably do pretty well with 

a standard like that. And again, this is just purely, kind of, seat 

of the pants. 

But you started that with Senator Bennet. I have talked about 

it, and other Senators have talked about it. Is that, sort of, the 

kind of lodestar we ought to be talking about, seeing if we can 

move to a tech-neutral kind of approach, so that the focus is on 

performance and getting out of winners, losers, and all the rest? 

Some provisions now are for fossil fuels. Some now are for renewables. That is where we want to go. Is that the kind of thing you 

are talking about, and is that what we ought to be building 

around? 

Dr. METCALF. Given that we are not in a world where we are 

going to be looking at carbon pricing, then I think this is the right 

approach to be taking. And you really said something very important, that it is performance-based. What we care about is not how 

30 

many generating plants we build, but how much clean electricity 

we get out of them or how much lower-emission electricity we get 

out of these plants. So that really speaks to the value of a production-based approach. Though I understand that there are, perhaps, 

liquidity reasons why investment approaches would be valuable as 

well. 

So performance, I think, is important, and here I absolutely 

agree with Mr. Nickles that we do not want to be supporting mature industries. In that regard, I think the oil and gas industry is 

no longer an infant industry. I think percentage depletion is not related to the actual cost incurred, so I think we can make savings 

there. 

This actually provides some of the revenue to pay for these 

things, because you have the tough job of actually having to finance 

these tax breaks in the system. So a performance-based system will 

incentivize cleaner use of natural gas, and it will incentivize other 

technologies, and it will incentivize technologies that we do not 

even know about yet that will come along, whether it is cellulosic 

ethanol or other technologies. By not linking it to particular fuel 

types, we open the door to inventors and researchers to come up 

with technologies that will fit into this technology-neutral approach. 

The CHAIRMAN. Let us do this. You can tell that I am interested 

in this. I think this has the potential to be something that could 

be bipartisan. All of these capable people are toiling away on tax 

reform. If you or any of the panel members have further thoughts 

on this technology-neutral kind of approach, call all these good people nights and weekends and take their free time. [Laughter.] 

This is extraordinarily important. 

Senator Nickles, you are absolutely right with respect to the 

challenge of tax reform. When Senator Gregg retired, Senator 

Coats came in. Senator Coats had a number of areas that were important to him in the energy area, and you can see that I tried to 

address those as part of our reform bill going forward. 

The old notion—I think I still ascribe this to Senator Bradley at 

the time—is that tax reform is always totally, completely, and thoroughly impossible until about 15 minutes before it comes together. 

That means that this debate is in the ‘‘to be continued’’ department. 

We are going to keep the record open for all who would like to 

offer added submissions. With that, the Finance Committee is adjourned. 

[Whereupon, at 12:03 p.m., the hearing was concluded.] 

(31) 

A P P E N D I X 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD


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(109) 

COMMUNICATIONS


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Æ 


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