U.S. GOVERNMENT PUBLISHING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Publishing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

26–902 PDF 2017

FEDERAL ENERGY-RELATED TAX POLICY AND ITS 

EFFECTS ON MARKETS, PRICES, AND CONSUMERS 

HEARING 

BEFORE THE

SUBCOMMITTEE ON ENERGY 

OF THE

COMMITTEE ON ENERGY AND 

COMMERCE 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED FIFTEENTH CONGRESS 

FIRST SESSION 

MARCH 29, 2017 

Serial No. 115–22 

( 

Printed for the use of the Committee on Energy and Commerce 

energycommerce.house.gov 

COMMITTEE ON ENERGY AND COMMERCE 

GREG WALDEN, Oregon 

Chairman 

JOE BARTON, Texas 

Vice Chairman 

FRED UPTON, Michigan 

JOHN SHIMKUS, Illinois 

TIM MURPHY, Pennsylvania 

MICHAEL C. BURGESS, Texas 

MARSHA BLACKBURN, Tennessee 

STEVE SCALISE, Louisiana 

ROBERT E. LATTA, Ohio 

CATHY MCMORRIS RODGERS, Washington 

GREGG HARPER, Mississippi 

LEONARD LANCE, New Jersey 

BRETT GUTHRIE, Kentucky 

PETE OLSON, Texas 

DAVID B. MCKINLEY, West Virginia 

ADAM KINZINGER, Illinois 

H. MORGAN GRIFFITH, Virginia 

GUS M. BILIRAKIS, Florida 

BILL JOHNSON, Ohio 

BILLY LONG, Missouri 

LARRY BUCSHON, Indiana 

BILL FLORES, Texas 

SUSAN W. BROOKS, Indiana 

MARKWAYNE MULLIN, Oklahoma 

RICHARD HUDSON, North Carolina 

CHRIS COLLINS, New York 

KEVIN CRAMER, North Dakota 

TIM WALBERG, Michigan 

MIMI WALTERS, California 

RYAN A. COSTELLO, Pennsylvania 

EARL L. ‘‘BUDDY’’ CARTER, Georgia 

FRANK PALLONE, JR., New Jersey 

Ranking Member 

BOBBY L. RUSH, Illinois 

ANNA G. ESHOO, California 

ELIOT L. ENGEL, New York 

GENE GREEN, Texas 

DIANA DEGETTE, Colorado 

MICHAEL F. DOYLE, Pennsylvania 

JANICE D. SCHAKOWSKY, Illinois 

G.K. BUTTERFIELD, North Carolina 

DORIS O. MATSUI, California 

KATHY CASTOR, Florida 

JOHN P. SARBANES, Maryland 

JERRY MCNERNEY, California 

PETER WELCH, Vermont 

BEN RAY LUJA ́ N, New Mexico 

PAUL TONKO, New York 

YVETTE D. CLARKE, New York 

DAVID LOEBSACK, Iowa 

KURT SCHRADER, Oregon 

JOSEPH P. KENNEDY, III, Massachusetts 

TONY CA ́ RDENAS, California 

RAUL RUIZ, California 

SCOTT H. PETERS, California 

DEBBIE DINGELL, Michigan7 

SUBCOMMITTEE ON ENERGY

FRED UPTON, Michigan 

Chairman 

PETE OLSON, Texas 

Vice Chairman 

JOE BARTON, Texas 

JOHN SHIMKUS, Illinois 

TIM MURPHY, Pennsylvania 

ROBERT E. LATTA, Ohio 

GREGG HARPER, Mississippi 

DAVID B. MCKINLEY, West Virginia 

ADAM KINZINGER, Illinois 

H. MORGAN GRIFFITH, Virginia 

BILL JOHNSON, Ohio 

BILLY LONG, Missouri 

LARRY BUCSHON, Indiana 

BILL FLORES, Texas 

MARKWAYNE MULLIN, Oklahoma 

RICHARD HUDSON, North Carolina 

KEVIN CRAMER, North Dakota 

TIM WALBERG, Michigan 

GREG WALDEN, Oregon (ex officio) 

BOBBY L. RUSH, Illinois 

Ranking Member 

JERRY MCNERNEY, California 

SCOTT H. PETERS, California 

GENE GREEN, Texas 

MICHAEL F. DOYLE, Pennsylvania 

KATHY CASTOR, Florida 

JOHN P. SARBANES, Maryland 

PETER WELCH, Vermont 

PAUL TONKO, New York 

DAVID LOEBSACK, Iowa 

KURT SCHRADER, Oregon 

JOSEPH P. KENNEDY, III, Massachusetts 

G.K. BUTTERFIELD, North Carolina 

FRANK PALLONE, JR., New Jersey (ex 

officio) 

(II) 

(III) 

C O N T E N T S 

Page 

Hon. Fred Upton, a Representative in Congress from the State of Michigan, 

opening statement ................................................................................................ 2 

Prepared statement .......................................................................................... 3 

Hon. Jerry McNerney, a Representative in Congress from the State of California, opening statement .................................................................................... 4 

Hon. Greg Walden, a Representative in Congress from the State of Oregon, 

opening statement ................................................................................................ 5 

Prepared statement .......................................................................................... 7 

Hon. Frank Pallone, Jr., a Representative in Congress from the State of 

New Jersey, opening statement .......................................................................... 8 

Prepared statement .......................................................................................... 9 

WITNESSES

Terry Dinan, Ph.D., Senior Advisor, Microeconomic Studies Division, Congressional Budget Office ............................................................................................. 11 

Prepared statement .......................................................................................... 13 

Robert P. Murphy, Ph.D., Senior Economist, Institute for Energy Research ..... 32 

Prepared statement .......................................................................................... 34 

Devin C. Hartman, Electricity Policy Manager and Senior Fellow, R Street 

Institute ................................................................................................................ 60 

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

Steve Clemmer, Director of Energy Research and Analysis, Climate & Energy 

Program, Union of Concerned Scientists ........................................................... 77 

Prepared statement .......................................................................................... 79 

Joseph E. Aldy, Associate Professor of Public Policy, Harvard Kennedy 

School .................................................................................................................... 97 

Prepared statement .......................................................................................... 99 

Benjamin Zycher, Ph.D., John G. Searle Chair and Resident Scholar, American Enterprise Institute ..................................................................................... 109 

Prepared statement .......................................................................................... 111 

SUBMITTED MATERIAL

Statement of the American Institute of Architects, March 28, 2017, submitted 

by Mr. Sarbanes ................................................................................................... 172 

Statement of Doug Koplow, President, Earth Track, Inc., March 29, 2017, 

submitted by Mr. Sarbanes ................................................................................. 176 

Statement of Lake Erie Energy Development Corporation, March 29, 2017, 

submitted by Mr. Sarbanes ................................................................................. 196 

Statement of Biomass Thermal Energy Council, March 29, 2017, submitted 

by Mr. Sarbanes ................................................................................................... 198 

Statement of the American Public Power Association, March 29, 2017, submitted by Mr. Olson ............................................................................................. 201 

Statement of Matthew Godlewski, President, Natural Gas Vehicles for America, March 29, 2017, submitted by Mr. Olson .................................................... 208 

(1) 

FEDERAL ENERGY-RELATED TAX POLICY AND 

ITS EFFECTS ON MARKETS, PRICES, AND 

CONSUMERS 

WEDNESDAY, MARCH 29, 2017 

HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON ENERGY, 

COMMITTEE ON ENERGY AND COMMERCE, 

Washington, DC. 

The subcommittee met, pursuant to call, at 10:21 a.m., in Room 

2322 Rayburn House Office Building, Hon. Fred Upton (chairman 

of the subcommittee) presiding. 

Members present: Representatives Upton, Olson, Barton, Shimkus, Murphy, Latta, Harper, McKinley, Kinzinger, Griffith, Johnson, Long, Bucshon, Flores, Mullin, Hudson, Walberg, Walden (ex 

officio), McNerney, Peters, Green, Castor, Sarbanes, Welch, Tonko, 

Loebsack, Schrader, Kennedy, and Pallone (ex officio). 

Staff present: Grace Appelbe, Legislative Clerk, Energy/Environment; Ray Baum, Staff Director; Mike Bloomquist, Deputy Staff Director; Karen Christian, General Counsel; Wyatt Ellertson, Research Associate, Energy/Environment; Blair Ellis, Press Secretary/ 

Digital Coordinator; Tom Hassenboehler, Chief Counsel, Energy/ 

Environment; A.T. Johnston, Senior Policy Advisor, Energy; Ben 

Lieberman, Senior Counsel, Energy; Brandon Mooney, Deputy 

Chief Energy Advisor; Mark Ratner, Policy Coordinator; Annelise 

Rickert, Counsel, Energy; Christopher Sarley, Policy Coordinator, 

Environment; Dan Schneider, Press Secretary; Peter Spencer, Professional Staff Member, Energy; Madeline Vey, Policy Coordinator, 

Digital Commerce and Consumer Protection; Evan Viau, Staff Assistant; Hamlin Wade, Special Advisor for External Affairs; Everett 

Winnick, Director of Information Technology; Andrew Zach, Senior 

Professional Staff Member, Environment; Jeff Carroll, Minority 

Staff Director; David Cwiertny, Minority Energy/Environment Fellow; Tiffany Guarascio, Minority Deputy Staff Director and Chief 

Health Advisor; Rick Kessler, Minority Senior Advisor and Staff 

Director, Energy and Environment; John Marshall, Minority Policy 

Coordinator; Jessica Martinez, Minority Outreach and Member 

Services Coordinator; Alexander Ratner, Minority Policy Analyst; 

and Tuley Wright, Minority Energy and Environment Policy Advisor. 

2 

OPENING STATEMENT OF HON. FRED UPTON, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MICHIGAN 

Mr. UPTON. Good morning, everybody. Sorry I’m late. Today’s 

hearing gives us an opportunity to take a big-picture look at the 

effects of decades of Federal energy tax policy on energy markets, 

prices, and most importantly, consumers. So I’m hopeful that our 

discussion today will help us develop a deeper understanding of the 

costs and benefits of driving energy policy through the tax code. 

There is a great deal of interest in this topic and, with comprehensive tax reform on the agenda by the Ways and Means Committee, 

I look forward to working with them to deliver for the American 

people. 

For decades, the Federal Government has used the tax code to 

support the energy sector and promote energy policy goals. Tax 

preferences provide the bulk of Federal support, and, to put that 

in perspective, in 2016, energy-related tax preferences cost an estimated $18.4 billion, while relevant DOE spending programs cost 

nearly 6 billion. 

Looking back on the historical trends, we see that tax treatments 

have been used for a variety of purposes. One of the primary motivations has been to bring down costs for alternative energy sources 

and other energy-related technologies that would have otherwise 

been uneconomic. 

By some measures, tax subsidies have been pretty successful. For 

example, median installed prices for solar PV has fallen dramatically. Prices declined by 6 to 12 percent per year on average over 

the last 20 years, from about $12 per watt to less than $4 per watt, 

according to the DOE. Some critics might contend that solar costs 

would have come down anyway even without those tax measures, 

or that competing technologies were discouraged while solar was 

given an unfair advantage. Nonetheless, many see the role of the 

tax code as positive for the development of affordable solar energy. 

Similar stories can be told for wind generation and energy-effi- ciency technologies. In 1980, the cost of wind energy was over $500 

per megawatt hour. Today, the levelized cost of wind energy is 

about $50 per megawatt hour, according again to the EIA. In ’05, 

the country reached its highest level of per capita electricity consumption. Today, electricity consumption continues to decline 

thanks to the adoption of energy-efficient technologies that were 

subsidized through the tax code. 

Clearly, a strong argument can be made that specialized energytax treatments have played a major role in helping the U.S. 

achieve its energy goals. However, given the lasting market and 

price distorting impacts that these policies place on effective price 

formation and bidding in competitive markets, some are questioning whether yesterday’s justification for energy-tax policies remain appropriate for today. 

Today’s markets are evolving to respond to new trends in energy 

production, electricity generation, technological innovation, and 

State policies, which are all having an impact, a positive one, on 

the proper functioning of the interstate wholesale electricity system. 

So, as we look to modernize our energy policies, we are going to 

put consumers first. Consumers should be driving energy markets 

3 

from the bottom up rather than having the Federal Government 

driving them from the top. With tax reform on the horizon, Congress should be asking, How can we level the playing field to encourage competition, and will this policy grow our economy and 

keep energy policies affordable and reliable? Today’s hearing is an 

important step in that process. 

[The prepared statement of Mr. Upton follows:] 

PREPARED STATEMENT OF HON. FRED UPTON

Good morning. Today’s hearing gives us an opportunity to take a big picture look 

at the effects of decades of Federal energy-tax policy on energy markets, prices, and 

most importantly, consumers. I am hopeful that our discussion today will help us 

develop a deeper understanding of the costs and benefits of driving energy policy 

through the tax code. There is a great deal of interest in this topic and with comprehensive tax reform on the agenda, I look forward to working with our colleagues 

on the Ways and Means Committee to deliver for the American people. 

For decades, the Federal Government has used the tax code to support the energy 

sector and promote energy-policy goals. Tax preferences provide the bulk of Federal 

support. To put this in perspective, in 2016, energy-related tax preferences cost an 

estimated $18.4 billion, while relevant DOE spending programs cost $5.9 billion. 

Looking back on historical trends, we see that tax treatments have been used for 

a variety of purposes. One of the primary motivations has been to bring down costs 

for alternative energy sources and other energy-related technologies that would 

have otherwise been uneconomic. 

By some measures, tax subsidies have been successful. For example, median installed prices for solar PV have fallen dramatically. Prices have declined by 6- 12 

percent per year on average over the last 20 years from about $12 per watt to less 

than $4 per watt according to the DOE. Some critics might contend that solar costs 

would have come down anyway even without these tax measures, or that competing 

technologies were discouraged while solar was given an unfair advantage. Nonetheless, many see the role of the tax code as positive for the development of affordable 

solar energy. 

Similar stories can be told for wind generation and energy-efficiency technologies. 

In 1980, the cost of wind energy was over $500 per megawatt hour; today the leveled cost of wind energy is around $50 per megawatt hour, according to EIA. 

In 2005, the country reached its highest level of per capita electricity consumption; today, electricity consumption continues to decline thanks to the adoption of 

energy-efficient technologies that were subsidized through the tax code. 

Clearly, a strong argument can be made that specialized energy-tax treatments 

have played a major role in helping the United States achieve its energy goals. However, , given the lasting market and price distorting impacts that these policies 

place on effective price formation and bidding in competitive markets, some are 

questioning whether yesterday’s justifications for energy-tax policies remain appropriate for today. Today’s markets are evolving to respond to new trends in energy 

production, electricity generation, technological innovation, and State policies, which 

are all having an impact on the proper functioning of the interstate wholesale electricity system. 

As we look to modernize our energy policies, we’re going to put consumers first. 

Consumers should be driving energy markets from the bottom up, rather than having the Federal Government driving it from the top down. With tax reform on the 

horizon, Congress should be asking ‘‘how can we level the playing field and encourage competition?’’ and ‘‘will this policy grow our economy and keep energy prices affordable and reliable?’’ 

Today’s hearing is an important step in this process. 

With this goal in mind, I look forward to today’s hearing and continuing the work 

with our colleagues on the Ways and Means Committee to modernize our tax code 

to reflect our changed energy landscape and 21st century realities. 

Mr. UPTON. And I would yield to any of my colleagues on the 

right. The gentleman from the Texas, the vice chairman. 

Mr. OLSON. I thank you, Mr. Chairman, and I will be very brief. 

This hearing is very important because all too often we are only 

looking at one side of the coin. Tax policy without a doubt moves 

4 

markets when it comes to energy. For example, my home State of 

Texas leads the Nation in wind power. Some of that is because of 

how the State has handled construction of power lines, but it is 

also absolutely true that the wind production tax credit is distorting our markets. 

At the same time, there are credits that give a leg up on some 

sources and leave others behind. In our current tax system, DC bureaucrats pick winners and losers and they have a dubious record. 

They always pick the losers. My fellow Texan, Kevin Brady, is on 

the driver’s seat for tax reform. I am glad we are having this hearing this morning and can be part of that conversation. I yield back. 

Mr. UPTON. I appreciate the gentleman’s testimony. Now I will 

look to my friends on my left. I recognize Mr. McNerney for 5 minutes for an opening statement. 

OPENING STATEMENT OF HON. JERRY MCNERNEY, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA 

Mr. MCNERNEY. Well, I thank you, Mr. Chairman, and this is an 

area I care a lot about. You know, climate change has been happening, it is affecting our water, our air, our public health, and our 

environment. And despite all this, yesterday, our President signed 

an executive order to retract the Clean Power Plan, to roll back 

carbon standards for new power plants, to rescind methane standards, and it is unfortunate that the administration is trying to 

undo the progress that we have made while ignoring where our energy sector is actually heading. We should be a world leader in 

clean energy. 

Our hearing today is about the larger implication of our Nation’s 

energy-tax policy. We use the tax code for a lot of stuff, for 

incentivizing things like water use, energy deployment and directing business expenditures, and we use tax policies to encourage innovation. The Federal Government plays a critical role in supporting energy development and production and this leads to increased efficiency, jobs, and reduced emissions. 

I worked in the renewable energy sector for 2 decades before 

coming to Congress back when we actually had to climb windmills 

to work on them up on the top of the towers. So I have seen firsthand how the industry has grown from the late 1980s to where it 

is today, and I saw more than once what happens when Federal 

subsidies change. We saw innovation and jobs and industry going 

overseas during periods of low Federal support. 

However, we have learned from that mistake and the Federal 

Government has taken a steadier hand. Let’s look at some of the 

progress with wind. The wind capacity has doubled since 2010. It 

represents nearly one-third of all new electricity generation capacities since 2007; and in 2016, 15,000 new jobs were directly created 

in wind energy, and 102,000 indirect full-time jobs were created. 

Now, with solar there is a record 14,800 megawatts of solar capacity installed in 2016, over 42,000 megawatts installed in the 

U.S. That is more than eight million homes and this is key, it created over 260,000 jobs just in 2016. So we are moving in the right 

direction. In hydropower about 101 gigawatts capacity, that is a lot 

of big watts. A lot of capacity was added with potential to grow to 

5 

150 more gigawatts by 2050. This would mean $209 billion in savings from avoided global damages from greenhouse gas emissions. 

The U.S. tax code supports the energy sector by providing a number of targeted tax incentives related to production of fossil fuels, 

nuclear power, renewable energy, and energy-efficiency technology. 

Oil and gas firms benefit from a number of direct and indirect subsidies that increase their profitability and these are permanent 

subsidies, whereas the renewable sector the subsidies are always 

grandfathered and always sunset. 

Now, it is not about and it shouldn’t be about picking winners 

and losers. We can have a reliable generation developed in this 

country that is zero or low emission. I think it is unfair to overly 

simplistically claim that the tax incentives have somehow ruined 

the wholesale/retail markets across this country. For example, in 

California is one of the three least carbon-intensive economies in 

the world, and in 2014, California averaged monthly residential 

bills were 20 percent lower than the U.S. as an average. The argument ignores such factors as changes in our centralized versus decentralized generation, policies intended to protect our air and 

water resources, natural gas prices and transmission congestion. 

In order for the U.S. to remain globally competitive we need to 

recognize a couple of things. We have to decarbonize the electric 

sector and we need to modernize our electric grid. The Nation’s 

electric grid is undergoing rapid changes right now that we have 

seen new technologies help shift the market structure across the 

United States. This includes demand-response and distributed energy sources. The boom in solar and wind, the potential for storage, 

has allowed customers and consumers to become more engaged in 

the electricity market including selling energy back to the grid. 

These dynamics along with the more cost competitive nature of 

renewable energy has been driving the wheel where we need to go. 

It will be important that we have a grid that is able to incorporate 

this growing clean energy to the variable energy needs and can reliably produce energy regardless of the generation sources. I am 

about to run out of time so I am going to wrap up here. The market 

is moving toward clean, renewable energy. Let’s not change that. 

With that, I yield back. 

Mr. UPTON. I would have given my friend on the left an extra 

10 seconds, so thank you. I recognize the chairman of the full committee, the gentleman from Oregon, Mr. Walden. Go Ducks. 

Mr. WALDEN. Thank you very much. Go Ducks, yes. Sorry about 

Michigan. 

Mr. UPTON. Time has expired. 

[Laughter.] 

Mr. WALDEN. That is what happened, kind of ran out. 

OPENING STATEMENT OF HON. GREG WALDEN, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF OREGON 

Over the last decade, the United States has undergone an energy 

revolution. I think we all know that. Old assumptions have been 

proven wrong and the future of energy production is brighter than 

it has ever been, and the shale revolution made the peak oil theory 

simply obsolete, while technological advances combined with greater market competition have driven power sector emissions down 

6 

below 2005 levels. And new information and communication technologies are providing consumers new insights into their energy 

consumption habits that were once taken for granted. 

While some of these developments have been assisted by Federal 

policy, the bulk of the changes are the result of market forces over 

the last decade. So much of our Federal energy policy is designed 

to address an antiquated marketplace that looks entirely different 

than the one we see emerging today. This is especially true regarding tax policy. A host of energy-related provisions have intermittently been added to the tax code over decades. This includes everything from tax credits for renewable electricity production to incentives for installing energy-saving devices in our homes. Now, 

there are also provisions that create favorable depreciation schedules for certain energy investments. The list goes on and on. 

We have allowed these tax measures to accumulate, frankly, 

without sufficient oversight, and it is time to give them a long-overdue checkup. For example, it is not hard to find instances where 

tax credits encourage a particular activity but tough regulations 

and lengthy permitting delays are at the same time discouraging 

it. We are also seeing more State-level interventions through tax 

and nontax policy in the markets, which add another layer of complexity to this issue. 

So I think it is important for all of us, the committee of jurisdiction on energy matters, to understand all of these energy-related 

policies and view them in an integrated fashion, which is why we 

are having this hearing today. The stakes could hardly be higher. 

Getting energy-tax policy right can preserve millions of jobs in the 

energy and manufacturing sectors while potentially adding many 

more emerging sectors in the years ahead. Our efforts can also bolster our economic strength as America continues to emerge as the 

21st century’s newest energy superpower and expand its export 

market opportunities. 

However, what ultimately matters most are these policy impacts 

on consumers. We need to do what is best for households struggling 

to pay the electric or gas bill. Open and competitive markets are 

the surest way to keep prices down for families while taking full 

advantage of the technological improvements that give consumers 

more control over the way we use energy. 

This Congress we will examine how energy and electricity markets, and the policies affecting those markets, are impacting consumers. Congress will also need to consider ways to modernize and 

better integrate tax-related energy policy. But before we reach that 

point we need to have a broader understanding of where our energy policies stand right now, and that is why we are here today. 

So we appreciate our witnesses’ testimony and your guidance and 

counsel you will give us today and in the future. 

Mr. Chairman, I thank you for your leadership on this issue as 

well. I can tell you in Oregon we have a robust energy policy. In 

my district alone we have thousands and thousands of megawatts 

of wind energy, we have great potential for geothermal energy, we 

have solar energy, and of course massive hydroelectric energy 

throughout the Northwest. 

So we have been on the forefront of renewable energy for a long 

time. It has been a good thing, but I think it is always good to look 

7 

and evaluate it, how all these incentives and subsidies and all affect the market and are they really needed. In some areas, some 

they are, some maybe not. Some maybe have come to maturity and 

don’t need them at all. Others may continue to need them. 

I think it is important for us to take a look at the whole panoply 

of support systems, markets, and look at the grid as well, you know 

we are doing that in your committee, as we look at the whole issue 

going forward. So thank you, Mr. Chairman, for doing this hearing. 

I look forward to hearing from our witnesses. I would admit up 

front I have another subcommittee I am bouncing back and forth 

between, but I have all your testimony. Thank you, and I yield 

back. 

[The prepared statement of Mr. Walden follows:] 

PREPARED STATEMENT OF HON. GREG WALDEN

Over the last decade, the United States has undergone an energy revolution. Old 

assumptions have been proven wrong and the future of energy production is brighter than it has ever been. The shale revolution made the peak oil theory obsolete, 

while technological advances, combined with greater market competition have driven power sector emissions down below 2005 levels. And new information and communication technologies are providing consumers new insights into their energy-consumption habits that were once taken for granted. While some of these developments have been assisted by Federal policy, the bulk of the changes are the result 

of market forces over the last decade. 

So much of our Federal energy policy is designed to address an antiquated marketplace that looks entirely different than the one we see emerging today. This is 

especially true regarding tax policy. A host of energy-related provisions have intermittently been added to the tax code over decades. This includes everything from 

tax credits for renewable electricity production to incentives for installing energysaving devices in our homes. There are also provisions that create favorable depreciation schedules for certain energy investments. The list goes on. 

We have allowed these tax measures to accumulate without sufficient oversight, 

and it is time to give them a long-overdue check-up. For example, it is not hard to 

find instances where tax credits encourage a particular activity but tough regulations and lengthy permitting delays are at the same time discouraging it. We are 

also seeing more State-level interventions through tax and nontax policy in the markets, which add another layer of complexity to this issue. 

It is important for us, the committee of jurisdiction on energy matters, to understand all of these energy-related policies and view them in an integrated fashion. 

The stakes could hardly be any higher. Getting energy-tax policy right can preserve millions of jobs in the energy and manufacturing sectors while potentially adding many more in emerging sectors in the years ahead. Our efforts can also bolster 

our economic strength as America continues to emerge as the 21st century’s newest 

energy superpower and expand its export market opportunities. 

However, what ultimately matters most are these policy impacts on consumers. 

We need to do what is best for households struggling to pay the electric or gas bill. 

Open and competitive markets are the surest way to keep prices down for families 

while taking full advantage of the technological improvements that give consumers 

more control over the way they use energy. 

This Congress, we will examine how energy and electricity markets, and the policies affecting those markets, are impacting consumers. Congress will also need to 

consider ways to modernize and better integrate tax-related energy policy. But before we reach that point, we need to have a broader understanding of where our 

energy policies stand right now, and that is why we are here today. 

I welcome today’s witnesses and look forward to hearing their thoughts on today’s 

energy policies. 

Mr. UPTON. The gentleman yields back. The Chair recognizes the 

ranking member of the full committee, Mr. Pallone from New Jersey, for 5 minutes. 

8 

OPENING STATEMENT OF HON. FRANK PALLONE, JR., A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NEW JERSEY 

Mr. PALLONE. Thank you, Mr. Chairman. Thanks for holding this 

hearing on how tax policy affects our Nation’s energy policy. The 

conversation of late has focused on the various tax credits that benefit solar, wind, and other renewables, yet every form of energy 

produced receives some form of favorable tax treatment. Many also 

receive favorable regulatory treatment as well. 

And this is not new. It can be traced back to the tariffs giving 

domestic coal an advantage right after we became a nation. Coal 

and wood fueled the early growth of our country and the railroads 

that eventually connected it, while the Government put forward 

policies that helped underwrite dominance of all three. And looking 

back on the 20th century, Federal energy-tax subsidies almost entirely benefited oil and gas interests. It wasn’t until the early 

1900s, I should say the early 1990s that the Federal Government 

began to provide meaningful tax credits for energy produced from 

renewable resources. 

So, when someone pulls out a statistic from a given year in recent memory citing the preponderance of tax credits for renewable 

energy, it is worth remembering that coal, oil, and gas have benefited from centuries of beneficial tax treatment, and many of those 

fossil incentives are permanent, unlike the temporary nature of tax 

credits for renewables. Now, let me be clear: I am not taking issue 

with tax incentives or saying it is a bad thing in any way to have 

supported all of these technologies at certain times throughout our 

history. But it is important to put today’s hearing in context. 

As I said, there have been and likely will continue to be subsidies 

for all types of energy production. But our task as legislators now 

is to determine where Federal support should be focused. The 

choices we make in providing tax benefits to one type of generation 

versus another have real world impacts on the energy sector. And 

these are important choices because we must keep energy affordable, but we must also think about the impacts certain sources of 

energy have on human health and the environment. 

The Federal Government should be incentivizing technologies 

that are cleaner, safer, and more protective of the health of all 

Americans. The renewable energy sources in particular provide societal benefits that cannot be effectively valued by the markets. Another important factor we must consider are new technologies with 

clear benefits to the electricity grid such as battery storage and energy efficiency. 

Tax subsidies are among the policy drivers least understood by 

the general public. This is largely because they also are the least 

transparent. Many are only known because they expire and have 

to be reconsidered every few years. However, there are many more 

that are not known to the public because they are permanent in 

nature. For example, oil and gas firms can organize as master limited partnerships, a corporate form that allows the companies to 

pass-through profits without paying corporate taxes. And this benefit continues in perpetuity with no reauthorization by Congress 

needed. 

9 

There are also many nontaxed regulatory subsidies that I hope 

will not be overlooked as we consider subsidies and the impact on 

the energy market. For instance, Section 404 of the Clean Air Act 

literally contains the names of hundreds of coal-fired electric generating units that were each given the right to emit thousands of 

tons of sulphur dioxide pollution extending their operating lives 

and keeping them competitive with cleaner forms of energy. 

Another example, the Superfund statute excludes oil and gas 

from the definition of hazardous substance, providing massive liability protection to one specific energy sector that is often a major 

source of contamination in communities around the country. This 

provides an economic boost that would otherwise be on the hook for 

expensive cleanups. Similarly, oil and gas exploration and production waste are excluded from RCRA regulations. All of this special 

treatment directly affects the costs associated with producing and 

distributing oil, gas, and electricity at the expense of taxpayers and 

the environment. 

So Mr. Chairman, if we are to move down this path of examining 

tax subsidies we must also consider all subsidies, direct, indirect, 

and regulatory. And I believe the tax policies should seek to limit 

the cost of pollution to society including the costs that regulatory 

subsidies often effectively shift from companies onto the taxpayer 

and the environment itself. Unfortunately, if fuels and energy truly 

reflect the long-term cost to society and the environment as well as 

individuals, people will make rational choices that will benefit all 

of us. And I yield back. 

[The prepared statement of Mr. Pallone follows:] 

PREPARED STATEMENT OF HON. FRANK PALLONE, JR. 

Thank you, Mr. Chairman, for holding this hearing today on how tax policy affects 

our Nation’s energy policy. 

The conversation of late has focused on the various tax credits that benefit solar, 

wind and other renewables. Yet every form of energy produced receives some type 

of favorable tax treatment. Many also receive favorable regulatory treatment as 

well. This is not new—it can be traced back to the tariffs giving domestic coal an 

advantage right after we became a nation. Coal and wood fueled the early growth 

of our country and the railroads that eventually connected it, while the Government 

put forward policies that helped underwrite dominance of all three. And, looking 

back on the 20th century, Federal energy-tax subsidies almost entirely benefitted 

oil and gas interests. 

It wasn’t until the early 1990s that the Federal Government began to provide 

meaningful tax credits for energy produced from renewable sources. So, when someone pulls out a statistic from a given year in recent memory citing the preponderance of tax credits for renewable energy, it’s worth remembering that coal, oil and 

gas have benefitted from centuries of beneficial tax treatment. And, many of those 

fossil incentives are permanent, unlike the temporary nature of tax credits for renewable energy. 

Now, let me be clear, I am not taking issue with tax incentives or saying it is 

a bad thing in any way to have supported all these technologies at certain times 

throughout our history, but it is important to put today’s hearing in context. As I 

said, there have been, and likely will continue to be, subsidies for all types of energy 

production. Our task as legislators now is to determine where Federal support 

should be focused. 

The choices we make in providing tax benefits to one type of generation versus 

another have real world impacts on the energy sector. These are important choices 

because we must keep energy affordable, but we must also think about the impacts 

certain sources of energy have on human health and the environment. The Federal 

Government should be incentivizing technologies that are cleaner, safer, and more 

protective of the health of all Americans. Renewable energy sources, in particular, 

provide societal benefits that cannot be effectively valued by the markets. Another 

10 

important factor we must consider are new technologies with clear benefits to the 

electricity grid, such as battery storage and energy efficiency. 

Tax subsidies are among the policy drivers least understood by the general public. 

This is largely because they are also the least transparent. Many are only known 

because they expire and have to be reconsidered every few years. However, there 

are many more that are not known to the public because they are permanent in 

nature. For example, oil and gas firms can organize as Master Limited Partnerships, a corporate form that allows the companies to pass through profits without 

paying corporate taxes. And this benefit continues in perpetuity with no reauthorization by Congress needed. 

There are also many nontax, regulatory subsidies that I hope will not be overlooked as we consider subsidies and their impact on the energy market. For instance, Section 404 of the Clean Air Act literally contains the names of hundreds 

of coal-fired electric generating units that were each given the right to emit thousands of tons of sulfur dioxide pollution, extending their operating lives and keeping 

them competitive with cleaner forms of energy. 

Another example: the Superfund statute excludes oil and gas from the definition 

of a hazardous substance, providing massive liability protection to one specific energy sector that is often a major source of contamination in communities across the 

country. This provides an economic boost to companies that would otherwise be on 

the hook for expensive cleanups. Similarly, oil and gas exploration and production 

wastes are excluded from RCRA regulations. All of this special treatment directly 

affects the costs associated with producing and distributing oil, gas, and electricity 

at the expense of taxpayers and the environment. 

Mr. Chairman, if we are to move down this path of examining tax subsidies, we 

must consider all subsidies: direct, indirect, and regulatory. I believe that tax policies should seek to limit the cost of pollution to society, including the costs that regulatory subsidies often effectively shift from companies onto the taxpayer and the 

environment itself. Ultimately, if fuels and energy truly reflect their long-term costs 

to society and the environment as well as individuals, people will make rational 

choices that will benefit all of us. 

Mr. UPTON. The gentleman yields back. 

We are delighted to have the witnesses that we have today, and 

I am told that our computer is back online so we can have the little 

presentation. We are joined by Terry Dinann—— 

Dr. DINAN. Dinan. 

Mr. UPTON. Dinan. I am sorry—Senior Advisor from CBO; Ben 

Zycher, Resident Scholar and John G. Searle Chair from AEI; Robert Murphy, Senior Economist, Institute for Energy Research; 

Devin Hartman, Electricity Policy Manager for the R Street Institute; Joseph Aldy, Associate Professor from Harvard, School of Government; and Steve Clemmer, Director of Energy Research and 

Analysis from the Union of Concerned Scientists. 

Thank you all for being here. Dr. Dinan—— 

Dr. DINAN. Thank you. 

Mr. UPTON [continuing]. Thank you. You are recognized for 5 

minutes. 

11 

STATEMENTS OF TERRY DINAN, PH.D., SENIOR ADVISOR, 

MICROECONOMIC STUDIES DIVISION, CONGRESSIONAL 

BUDGET OFFICE; ROBERT P. MURPHY, PH. D., SENIOR ECONOMIST, INSTITUTE FOR ENERGY RESEARCH; DEVIN C. HARTMAN, ELECTRICITY POLICY MANAGER AND SENIOR FELLOW, 

R STREET INSTITUTE; STEVE CLEMMER, DIRECTOR OF ENERGY RESEARCH AND ANALYSIS, CLIMATE & ENERGY PROGRAM, UNION OF CONCERNED SCIENTISTS; JOSEPH E. 

ALDY, ASSOCIATE PROFESSOR OF PUBLIC POLICY, HARVARD KENNEDY SCHOOL; AND BENJAMIN ZYCHER, PH.D., 

JOHN G. SEARLE CHAIR AND RESIDENT SCHOLAR, AMERICAN ENTERPRISE INSTITUTE 

STATEMENT OF TERRY DINAN 

Dr. DINAN. Thank you. Chairman Upton, Congressman McNerney, and members of the subcommittee, thank you for the invitation to testify on the support that the Federal Government provides 

for the development, production, and use of energy and technologies and fuels. In fiscal year 2016, tax preferences provided the 

bulk of that support. Based largely on estimates from the staff at 

the Joint Committee on Taxation, energy-tax preferences resulted 

in $18.4 billion in foregone revenues. In contrast, spending programs administered by the Department of Energy totaled $5.9 billion. 

First, I would like to discuss tax preferences. As shown on the 

display, for most years until 2005, the largest share of that support 

went to domestic producers of oil and natural gas. Beginning in 

2006, the cost of energy-related tax preferences grew substantially. 

Moreover, an increasing share of those costs was aimed at encouraging energy efficiency and the use of energy produced from renewable sources. 

Now I will turn to the breakdown of tax preferences in fiscal year 

2016. As shown in this figure, provisions aimed at energy efficiency 

and renewable energy accounted for about 75 percent of all energyrelated tax preferences and provisions aimed at fossil fuels made 

up most of the remaining amount. Under current law, the mix of 

energy-tax preferences will look quite different in the future. That 

is because about $5 billion, or a little more than 35 percent of the 

support for energy efficiency and renewable energy came from provisions that expired at the end of calendar year 2016. 

In contrast, most of the support for fossil fuels and nuclear power 

came from provisions that are permanent. Although temporary tax 

preferences have often been extended, their lack of permanence creates uncertainty and reduces the extent to which they are likely to 

motivate investment. Next, I would like to turn to the Department 

of Energy. Oops, it doesn’t seem to be flipping. OK. 

DOE supports energy technologies by making investments in 

them and by subsidizing and guaranteeing loans. DOE’s funding 

has also changed over time, but with the exception of 2009 has generally been less since 2010 than it was in the early 1990s. Looking 

at fiscal year 2016, we find that 35 percent of DOE’s support for 

energy technologies is directed towards energy efficiency and renewable energy, 31 percent supports basic science, 15 percent is directed at nuclear energy, and 11 percent at fossil fuels. 

12 

Boosting domestic production of oil and gas, reducing greenhouse 

gas emissions, and encouraging research that would benefit society 

have historically been central goals motivating the support of energy. Determining the cost effectiveness of Federal support in 

achieving those goals is difficult. However, in 2015, CBO estimated 

that over the previous decade tax preferences increased U.S. production of crude oil by less than one percent and did so at a cost 

of roughly $90 to $200 per additional barrel of oil produced. In addition, a 2013 study by the National Research Council indicated 

that production investment tax credits for renewable electricity 

generation reduced carbon dioxide emissions at an average cost of 

$250 per ton, a value that is several times higher than a commonly 

used estimate of the benefit of such reductions. 

Evaluating the effects of R&D is also challenging. However, Government funding is most likely to be cost effective when it supports 

research on the basic science of energy or research aimed at very 

early stages of technology development. Such research is typically 

underinvested in by private entities because it creates benefits for 

society as a whole but may not be profitable for firms to undertake 

on their own. 

Finally, I would like to note that multiple factors affect the mix 

of fuels and energy technologies in the U.S. For example, the share 

of electricity generated by renewables is influenced by tax preferences as well as by State-level mandates to increase the production of electricity from wind, solar, or biomass. Likewise, the mix 

of fuels used in the transportation sector has been affected not only 

by the provision of tax preferences for renewable fuels, but also by 

the Federal Renewable Fuel Standard which mandates the use of 

particular quantities of renewable fuels. Estimating the extent to 

which tax preferences influence producer and consumer choices requires careful analysis that controls for those other influences. 

Thank you for the opportunity to testify and I am happy to answer any questions you might have. 

[The prepared statement of Dr. Dinan follows:] 

13 

14 

15 

16 

17 

18 

19 

20 

21 

22 

23 

24 

25 

26 

27 

28 

29 

30 

31 

32 

Mr. UPTON. Thank you. 

Dr. Murphy. 

STATEMENT OF ROBERT P. MURPHY 

Dr. MURPHY. I would like to thank Chairman Upton, Congressman McNerney, and the other members of the subcommittee for 

the opportunity to speak on this important topic concerning Federal tax policy and its effects on energy markets and consumers. 

When it comes to assessing tax policy, economists generally focus 

on the ways the tax code distorts behavior. There is a general presumption in favor of letting market prices guide the decisions of 

producers and consumers so that resources are allocated according 

to the underlying economic realities. When the tax code artificially 

steers behavior away from the market outcome, this makes society 

poorer. 

A textbook example of such harms is the distortions caused by 

an income tax. By artificially reducing the reward to earning 

wages, the income tax discourages work effort. On top of that an 

income tax also leads individuals to save less because the income 

earned from saving is itself taxed. The income tax thus makes society poorer by both reducing work and reducing investment. 

Now, although economists disagree about the proper size of government, there is a general consensus that if the Government is 

going to raise a target amount of revenue through a percentage 

tax, then the way to minimize the economic fall is applying that 

tax on as wide of a base as possible in order to keep the rate of 

the tax as low as possible. Now, to be sure, there is other goals of 

tax policy besides economic efficiency, but in terms of minimizing 

the distortion of behavior the tax code would apply the same tax 

rate to all sectors of the economy and would contain no arbitrary 

deductions or credits that favor one group over another. 

Now, I should clarify that the principle here is no arbitrary deductions. I bring this up because some proposals for tax reform 

want to take away the deductibility of interest expenses, an option 

that currently gives companies an incentive to engage in debt finance relative to equity finance. But to me it seems this has things 

backwards. After all, a company’s interest payments really are expenses to the company. The real source of the distortion is the currently high corporate income tax rate of 35 percent; lowering that 

rate would alleviate this particular distortion. 

Now, when it comes to energy markets there are many provisions 

of the tax code that violate these general principles I have discussed. That is to say the tax code currently has many provisions 

that are specifically designed to favor certain sectors of the energy 

market. Society ends up producing energy using more resources 

than it needs to because the tax code artificially hides the true cost 

of less efficient energy sources. 

The best example of such a distortion occurs in the electricity 

market where there can be long stretches of negative wholesale 

prices. Wind operators will pay the grid to buy electricity from 

them with the price sometimes falling below $20 per megawatt 

hour. The reason for this strange occurrence is the generous production tax credit, which currently gives the owners of wind facilities a tax credit of $23 for every megawatt hour they produce. This 

33 

can make it profitable at the individual level to sell wind power 

even at negative prices, but of course from the perspective of society as a whole this is clearly a perverse outcome that would not 

occur on a normal market. 

The Congressional Research Service recently estimated the implicit expenditures in the tax code for energy-specific provisions. It 

found that the production tax credit was the most expensive at a 

projected cost of $25.7 billion from 2016 through 2020. The second 

most expensive provision was the related investment tax credit also 

designed for renewable energy sources at a cost of 13.6 billion. 

These two provisions alone accounted for almost 48 percent of the 

total energy-tax advantages analyzed in this particular report. By 

artificially encouraging the expansion of wind and solar capacity, 

current tax policy makes energy production less efficient. 

Now, some have argued that wind and solar are infant industries 

that need support from the tax code, but these arguments have 

been around for decades. At this point wind and solar are not infants, they are grown adults. If they can currently only serve niche 

markets, that is the economic reality. 

It is also worth addressing the distributional consequences of 

some of these particular tax measures. So, for example, a 2015 

study by UC Berkeley found that for the particular measures trying to reward consumers for buying electric vehicles, 90 percent of 

the credits went to filers earning above $75,000 per year, and 35 

percent of this particular tax credit was claimed by people earning 

above $200,000 per year. 

A more consistent, neutral tax code would let producers and consumers choose the mix of energy sources that made the most economic sense. Energy would be produced at the lowest cost, freeing 

up resources to increase output in other areas of the economy giving Americans more reliable energy and a higher standard of living. Thank you, and I look forward to answering your questions. 

[The prepared statement of Dr. Murphy follows:] 

34 

35 

36 

37 

38 

39 

40 

41 

42 

43 

44 

45 

46 

47 

48 

49 

50 

51 

52 

53 

54 

55 

56 

57 

58 

59 

60 

Mr. UPTON. Thank you. 

Mr. Hartman? Got to keep talking. 

STATEMENT OF DEVIN C. HARTMAN 

Mr. HARTMAN. Good morning, Mr. Chairman and members of the 

subcommittee. Thank you for inviting me to have this conversation 

with you today. 

When competitive energy markets thrive so do consumers, innovation, and the environment. Well-functioning markets require 

transactions to account for all costs and benefits. Markets alone do 

not fully capture the external cost of pollution nor the benefits of 

all knowledge gains. Government interventions have sometimes 

helped to address these market shortcomings, but often result in 

costly unintended consequences that leave society worse off. This 

underscores the importance of limiting government’s role to efficiently correcting market shortcomings with an underlying objective to enhance market performance. 

Energy policy discussions frequently stray from focus on market 

performance. Often they romanticize particular technologies associated with certain desirable qualities. From this, industrial policy 

narratives have emerged where government explicitly picks winners. This central planning bias has notably manifested itself in 

procurement mandates and subsidies including some tax preferences. Industrial policies undermine market performance. They 

inherently result in political disputes over the right technologies 

leading to politically vulnerable and unstable policies. This has contributed to the proliferation of false narratives and half-truths that 

complicate our ability to have a civil, factual energy policy discussion. 

Tax preferences can be effective tools for industrial policy, but 

they seldom correct for market failures efficiently. Economic research is not kind to targeted tax incentives. They are expensive 

and inefficient. Clean-energy tax preferences reduce emissions 

modestly at high cost. Tax incentives for nascent technologies may 

create limited knowledge gains, but they deter R&D in technologies 

that don’t receive preferences. At the same time, tax preferences 

and other industrial policies increasingly distort energy markets. 

For example, production tax credits artificially depress electricity 

prices, which undermines efficient investment and grid management, while investment tax credits skew investment towards capital-intensive projects. 

Tax preferences also create entrenched interest that deepen cycles of subsidization. Look no further than reauthorization of tax 

preferences for mature technologies or excluded technologies seeking subsidies to compensate for their competitors’ preferences. The 

future performance of competitive energy markets depends on 

unwinding existing industrial policy, not layering on additional 

counter-distorting subsidies. 

With that said, some energy tax incentives improve cost recovery, 

a tenet of pro-growth tax structure, but only apply to select technologies. For example, some provisions allow full expensing, which 

is preferable to depreciation because it lowers the cost of capital. 

However, uneven tax treatment can distort competitive relationVerDate Mar 15 2010 10:21 Sep 25, 2017 Jkt 037690 PO 00000 Frm 00064 Fmt 6633 Sfmt 6633 I:\115THCONGRESS\115X22ENERGYTAX\115X22ENERGYTAXPENDING WAYNE
61 

ships. Moving toward uniform expensing treatment would mitigate 

these distortions and ensure vibrant competition. 

While the best course of action is to eliminate tax preferences, 

Congress may instead pursue a more modest direction. Improvements to existing preferences should follow objective criteria, such 

as basing eligibility on technology-neutral performance criteria. Department of Energy programs should also follow objective economic 

criteria. DOE direct investments in applied energy research more 

than double those in basic research, whereas the greatest spillover 

benefits of knowledge creation occur in basic research. 

All technologies should compete on their merits. High costs are 

a natural barrier to entry that does not justify intervention. In contrast, regulatory rules that preclude technologies from participating 

or receiving fair market compensation present artificial barriers to 

entry. Modernizing these rules would improve market performance 

while leveling the competitive playing field. 

Americans deserve an energy policy where markets pick winners, 

not government. We need an energy policy vision that enhances 

market performance and uses taxpayers’ dollars wisely. Congress 

has an opportunity to take major strides in pursuing a politically 

durable and economically rewarding energy-policy framework that 

includes the following: phase out distortionary tax preferences; enable broad-based cost recovery in the tax code; align public research expenditures with knowledge spillover benefits; reduce unnecessary regulatory burdens; and encourage electricity market reforms that enhance competition. 

This framework will generate economic dynamism, improve environmental quality, reward innovative companies, lower customer 

bills, and place the United States on a more fiscally responsible 

pathway. Thank you for your time. 

[The prepared statement of Mr. Hartman follows:] 

62 

63 

64 

65 

66 

67 

68 

69 

70 

71 

72 

73 

74 

75 

76 

77 

Mr. UPTON. Thank you. 

Mr. Clemmer? 

STATEMENT OF STEVE CLEMMER 

Mr. CLEMMER. Good morning. On behalf of the Union of Concerned Scientists and our 500,000 supporters, I would like to thank 

Chairman Upton, Representative McNerney, and the other distinguished members of the subcommittee for the opportunity to testify 

today. In contrast to a couple of the previous speakers, my comments today are going to focus on how the Federal tax credits for 

renewable energy have been an effective and affordable policy. 

As Representative McNerney said, tax credits have been a key 

driver for the recent growth in the wind and solar industries spurring innovation and creating new jobs, income, and tax revenues 

for State and local economies. They have also been very effective 

in driving down the cost of wind and solar power, making renewable energy more affordable for consumers. Tax credits are needed 

to provide more parity in the tax code with fossil fuels and nuclear 

power. 

As we have heard, these industries have received enormous tax 

subsidies and other tax benefits over the past hundred years. And 

I would take issue with some of the presentation of these subsidies 

either on an annual basis or even a few years. Because some of the 

tax preferences for other technologies are permanent, you really 

need to look at this over a long period of time which paints a very 

different picture than what we have heard. 

Federal tax credits also represent a way to value the environmental and other public benefits of renewable energy that are not 

currently priced in energy markets. Tax credits have also helped 

the U.S. become a global leader in manufacturing and deploying renewable-energy technologies with excellent potential for export. 

Federal tax credits combined with State renewable standards have 

been the key driver for the recent growth in wind and solar. 

As Representative McNerney said, the U.S. wind capacity has 

more than doubled since 2010 and has accounted for more than a 

third of all generating capacities since 2007. It has also just recently surpassed U.S. hydro capacity. In addition, a record amount 

of solar went in last year as we heard nearly doubling the previous 

year’s record and making solar the largest source of new capacity 

for the first time. 

The rapid growth in these technologies have provided significant 

benefits to State and local economies. The wind industry has invested more than $143 billion in the U.S. economy over the past 

decade and almost all of this has gone into rural areas where these 

wind farms are located. They have also added nearly 15,000 jobs 

in 2016, reaching a total of over a hundred thousand jobs in all 50 

States. The amount of employment has doubled since 2013 in the 

wind industry. 

The growth of domestic manufacturing of wind turbines is also 

a major success story. More than 500 manufacturing facilities located in 43 States produced 50 to 85 percent of the major wind turbine components installed in the U.S. Just back in 2007 we were 

only producing about 20 percent. Wind power is also providing a 

significant source of income for rural communities. About 70 perVerDate Mar 15 2010 10:21 Sep 25, 2017 Jkt 037690 PO 00000 Frm 00081 Fmt 6633 Sfmt 6633 I:\115THCONGRESS\115X22ENERGYTAX\115X22ENERGYTAXPENDING WAYNE
78 

cent of wind projects installed in 2015 are located in low-income 

counties that fall below U.S. median household income levels. Wind 

also provided $222 million in lease payments to landowners in 

2015. 

The solar industry is also a major source of new jobs. Total industry employment doubled since 2012 and 51,000 jobs were added 

in 2016. In total, there are more than 9,000 businesses located in 

every State that is involved in the solar industry. A recent DOE 

report found that more Americans worked in solar and wind power 

generation in 2016 than in either nuclear, coal, natural gas, or hydroelectric generation. As we have heard, the cost of wind and solar 

have also fallen by about two-thirds since 2009. 

The tax credits are also a benefit for consumers. Recent DOE 

analyses have shown that the environmental and public health 

benefits of increasing renewable energy are 2 to 3 times greater 

than the cost of the Federal tax credits. The studies that DOE did 

also showed that renewables could reduce wholesale electricity 

prices and natural gas prices, saving consumers about $13 to $49 

per megawatt hour of renewable generation. 

In terms of the policies going forward, Federal tax credits and 

R&D funding have been important complements to State policies, 

as I have discussed. But until we can transition to national policies 

that recognize the public benefits of renewables and other low-carbon sources of energy in energy prices, we recommend extending 

the tax credits by at least 5 more years to maintain the sustained, 

orderly growth of the industry. 

A long-term tax credit extension for renewables could also be 

part of a well-designed technology-neutral tax credit, and tax credits should also be expanded to encourage investments in energystorage technologies to help accelerate deployment and cost reductions. Thanks again for the opportunity to testify. I would be happy 

to answer any questions. 

[The prepared statement of Mr. Clemmer follows:] 

79 

80 

81 

82 

83 

84 

85 

86 

87 

88 

89 

90 

91 

92 

93 

94 

95 

96 

97 

Mr. UPTON. Thank you. 

Mr. Aldy? 

STATEMENT OF JOSEPH E. ALDY 

Mr. ALDY. Thank you, Chairman Upton, Congressman McNerney, and members of the committee for hosting me today for this 

testimony. I am an associate professor of Public Policy at the Harvard Kennedy School where my research in teaching focuses on the 

design, the evaluation, and the rationale for energy and environmental policy. I appreciate the opportunity to speak about energytax policy today, and I would like to begin the conversation with 

suggesting three public policy principles. 

First, energy-tax policy should correct market failures. Well-functioning markets do not need government interventions. Indeed, 

when the Government intervenes in well-functioning markets, we 

risk government failures that actually make society worse off. Now, 

if there is too much pollution or too little innovation, then an energy-tax instrument could be a very effective way to remedy this 

problem. 

Second, energy-tax policy should promote cost effectiveness. If 

the policy targets the market failure cost effectively, then we can 

make the American people, businesses, consumers better off. Taxpayers should get the biggest bang for their tax expenditures, because one firm’s tax benefit or tax preference in the tax code is implicitly financed by another firm’s or family’s taxes. 

Third, reviewing the impacts of tax instruments can inform the 

design and potential reform of energy-tax policy. When we think 

about the implementation of energy policy and environmental policy that has impacts on the energy sector we see a really big disconnect between how we review energy policy that is subject, say, 

to regulation which typically then is subject to benefit-cost analysis, public comment, and congressional review; whether the instrument of implementation is spending, which is subject to congressional oversight and agency evaluation; or tax instruments, 

which typically are subject to very little review and analysis. 

And I think that is why it is really important for this committee 

to look at the role of energy-tax instruments in energy policy. We 

should be very comprehensive in our assessment of what are the 

most effective ways to deliver on our social goals through energy 

policy and assess whether the best way forward is through the tax 

code, through regulation, through spending, or by recognizing that 

the private market may be best left on its own. 

In my written testimony I illustrate principles in my review of 

fossil fuel tax expenditures including the expensing of intangible 

drilling costs, percentage depletion, the manufacturing deduction 

for oil and gas, and other hydrocarbon subsidies in the tax code. 

I show how these fossil fuel tax expenditures fall short on each of 

these principles. The current slate of fossil fuel subsidies do not 

target an externality, although some past subsidies, for example 

the unconventional natural gas production tax credit, I think, was 

important in helping to promote and address concerns associated 

with innovation. 

Indeed, when we look at the fossil fuel subsidies in the tax code 

today, they have the potential to increase the production of socially 

98 

harmful externalities such as air pollution that contributes to premature mortality and carbon dioxide emissions that contribute to 

climate change. Moreover, retaining fossil fuel subsidies may undermine reform of fossil fuel subsidies around the world. We have, 

as a government, worked with a number of other countries to try 

to get them to reform their fossil fuel subsidies in a way that would 

benefit us both economically and environmentally, because if developing countries around the world reduce their fossil fuel subsidies 

it actually lowers oil prices in the United States and lowers global 

carbon dioxide emissions. 

Since fossil fuel subsidies do not correct market failures, by definition they cannot deliver on the objective of being cost effective. 

And the research literature shows that these subsidies don’t meaningfully impact production so they don’t really help us much when 

we look at the price of gasoline at the pump, so we are spending 

taxpayers’ monies without much to show for it when we look at the 

hydrocarbon subsidies. 

Finally, I would note and as has been already noted in this hearing, fossil fuel tax expenditures do not have a sunset provision. A 

future reform could set sunset provisions which would create milestones that can motivate evaluation of effectiveness of the policy, 

and these provisions could leverage the democratic process so that 

the case could be made for continuing, reforming, or eliminating 

the policy intervention. Let me also suggest that we could task 

some of the experts we have in the Government, CBO, EIA, and 

other agencies, to analyze and review energy-tax expenditures in 

order to inform the public debate about energy-tax policy. 

And let me close by noting that if we really want to maximize 

social welfare to make Americans as well off as possible, we want 

to look for ways to transition from the second best subsidy instruments that are the norm in the tax code on energy and instead 

transition to a world in which we have direct pricing on the 

externalities associated with energy. Such policies could be implemented in a way that clearly corrects the externality, does so cost 

effectively, and can enable, review, and reform over time. It would 

provide tax revenues that could enable major reductions in business and personal income taxes, and by taxing bad things like pollution and reducing taxes on good things like labor and investment, 

we could promote faster economic growth, higher levels in employment, and a cleaner environment. Thank you, Mr. Chairman. 

[The prepared statement of Mr. Aldy follows:] 

99 

100 

101 

102 

103 

104 

105 

106 

107 

108 

109 

Mr. UPTON. Thank you. 

Dr. Zycher? 

STATEMENT OF BENJAMIN ZYCHER 

Dr. ZYCHER. Thank you, Mr. Chairman. I would like to emphasize two points today. First, it is the tax subsidies for unconventional energy that, by far, have the most detrimental effects on 

markets, prices, and consumers. Second, the various rationalizations offered over the last 4 decades in support of those Federal tax 

subsidies are exceptionally weak analytically. The central question 

always to be asked is, Does a tax provision improve economic wellbeing, that is, the productivity of resource use, defined broadly? 

The subventions for various unconventional forms of energy and 

electricity create resource waste and reduce economic well-being. 

Wind and solar power in particular cannot compete without large 

subsidies and guaranteed market shares, and it is clear that higher 

market shares for such power have driven electricity rates upward. 

This is particularly the case given the need for expensive backup 

generation to avoid blackouts and the need for extra transmission 

capacity due to the geographic limitations of unconventional generation. 

Moreover, the subsidized expansion of wind and solar power is 

likely to increase rather than to reduce emissions of conventional 

effluents and greenhouse gases, in particular because of the up and 

down cycling of conventional backup units needed to preserve system reliability. Clean power is clean only if we ignore the adverse 

environmental effects of wind and solar power. 

The various tax provisions for conventional energy in general are 

not subsidies defined properly. And with the exception of the clean 

coal tax credit and perhaps a few others, they may or may not improve the efficiency of resource allocation depending on various underlying conditions. 

Let me turn to the various rationales offered over the last 4 decades in support of energy-tax policies. Energy independence, the 

degree of self-sufficiency in terms of energy production, is irrelevant analytically because the price effects of supply disruptions are 

independent of the degree of self-sufficiency, and such secondary effects as exchange rate shifts are not relevant for policy making. 

The infant industry rationale for renewable subsidies is a non sequitur because capital markets can sustain promising industries or 

technologies in their infancy. There is no analytic evidence that renewables suffer from a subsidy imbalance relative to competing 

conventional energy technologies, even if we put aside how the 

word subsidy is defined. Quite the reverse is true. Per unit of energy production, renewable subsidies are vastly larger. The level 

playing field argument is simply not correct. 

The sustainability or resource depletion argument for renewable 

subsidies is incorrect as market forces provide powerful incentives 

to conserve resources for consumption during future periods. The 

green jobs employment rationale for renewable subsidies does not 

make analytic sense, as a resource shift into the production of politically favored power must reduce employment in other sectors 

and the taxes needed to finance the subsidies cannot have favorable employment effects. Moreover, the historical evidence on the 

110 

relationships among GDP, employment, and energy consumption 

does not support the green jobs argument. 

Finally, the social cost of carbon argument promoted by the 

Obama administration was deeply flawed. Indeed that estimate of 

about $40 per ton in year 2016 dollars was the single most dishonest exercise in political arithmetic that I have ever seen produced by the Federal bureaucracy. Moreover, the policies previously proposed to reduce emissions of greenhouse gases would 

have temperature effects trivial or unmeasurable even at the international level using the EPA’s own climate model. 

It would be hugely productive for the U.S. economy were policymakers to assume that resource allocation in energy sectors driven 

by market prices is roughly efficient in the absence of two compelling conditions. First, it must be shown that some set of factors has 

distorted those allocational outcomes to a degree that is substantial 

and that have not been addressed with other policy interventions. 

Second, it must be shown that government actions with high confidence will yield net improvements in aggregate economic wellbeing. 

Thank you again, Mr. Chairman, and I will be very pleased to 

address any questions that you and your colleagues may have. 

[The prepared statement of Dr. Zycher follows:] 

111 

112 

113 

114 

115 

116 

117 

118 

119 

120 

121 

122 

123 

124 

125 

126 

127 

128 

129 

130 

131 

132 

133 

134 

135 

136 

137 

138 

139 

140 

Mr. UPTON. Well, thank you all, and we will now rotate, and we 

will ask questions and ask you all to weigh in. 

So, many of us support the policy of all of the above on energy, 

whether it be fossil fuels, renewables, safe nuclear, greater efficiencies, a whole host of things. And I have to say it is often very 

difficult to measure the effects of the tax code because you have so 

many different complicating factors from State subsidies. Many 

States like my State just passed a major new energy bill that was 

bipartisan and Governor Snyder signed into law. You have some 

States where you have a minimum of what you have to get from 

renewable, so, again, my State just went from 10 percent to 15 percent to a mandate, and I think many of our utilities will be able 

to meet that mandate. 

Different definitions of what is renewable, is it new hydro, is it 

existing hydro? I mean, the whole—and some would argue, of 

course, that nuclear could be renewable because you have no carbon emissions that are there. Where do you get the best bang for 

the buck? Is it these mandates that a State may have that they 

may pass in their State legislature telling the utilities what to do 

and then letting them figure it all out? 

The subsidies as I indicated in my opening remarks on energy, wind energy, in 35 years has gone from $500 downward, in a large 

part because of the subsidy because you have those greater efficiencies that are there, and down to $50 per megawatt hour. What 

is, you know, if you were rewriting the tax code, if you were starting from scratch what would you do today? And maybe we will just 

go—Dr. Zycher, we will start with you. 

Dr. ZYCHER. Thank you, Mr. Chairman. I would urge you to support all of the competitive rather than all of the above. There is little reason to believe that the subsidies properly defined for unconventional energy, for energy efficiency and investments, and all the 

rest have net effects that improve economic performance. 

With respect to where do we go from here which is, I think, a 

summary of your last question, the first step is to define what is 

and is not a subsidy. I have heard a lot of talk here about fossil 

fuel subsidies which are permanent in some sense, but I have not 

heard an example. The percentage depletion allowance to pick one 

example is a form of depreciation. Under certain conditions it may 

allow too much depreciation. It is not obvious that that problem is 

worse than the distortions created by cost depreciation based on 

historical accounting costs. 

The deduction for intangible drilling expenses conceptually is not 

correct, because spending on a capital asset ought to be depreciated 

not expensed, but that is similar to the treatment of R&D in all 

industries. 

Mr. UPTON. And Mr. Aldy made the point that perhaps you 

ought to sunset some of these, but that would then take away from 

the long-term planning, right, in terms of establishing what the 

ground rules would be as it relates to the investment that whatever the company, the investors would be making whether they be 

something like an ethanol plant or drilling in the Gulf? 

Mr. ALDY. I think, Mr. Chairman, when you consider the sunset 

provision that I described, you want to think about it in the context 

of what is the typical investment planning horizon for a project. 

141 

This has been a challenge for some of the wind farm developers 

where they have seen extensions of their PTC as short as 1 year. 

It takes much longer to do the planning, the contracting, the development of a wind farm. 

So I think, if you are looking at this in the context of oil and gas, 

you would want to have a sunset that is long enough to take account of their current planning cycle. 

Mr. UPTON. OK, other comments? Mr. Clemmer? 

Mr. CLEMMER. Yes, I guess I would just say that I think, even 

if you are able to get rid of all of the subsidies in the tax code, 

there is still the most fundamental problem. The biggest market 

price distortion has to do with the fact that carbon emissions and 

other air pollution and public health benefits are not factored into 

the price of electricity, and so we need to have a policy that does 

that. I think we have, in this country, used tax policy as a way to 

implement energy policy, and there are other tools that can be done 

to do that. 

Some of the statements that were made about the effect that 

wind power is having on market prices are grossly overstated, the 

fact that the bigger causes have to do with low electricity demand, 

the inflexibility of nuclear plants to ramp up and down, and the 

low price of natural gas which has really affected the economics of 

both coal and nuclear plants much more than renewable-energy 

technologies. 

Mr. UPTON. Mr. Hartman, I will let you respond and then I will 

yield. 

Mr. HARTMAN. Sure. I would say that if you were to start from 

scratch you would start off with a full expensing approach to capital cost recovery. I mentioned that is there are some provisions for 

that and those tend to be more fossil fuel heavy in the Code. I 

would distinguish those very carefully from what we might call 

subsidies in the form of tax credits or, you know, direct cash 

grants. 

So I think the direction of full expensing is something to start 

off with, especially in this context of a broader form of tax recovery. 

That is going to lead to improved growth overall and that is really 

how you drive the level playing field. And also, for including R&D 

expenses within that, that is a much more technology-neutral approach to drive. 

Mr. UPTON. OK, my time has expired. Mr. McNerney? 

Mr. MCNERNEY. Well, I appreciate that, Mr. Chairman. 

Mr. Hartman, do you see a carbon price or a carbon dioxide price 

as a uniform approach to taxing that would have a benefit? 

Mr. HARTMAN. Yes, that is sort of the first best approach I think 

that Mr. Aldy was alluding to. Generally, you price in externalities 

into the marketplace and that is absolutely the preferable way to 

approach pollution pricing, internalizing it. I think if you put that 

in context of making it revenue-neutral and you do so to offset 

distortionary taxes such as those on capital or the corporate tax 

that was mentioned in Dr. Murphy’s testimony, those are wonderful approaches to both yield economic and environmental co-benefits. 

Mr. MCNERNEY. OK, thank you. 

142 

Mr. Aldy, would you like to comment on that benefit of carbon 

pricing? 

Mr. ALDY. Yes. In fact, in a sense this will answer the chairman’s 

last question as well. If you were to start from scratch, price carbon 

through the tax code. It is technology-neutral. We get away from 

this game where we are going to pick technology winners with each 

instrument that is using to subsidize this favored technology or 

that one. We just say here is a level playing field, this has important environmental impacts that affects people in the United 

States. 

And if we are able to do this we can raise some meaningful revenue that actually allows us to do what people really want to do 

as well on the business side and on the family side, which is to pay 

lower taxes through the tax code. 

Mr. MCNERNEY. Well, I have to say I enjoyed hearing you talk 

about the current benefits or nonbenefits of fossil fuel tax subsidies 

in one form or another. Could you elaborate a little bit? It might 

increase externalities, might encourage other countries not to reduce carbon emissions, and they don’t reduce production costs any. 

Mr. ALDY. Right. So there are about 10 provisions in the tax code 

that effectively subsidize the investment in oil, natural gas, and 

coal development. And these subsidies, the empirical evidence 

when we look at the research literature, they have a small impact 

on production, a very small impact on energy prices. Some of the 

more recent research suggests it might affect the price of gasoline 

by one penny a gallon. 

So we are not really getting much out of that when we look at 

the expenditures. To the extent that it is increasing production, we 

do have more pollution. That is bad when we think about people 

who have chronic bronchitis, asthma, the elderly who may die prematurely from the emissions associated with burning of these fuels. 

But I think it is also important that if we are able to engage our 

economic partners around the world and get everyone to price fuels 

correctly. In the developing countries they typically subsidize dramatically the price of fuels that causes excess consumption. If they 

were to remove those subsidies, we would see their emissions of 

harmful pollutants like carbon dioxide go down. It would actually 

have a positive impact on the price of oil and the price of gasoline 

in the United States. We would actually see those prices go down 

here at home if we were able to leverage our leadership and get 

them to reduce their subsidies as well. 

Mr. MCNERNEY. Well, do you think the United States could be 

the world leader in terms of producing renewable energy products 

such as solar and wind energy? 

Mr. ALDY. Oh, I think we have seen the innovation is certainly 

there. The fact that we look at now the manufacturing of solar PV 

occurs more in China than the U.S., a lot of that is building off of 

the ideas that were created in America by businesses in America. 

They have been able to push out more on both the manufacturing 

and even the deployment of solar. So I think there is a potential 

risk here that, as we sort of pull back on investments in these new 

clean-energy technologies, we are going to be ceding market share 

to other countries. 

Mr. MCNERNEY. Thank you. 

143 

Mr. Clemmer, could you talk about the tax benefits of incentives 

for grid storage? 

Mr. CLEMMER. The tax benefits? 

Mr. MCNERNEY. Or the benefits, the external benefits. 

Mr. CLEMMER. The benefits of storage, yes, I think, I mean in 

terms of there is lots of different benefits from storage. One is to 

help integrate renewable-energy sources in parts of the country 

where we have higher levels of renewables; it can provide a role 

there. With electric vehicles is another way, and also as part of 

microgrids to help shield communities and critical infrastructure 

from disruption from storm-induced power outages is another benefit. We have also seen the cost of storage coming down. 

So I think, you know, I do think there is a role in the tax code 

for new technologies to help stimulate growth to help drive down 

the cost. We have seen that with wind and solar. I think the same 

could happen with storage as well, we could accelerate that. 

Mr. MCNERNEY. And then you see continuing job creation with 

tax benefits for clean energy? 

Mr. CLEMMER. Yes, most definitely. That would help facilitate 

and enable more clean energy and as well as jobs directly in the 

storage industry, as well. 

Mr. MCNERNEY. So how would you see the number of jobs created with renewable energy compared to the action that the President took yesterday to promote the coal industry in terms of job 

creation? 

Mr. CLEMMER. Frankly, I think the executive order that came out 

yesterday is not going to do much to help the coal industry. The 

fundamental problem is low natural gas prices, low prices for wind 

and solar. Even without the tax credits, the prices for those technologies in some parts of the country is competitive, and so I don’t 

think it is going to fundamentally change that. 

But I do think it is really important to have programs in place 

to help with the transition to a cleaner energy economy, work a 

transition to diversify some of the economies in those States, but 

the coal industry is really being hurt by a lot of the market factors 

and pressures particularly from natural gas. 

Mr. MCNERNEY. Thank you. 

Mr. UPTON. Thank you. Mr. Olson? 

Mr. OLSON. I thank the Chair, and good morning and welcome 

to our six witnesses. A special welcome to you, Mr. Aldy. Like yourself, my wife is a Duke Blue Devil, class of 1985. She is just getting 

out of the funk from the smackdown South Carolina gave us 10 

days ago, so thanks for being here. 

Mr. ALDY. Sixty five points in the second half is tough. 

Mr. OLSON. Yes, sir. It was devastating. 

My first question is for you, Mr. Hartman. In your statement you 

mentioned the need to subject all energy-tax provisions to a, quote, 

objective criteria, end quote, and the need to, quote, equalize, end 

quote, tax structures. Could you please talk some more about what 

you mean by that and maybe about how those ideas tie together 

in terms of a level playing field? And when I say level playing field 

I mean a playing field that is driven by the free market. 

Mr. HARTMAN. Absolutely. No, that is a wonderful framing of the 

question. First off, I would say that the unequalizing treatment 

144 

part that gets back to some prior comments I made on capital cost 

expensing which is a very good idea in principle to expand cost recovery. What we need to be careful of is doing it in a preferential 

manner. What we should be doing is across the board, because it 

will distort capital investments between technologies and across industries if we are just picking winners with it, so we should be 

doing that, putting everyone on a level cost recovery platform. 

The other part there was talking about the objective criteria. So, 

again, sort of the first best outcome is that we phase to just a tax 

preference-free world where markets fully decide everything, of 

course recognizing some constraints in facilitating that. 

Mr. OLSON. Politics. 

Mr. HARTMAN. Yes, thank you. I think a good way of looking at 

it is to put some objective criteria in place. So I would say one is 

to look at the performance characteristics. So, if it is a certain environmental performance characteristic, make it across all technologies that qualify for that. If it has some other reliability performance or other, you know, great technology spillover benefits, 

then, you know, determine what that should be operationalized and 

let that qualify, let those qualifications occur across multiple technologies and industries. 

And also—and we have seen some progress on this front in terms 

of setting phase-out provisions, so, even though I disagree with the 

infant industry argument that I think was well-articulated by some 

of my counterparts here, I think that if we are going to use that 

as a crutch to support tax credits, then we need to have firm 

phase-out provisions based on when economies of scale are targeted 

and hit. 

Mr. OLSON. Thank you. Further question on, as you all know not 

all tax policy is the same. For example, some policies give people 

a credit for the money they spent to build a facility or help them 

recover the costs that they spent working on a project, but some 

credits like the production tax credits incentivize projects to operate after they are built. And Mr. Hartman, can you talk about the 

differences between how these certain tax credits work and some 

of the positive/negatives associated with these policies? 

Mr. HARTMAN. Sure. So, on one hand, most of the economic literature—for example looking at the investment tax credit versus 

the production tax credit for clean-energy technologies—most of 

that research, you know, shows that the investment tax credits 

skews things toward capital-intensive technologies, which, of 

course, if we are using it as a back-door approach to correct for the 

pollution externality, what we actually care about is displacing 

emissions. We don’t care about building it, per se. 

So that is where some of the economic literature says the production tax credit is better. However, when we get into the actual production profile of it, it lowers the effective cost of operating these 

plants. And I have seen this because I have had access to some 

privileged information in my years that has clearly shown that 

these resources do offer negativity into these markets and that 

does result—especially in areas where there is transmission constraints on the grid such as in the Midwest, we will see a lot of 

those prices go negative for sustained periods and that artificially 

distorts these markets. 

145 

Mr. OLSON. Dr. Zycher, do you want to comment, sir, within 30 

seconds? I am sorry for the time crunch, but just about the tax policies how they differ between building and then after its built getting some—— 

Dr. ZYCHER. Yes. There is no question that the investment tax 

credit for solar production provides weak incentives for actual output of power and powerful incentives for simply building facilities. 

A good example of that is the Ivanpah Solar Power plant in the 

California Mojave Desert, the performance of which has been vastly 

smaller than was advertised. The production tax credit provides incentive to produce excessively expensive power, particularly if we 

do the accounting correctly and it too has its own set of distortions. 

That’s right. 

Mr. OLSON. Thank you. My time’s expired. Don’t despair. Coach 

K does not recruit, he reloads. Duke will be back. 

Mr. UPTON. The Chair recognizes Mr. Peters. I am sorry, Mr. 

Pallone. I didn’t see you come back. I am sorry, Frank. Mr. Pallone. 

Mr. PALLONE. Thank you, Mr. Chairman. The committee has 

spent a lot of time today talking about markets and how the policies we implement can change energy markets. And one of the 

major problems with this discussion is that the fossil fuel industry 

likes to overlook the greatest market distortion that exists and that 

is the public health, environmental costs of pollution. 

My colleagues and I on the Democratic side have had to remind 

our Republican counterparts time and again that these costs over 

the course of—well, we have talked about it many times in dozens 

of hearings, and those costs include millions of missed work and 

school days, greater health costs for children and the elderly struggling with asthma and other respiratory illnesses and higher mortality rates. 

So I wanted to ask Dr. Dinan, do you agree that energy generated from burning fossil fuels generates social costs? And then 

maybe tell me what does the CBO estimate those costs to be. 

Dr. DINAN. Well, the Congressional Budget Office has not actually weighed in on what the benefits of reducing carbon dioxide 

emissions are. We have in previous work indicated that there are 

risks associated with that and that there is a lot of uncertainty. 

So—and we have also talked, but we haven’t quantified the benefit. 

We have also indicated that if the most cost effective way of reducing those emissions would be to put a price on carbon in some way, 

either by putting a tax on those emissions or by enacting a cap and 

trade program. 

Mr. PALLONE. But then these costs are not reflected in the price 

of energy generated from fossil fuels. We don’t see that either, 

right, with these costs? 

Dr. DINAN. Yes, we have stated that. It is what we call an externality. The prices aren’t, the costs associated with, the environmental costs aren’t reflected in the prices that consumers pay. 

Mr. PALLONE. And then that means that these firms, you know, 

the fossil fuel industry, the firms have no incentive to consider 

them when making business decisions even though these costs 

weigh heavily on society and fall on the backs of parents and seniors or whatever. 

146 

Dr. DINAN. Yes. That is the rationale behind putting a price on 

those emissions is to internalize them and give firms an incentive 

to take them into account when they decide how to produce energy 

and what types of technologies to use, and also consumers’ incentives to take those costs into account when they decide how much 

energy to consume and what types of energy to use. 

Mr. PALLONE. All right, thank you. 

Let me ask Mr. Hartman, in your written testimony you discuss 

the existence of pollution externalities. Do you agree that pollution 

from fossil fuels creates externalities that distort the market? 

Mr. HARTMAN. Yes. 

Mr. PALLONE. And do you believe that action is necessary to correct these externalities so that third parties don’t have to shoulder 

the heavy cost of pollution? 

Mr. HARTMAN. I believe correct action should be taken on it. We 

need to be careful to make sure that the medicine is not harsher 

than the disease and I think that is where we get into the question 

of second, third, and fourth best policy mechanisms. 

Mr. PALLONE. OK. Now a number of witnesses today have said 

that in recent years renewable energy sources are getting the lion’s 

share of tax expenditures. So let me ask Dr. Murphy, your testimony claims this amounts to artificial encouragement for the renewable-energy sector, which I find interesting given that our 

country has been providing different types of artificial encouragement for fossil fuels since before you and I were born—a long time 

ago, in my case. 

Dr. Murphy, yes or no: Do you believe that the PTC provides artificial encouragement to the wind sector? 

Dr. MURPHY. Yes, I do think the PTC provides artificial encouragement. And that is why I focus—I think the negative wholesale 

electricity prices that wind operators are offering is a clear signal 

that that is not a normal market outcome. 

Mr. PALLONE. OK. So then, and maybe just yes or no because we 

are running out of time, do you consider percentage depletion an 

artificial encouragement to the oil sector? 

Dr. MURPHY. I think it is, I would agree with what Mr. Zycher 

was saying that it is perhaps an artificial tax code treatment, but 

I don’t know if the rationale was to encourage output. 

Mr. PALLONE. All right. What about intangible drilling costs? 

Dr. MURPHY. Again, it may be incorrect tax policy, but I don’t 

know what the rationale was for that. 

Mr. PALLONE. All right. 

Mr. Aldy, do you consider percentage depletion and intangible 

drilling costs as artificial encouragement? 

Mr. ALDY. Yes. They distort the investment decision. They make 

it easier for someone to make money off of an oil and gas project 

than if they were to invest in say a new steel mill or a new commercial retail facility. So it is clearly distorting the investment decision favoring that technology and favoring that investment over 

other options in the economy. 

Mr. PALLONE. All right, thank you very much. Thank you, Mr. 

Chairman. 

147 

Mr. OLSON [presiding]. The gentleman’s time has expired. The 

Chair calls upon the vice chairman of the full committee, Mr. Barton, for 5 minutes. 

Mr. BARTON. Well, thank you. And Mr. Vice Chairman of the 

subcommittee, I am not a Duke graduate. I am a proud graduate 

of Texas A&M which didn’t make anything this year. They didn’t. 

We are just proud to be proud, I guess. 

I am going to ask, I guess, Dr. Murphy, is there any country in 

the world that has a better, more diversified energy production 

market than the United States? 

Dr. MURPHY. Not to my knowledge. 

Mr. BARTON. Not to mine either. We are number three in oil production, could be number one. We are number one in coal production, number one in natural gas production, number one in hydro 

production; I think we are number two in ethanol. I believe Brazil 

is ahead of us in that. I don’t know where we are in the solar industry, but we would be in the top five, and I believe we are number one in wind production. That is not bad. 

So is there anybody on the panel that disagrees with the statement that—or let me rephrase it. Is there anyone on the panel that 

thinks we would be better off if we went from a free-market, capitalistic energy sector to a government-owned, government-controlled energy sector? 

Dr. MURPHY. So, if I could just make one comment on that related to the earlier question, too, that, yes, all of the above from 

the Institute for Energy Research perspective means a level playing field, and let the market determine the outcome. So not favoring fossil fuels, not favoring renewables, just let markets, consumers, and producers choose the right mix. 

Mr. BARTON. Right. Well, I can’t say that we are a total level 

playing field, there are people on these panels that disagree with 

that statement. But at least we start from the premise that we are 

going to let free market capitalism dictate our energy sector, and 

then the government, both at the State level and the Federal level, 

we tinker around with it with tax policy and various research 

grants and things like that. 

If you will all agree that we are better off having a privately 

owned energy market and energy sector, the next question would 

be, logically, is it appropriate to create incentives for various subcomponents of that, incentives, subsidies, and on occasion penalties? Anybody have a comment on that? Mr. Aldy? Professor Aldy, 

I guess. 

Mr. ALDY. Yes. Congressman Barton, I believe when we talk 

about a level playing field in a competitive market I think it is important, as has already been discussed, for us to fully account for 

the social cost of different kinds of energy. It is not a level playing 

field when we have some technologies that don’t emit any air pollutions that contribute to premature mortality competing with technologies that do cause premature mortality but don’t have to actually bear those costs, invest in technologies to reduce that exposure 

to the elderly and to children around the country. 

So I think it is important when we think about a competitive 

marketplace that we are ensuring that the market is actually delivering what is in everyone’s social best interest. If I could go out and 

148 

buy clean air in the market I would go do some of that and the 

market would help deliver it, but the fact that you can’t do that 

makes it very difficult. 

Mr. BARTON. I didn’t postulate that our energy policy is absolutely a level playing field. I haven’t said that. I admit that we do, 

you know, I happen to think it is OK to subsidize or at least 

incentivize through the tax code some oil and gas exploration and 

production. I don’t buy into this concept of social cost of energy. A 

cost is a cost. A dollar monetized, either produce it or transport it 

and then what it costs to consume it, so I am not a fan of that. 

Dr. Zycher? 

Dr. ZYCHER. Yes, Zycher. I really have to take issue with most 

of the other people on the panel and with some of your colleagues 

up on the dais. The argument that the externalities created by fossil fuel production and use have not been internalized simply ignores the entire framework of the Environmental Protection Agency regulation. Those regulations reduce, or at least ostensibly require, a national ambient air quality standard that protects the 

public health with an adequate margin of safety. 

If people want to argue that the EPA regulatory framework for 

any given pollutant is insufficient, fine, make that argument. I 

have not heard that. And then there is the further argument that 

somehow wind and solar power are clean. No, they are not. Because of the backup units required to maintain system reliability, 

you actually get more pollution rather than less, however defined, 

because of wind and solar power. That is what the Bentek study 

of Colorado and Texas found, and it is really rather obvious. We 

don’t talk about that, but the premise here is really quite wrong 

and—— 

Mr. BARTON. My time has expired. I agree with what you said. 

I also think that you need to have a regulatory framework because 

free market capitalism sometimes does not account—— 

Dr. ZYCHER. Right. 

Mr. BARTON [continuing]. For some costs in the environmental 

area that need to be regulated at the State and Federal level. And 

with that I yield back, Mr. Chairman. 

Mr. OLSON. The gentleman’s time has expired. The Chair calls 

upon the acting vice chairman, Mr. Peters from California, for 5 

minutes. 

Mr. PETERS. Thank you, Mr. Chairman. I have to say also I am 

a Blue Devil, and the only two good things are we beat Carolina 

2 out of 3 in the ACC championship, and we are less distracted 

than we would be typically this time of year, so we can pay attention to this hearing. 

Mr. ALDY. I would rather be distracted. 

Mr. PETERS. Yes, me too. I thought Mr. Hartman did a great job 

of sort of laying out the classical economics of the free market that 

would drive good competition and ultimately low prices for consumers. And what I was curious about, though, is whether CBO— 

maybe Dr. Dinan has looked at if you wiped out all these preferences in theory, would you understand what the effect would be 

on domestic job creation, because I suspect that other countries 

might be subsidizing. 

149 

Dr. DINAN. Looking at the effects of reducing tax preferences on 

jobs is a very challenging task because there are, you know, for example, studies that look at how much jobs would be created in the 

wind energy, you know, associated with the tax preference don’t 

look at what would have happened in the absence of that. 

Mr. PETERS. Right. 

Dr. DINAN. So where would employment have been greater in the 

absence. And so CBO has not taken a careful, has not yet looked 

at the effect of say a cap and trade program on jobs and individual 

industries, although we have said that in total putting constraints 

on the economy can result in a small reduction. 

Mr. PETERS. I don’t want to labor it because I don’t have a lot 

of time, but that wasn’t my question. My question was about if you 

just removed all the tax expenditures related to energy to level the 

playing field in a really clean way along the lines of what Mr. 

Hartman did, is there an understanding of what the effect would 

be on job creation in these energy sectors? But I am going to leave 

that to maybe follow up on because it sounds like it would be a difficult thing to assess. 

I did want to say that Mr. Hartman’s statement acknowledges 

that a targeted tax preferences for—I am sorry—that pricing 

externalities is the most efficient policy for dealing with this. Do 

you have a suggestion for us? I know there has been some criticism 

of the social cost of carbon. Do you see that as an appropriate way 

to calculate the externalities of carbon, or how would you do it if 

not that? 

Mr. HARTMAN. I think generally the approach in theory is absolutely the appropriate way to go. Right, the idea is to quantify all 

the damages, you know, going forward and that is definitely the 

basis. Now I think when we start getting into the methodology behind it, it gets very difficult. So, in a large part, the damage valuation of climate change largely comes down to the choice of discount rate because most of the folks that are hurt by this are our 

future generations. 

Mr. PETERS. Right. 

Mr. HARTMAN. And also potential catastrophic effects associated 

with climate change and figuring out what the triggers of those are 

there is an immense load of scientific uncertainty on that front. 

And so it is very hard to even get good estimates with an order of 

magnitude, but I think it is a worthwhile exercise to try and perform it. 

Mr. PETERS. And you have to set it somewhere. You have to 

make some assumptions about what is going to happen so that you 

can actually provide a cost for this externality if you are going to 

recover it, right? 

Mr. HARTMAN. And doing the sensitivity analysis just gives us a 

sense of what we know and what we don’t know as well, and I 

think that is still very helpful. 

Mr. PETERS. Finally, I want to ask, I think, Mr. Aldy about something I have come across called the Conservative Case for Carbon 

Dividends from James Baker, George Shultz, Hank Paulson, and 

some other renowned Republicans. I don’t know if you are familiar 

with this, but the idea is that you would have a gradually increasing carbon tax. You would do dividends back to Americans with 

150 

what you collected and you would do border carbon adjustments. 

And there is some argument that you could roll back regulations 

as well. Have you evaluated this plan? Do you have a view on how 

it would work? 

Mr. ALDY. I do. I think it is an excellent plan. I have also put 

out a proposal for how you could think about taxing carbon and returning revenues back to the economy. The idea that everyone 

would get a check every month is, I think, a really important way 

to ensure that families aren’t adversely impacted by a carbon tax. 

There is a concern that it will increase energy prices. 

But if you have energy prices in a world in which you are getting 

a check every month that dividend, then that allows you to have 

the freedom to figure out what are the most effective ways to use 

those monies, whether it is to become a little bit more energy efficient or for other things that matter to your family. So I think it 

is an excellent idea and worthy of serious consideration. 

Mr. PETERS. And in 10 seconds, Mr. Hartman, I don’t know if 

you have a reaction to that approach. 

Mr. HARTMAN. I would emphasize that the dividend approach is 

probably the most if not the least efficient way to redistribute that 

revenue. I think you are better off going after distortionary taxes 

especially capital. 

Mr. PETERS. OK. Thank you very much. My time has expired. I 

appreciate it. 

Mr. OLSON. The gentleman’s time has expired. The Chair calls 

upon the subcommittee chairman of the Digital Commerce and 

Consumer Protection, Mr. Latta, for 5 minutes. 

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

thanks very much for our panel for being here, as you have probably heard that we have a couple of hearings going on two committees today, or subcommittees. 

But if I could ask, is it Dr. Dinan? I want to make sure I pronounce your name properly. Would a comprehensive evaluation of 

the cost effectiveness take into account costs and benefits to consumers in the economy? 

Dr. DINAN. Yes. In general, well, a cost effectiveness measure is 

just looking at how much it costs producers and consumers or taxpayers to achieve a given goal. It is not measuring that goal that 

cost against the benefit. So generally, a cost effectiveness measure 

when we compare different policies you are saying does this get a 

reduction in a certain pollutant or say an increase in domestic production at a higher cost or a lower cost in an alternative policy. 

Mr. LATTA. Maybe that follows up with my next question. How 

do you measure whether the consumers are benefiting from a particular tax treatment then when you are talking about the different 

types of measurements then? How would that measure for the consumer then if they are benefiting from that? 

Dr. DINAN. So are you referring to the measures that we talked 

about in my testimony about the cost of the greenhouse gas emission reductions? 

Mr. LATTA. Right. 

Dr. DINAN. OK. In that case it was looking at how much additional dollars—I am sorry. Yes, how much additional cost is imposed on the economy to get the reduction in greenhouse gas emisVerDate Mar 15 2010 10:21 Sep 25, 2017 Jkt 037690 PO 00000 Frm 00154 Fmt 6633 Sfmt 6633 I:\115THCONGRESS\115X22ENERGYTAX\115X22ENERGYTAXPENDING WAYNE
151 

sions, so it is not explicitly taking into account the cost, the benefits to consumers of achieving that which is why you would compare it with something like the social cost of carbon. In particular 

that measure was looking at cost, lost foregone revenue associated 

with achieving that outcome. 

Mr. LATTA. Thank you. 

Dr. Zycher, if I could ask you how has the tax code affected consumer choice? 

Dr. ZYCHER. Well, I think the primary impact of the current tax 

treatment of various energy forms is to allow given States to mandate market shares for renewable power, wind and solar power, 

and the production tax credit and the investment tax credit allowed 

those States to shift a substantial number of the amount of the 

costs of those policy choices onto taxpayers in other States. 

And so I think that, to answer your question, consumers are constrained to consume an energy mix that is more expensive than 

would otherwise be the case because of the tax policies that I have 

just mentioned. 

Mr. LATTA. Thank you very much. Mr. Chairman, I yield back. 

Mr. OLSON. The gentleman yields back. The Chair calls upon Ms. 

Castor from Florida for 5 minutes. 

Ms. CASTOR. Well, thank you, Mr. Chairman. This is a very important hearing the day after the Trump administration has begun 

to unwind the Clean Power Plan and our carbon pollution reduction goals. In the face of overwhelming evidence of the need to reduce carbon pollution and the need to generate electricity in cleaner ways, the Trump administration is instituting an energy policy 

that is more suitable to 50 years ago in America. 

It is not a policy for innovation. It is not a policy to keep the 

boom in clean-energy jobs going. It is a policy that will keep costs 

on our kids and future generations. See, America needs carbon pollution reduction goals and we also need a tax policy and tax incentives to help address the rising costs of the changing climate. 

I represent the State of Florida and there has been a lot of talk 

about cost, are costs factored in when you consider energy policy? 

And let me share with you some of the costs we are facing in Florida. And Florida is not unlike other States, but we have a lot at 

risk. We anticipate significant cost increases in flood insurance. We 

anticipate significant costs in property insurance, whether that is 

what happens on the coast or from extreme weather events. We are 

already seeing rising costs of beach renourishment. 

The economy in Florida is quite dependent upon clean water, 

clean air, and our beautiful beaches. People will probably have to 

start paying more in property taxes as local governments begin to 

repair their water infrastructure and wastewater infrastructure. 

Already in Miami-Dade County they are doing a lot of that. Not to 

mention air conditioning bills as the number of oppressively hot 

days continues to increase. In fact, the Florida League of Cities 

said that because Florida has more private property at risk from 

flooding than any other State, climate change could cost 69 billion 

in coastal property damage by 2030, and 152 billion in damage to 

coastal Florida properties by 2050. 

So Ms. Dinan, for the nonpartisan Congressional Budget Office 

as you are preparing to give advice and analyze the cost of certain 

152 

tax incentives as the Ways and Means Committee begins to discuss 

tax reform, do I understand it that these type of costs will not be 

factored in when we ask the CBO for cost analysis of fossil fuel tax 

incentives or the production tax credit or the investment tax credit? 

Dr. DINAN. Just to be clear, it is the Joint Committee on Taxation who estimates the cost of those tax expenditures so we rely 

on their estimates, and those estimates really just reflect the foregone revenue that is associated with them. 

Ms. CASTOR. So they wouldn’t include property insurance, flood 

insurance cost to consumers at home? 

Dr. DINAN. When they estimate the cost of the tax expenditures? 

No. That would be something that we would do in part of a broader 

analysis. 

Ms. CASTOR. What would you do that broader analysis? What 

would trigger a broader analysis? 

Dr. DINAN. Well, in general we do these longer term, more complicated studies at the request of either a ranking member or a 

chair of a relevant committee. 

Ms. CASTOR. OK. Mr. Clemmer, is that a good way to really estimate the cost to families back home when we are trying to make 

decisions on tax expenditures and tax policy? 

Mr. CLEMMER. No. And I think you bring up a really good point 

which is the cost of climate change. Even though there is some uncertainty about what they are going to be, there is a cost and it 

is significant, and there have been a lot of studies out there that 

have shown that. And some of the comments that were made earlier about discount rates in the future, you know, those are actually 

taken into account in the social cost of carbon estimates that the 

Government was using with a wide range of costs. 

But the other point I want to make, as you are pointing out in 

your comments, is that we are already seeing some of the costs of 

climate change. While you can’t put any, on one particular storm 

you can’t associate with climate change, we have seen an increase 

in drought, in wildfires, in coastal flooding and storm surge, and 

that is having a real cost on those communities and the trend has 

been increasing over time and those events have been increasing 

over time. And so we need to—as we have been discussing on this 

panel—need to fairly account for those externality costs. 

In my testimony, I mentioned the DOE. There have been a bunch 

of DOE studies recently that tried to quantify the benefits of renewables in terms of reducing those costs from CO2 emissions and 

from other pollutants and the public health impacts associated 

with it. And what they found was that the benefits were two to 

three times greater than what the production tax credit is, so I 

would urge people to take a look at that. 

Ms. CASTOR. Sure, thank you. 

Mr. OLSON. The gentlelady’s time has expired. The Chair calls 

upon gentleman from Mississippi, Mr. Harper, for 5 minutes. 

Mr. HARPER. Thank you, Mr. Chairman, and thanks to each of 

you for being here. Dr. Zycher, I would like to ask you a few questions if I may. And one thing that just amazes me when we look 

at intangible drilling costs more particularly, how that enables 

independent producers across the country to take what is a very 

high risk business. What is your view or take on IDC? 

153 

Dr. ZYCHER. Well, conceptually, labor costs incurred in the creation of a capital asset should be depreciated not expensed. At the 

same time, the deduction for intangible drilling expenses is allowed, basically R&D expenditures, everywhere, and so it is not 

really a subsidy for the oil and gas sector. It may be inefficient economically, but it is not a subsidy that is specific to that sector. 

And so I would be perfectly happy if—and it is not available, I 

guess, or it is available in limited formed integrated oil companies 

if I recall correctly. So I would be perfectly happy and I think it 

would be efficiency-inducing if Congress were to eliminate it across 

the board, but simply eliminating it for one sector, I think, would 

not be appropriate. 

Mr. HARPER. All right. There has been discussion here of, you 

know, certainly cap and trade or more recently carbon tax. Give me 

your views on the carbon tax, what that does to the economy, what 

that means as far as tax policy. 

Dr. ZYCHER. Yes. The carbon tax is really a terrible idea. And the 

study from the Climate Leadership Council that one of your colleagues mentioned earlier, I actually wrote a paper on that. It was 

published on the AEI Web site 3 weeks ago. It is deeply unserious. 

The carbon tax provides incentives for the Government to maximize revenue rather than optimize the level of emissions. 

The argument that Congress will simply send an equal check to 

every American is preposterous. The losers will have to be compensated more heavily than others. The carbon tax adjustment at 

the border is unworkable because of the supply chain phenomenon 

across countries, et cetera. The predictability argument made by 

Mr. Shultz and Mr. Baker refutes itself. They argue that the policy 

is predictable, but then they argue that after 5 years there should 

be a blue-ribbon commission to recommend whether there should 

be an increase in the tax. That proposal even among the several 

carbon tax proposals that have been made, that particular proposal 

from the Climate Leadership Council is deeply unserious and really 

ought not be paid too much attention to. 

A regulatory framework, surprisingly enough, is more efficient 

than a carbon tax in this context because it does not provide incentives for Congress to impose overly and stringent goals in terms of 

emission restrictions because of the availability of the revenues. 

Mr. HARPER. OK. You know, some have argued obviously that 

tax subsidies are necessary to correct market failures. Generally 

speaking, how well has the Government predicted those so-called 

market failures and has the tax code done a good job correcting 

them? 

Dr. ZYCHER. I don’t think so. The tax code subsidizes wind and 

solar power heavily despite the fact that they are polluting on that 

because of the need for backup generation that has to be cycled up 

and down. I made that point several times here today. EPA probably has incentives to overregulate because of the ideological and 

budget maximization incentives of the bureaucracy. But because of 

the power under the Congressional Review Act and possibly a 

REINS-type act, I think that that problem is being addressed by 

the current Congress. 

More generally, in the context of climate change, all the assertions here that we have heard about how the effects of increasing 

154 

greenhouse gas concentrations are becoming increasingly serious 

ignore the fact that there is simply no evidence in support of that. 

If you look, the temperature data are ambiguous, the correlation 

between increasing greenhouse gas concentrations and temperatures is actually very, very poor. The Arctic and Antarctic sea ice 

data provide conflicting stories. There is no evidence in the U.S. 

that flooding is correlated with increasing greenhouse gas concentrations. 

If you look at the data on wildfires from the National Fire Interagency Program in Boise, Idaho, there are no trends since 1985. 

The Palmer drought severity index shows no trends since 1895. 

There is simply no evidence that increasing greenhouse gas concentrations are having serious effects either in the U.S. or nationally. If you look at the cyclone data, the satellite data on cyclones, 

there is no trend since the early 1970s. Since 1954, there is no 

trend in tornado activity that is correlated with increasing greenhouse gas concentrations in the U.S. The assertions we have heard 

today from a number of people that there is a crisis because of increasing greenhouse gas concentrations is simply not supported by 

the evidence. 

Mr. HARPER. Thank you, Dr. Zycher. My time has expired. I yield 

back. 

Mr. OLSON. The gentleman’s time has expired. The Chair calls 

upon the gentleman from New York, Mr. Tonko, for 5 minutes. 

Mr. TONKO. Thank you, Mr. Chair. I agree we should hope to 

have a level playing field and was discouraged that many worthy 

emerging technologies were left out of the December 2015 ITC extension. Those included concepts like fuel cells, CHP, geothermal, 

and distributed wind. We should correct that and give these technologies ITC parity. I think it is a looming correction that needs 

to be addressed. 

With that said, wind and solar PV accounted for over two-thirds 

of new electricity generating capacity installed in 2015. Undoubtedly, tax policy has played a role, but is far from the only factor 

bringing these technologies online. 

So Mr. Clemmer, do you believe State Renewable Portfolio 

Standards requirements have played a role in bringing more renewables into our energy mix? 

Mr. CLEMMER. Yes, definitely. We have done a lot of research on 

that and there has been a lot of research from the national labs 

on that. And yes, they are one of the key drivers. They are actually 

in some ways more effective in the sense that they provide more 

long-term certainty of the industry. There has been lots of cost-benefit studies done on those showing that the cost impacts are very 

minimal. And as I mentioned in my testimony just a few minutes 

ago, one of the studies about the benefits from those being two to 

three times greater has to do with State renewable standards. 

I wanted to just quickly make a comment about what Dr. Zycher 

keeps bringing up, this issue of renewables being more polluting 

than fossil fuels, which is ludicrous. 

Dr. ZYCHER. Well, that is not what I said, Mr. Clemmer. 

Mr. CLEMMER. And in fact the—well, you said it makes more 

generation to back up renewables that increases pollution. 

Dr. ZYCHER. Yes. 

155 

Mr. CLEMMER. And the study he is referring to has been thoroughly debunked. It was a long time ago, and there have actually 

been dozens of studies by regional transmission organizations, utilities, the national labs that have all shown the amount of balancing that is needed for renewables is fairly small and the cost 

is actually fairly small too, on the order of five to ten percent of 

the wholesale price of electricity. So I completely disagree with 

what he is saying. 

Mr. TONKO. Thank you for that clarification. I think it is good to 

have on the record. I would point out that when I—my last workplace before this was at NYSERDA, the State Energy Research & 

Development Authority, and we saw tremendous efforts made in 

our renewables with the portfolios, and as an example we have set 

a goal of 50 percent of electricity in New York coming from renewable sources by 2030. 

Again, Mr. Clemmer, what about corporate procurement policies 

and consumer preferences for clean energy, what role do they play? 

Mr. CLEMMER. I think in the past few years they have been playing a huge role. We have seen a lot of large corporations directly 

purchasing and having power purchase agreements with renewable-energy developers and renewable-energy facilities, which is 

another indication that renewables are becoming more cost effective and the fact that it is good for consumers. They wouldn’t be 

doing this if it wasn’t good for them and it wasn’t affordable and 

cost effective for them to do it, as well as lining up with their corporate views about the environment and things like that. 

So I think there has been an enormous trend for both wind and 

solar in that way in the last couple of years. 

Mr. TONKO. Thank you. And since 2008, land-based winds cost 

has decreased by 41 percent and there has been a 64 percent decrease for utility scale PV. Has the increasing cost competitiveness 

of renewables, much of it due to technology improvements, played 

a role in their proliferation? 

Mr. CLEMMER. Yes. I think that the two main factors have been, 

you know, for wind it has been a combination of capital cost reductions due to some more economies of scale with that technology, 

but it has also been due to increasing levels of output or capacity 

factors as we often refer to it. In the best sites in the country right 

now, capacity factors for wind turbines are above 50 percent and 

the increase in output due to taller towers, longer blades, and more 

sophisticated power electronics have all helped boost capacity factors and made it viable for wind projects to be sited in areas of the 

country that were previously thought not to be cost effective for the 

technology. So innovation has played a key role. 

Mr. TONKO. Thank you. 

And again, Mr. Clemmer, many people have been using cost estimates looking at 2016 to 2020. Doesn’t that ignore the fact that 

only some of these credits are permanent and have existed for 

many decades and will continue to do so long after 2020? 

Mr. CLEMMER. Yes. It ignores that aspect, but it also ignores the 

historic treatment of different technologies. And in my testimony I 

give an example of looking back to basically 1950, and the amount 

of subsidies that have gone to wind power between that time frame 

and 2015 have been about three percent of the Federal subsidies, 

156 

whereas fossil fuels have provided almost two-thirds and nuclear 

power about 20 percent. 

Mr. TONKO. If we looked at a snapshot from 2016 to 2066, for example, we would probably get a different portrayal, right, of the 

impact? 

Mr. CLEMMER. Yes. But I think that would be very uncertain to 

look at that given, you know, the uncertainty about what is going 

to happen with policy and so forth. But if you were to just look at 

it from a snapshot of right now going into the future and the provisions that are going to get sunset at a certain point in time would 

be one way to do it, then you would see a much different picture. 

Mr. TONKO. OK, thank you. I believe my time has expired so I 

yield back. 

Mr. OLSON. The gentleman’s time has expired. The Chair calls 

upon the gentleman from West Virginia, Mr. McKinley, for 5 minutes. 

Mr. MCKINLEY. Thank you, Mr. Chairman. We have spent over 

the last numbers of years quite a bit of time in this committee with 

panels coming in about grid reliability and how we maintain our 

industrial might in this country. My concern a little bit is that let’s 

just say if we could just imagine an elementary level, if we were 

to do away with all of our fossil fuels and we were totally reliant 

on the wind, solar primarily, what would our grid look like? Would 

we have a reliable grid to be able to maintain our might if we had 

a complete reliability on renewables? 

Dr. Zycher, if I could get your view on that. 

Dr. ZYCHER. Yes. Is your question if we had a hundred percent 

grid powered by wind and solar power? 

Mr. MCKINLEY. Right. 

Dr. ZYCHER. Well, then we would have an extreme version of 

what happened in West Germany and the U.K., highly unreliable 

and highly expensive, devastatingly expensive electricity delivery 

system. And I don’t think, I really rather doubt that if people who 

argue—— 

Mr. MCKINLEY. So if that were correct, and I don’t disagree with 

you on that coming from a coal State, but if that is correct, then 

why are we having policy that is moving us in that direction? 

Dr. ZYCHER. Well, I am not really a political expert on why we 

are subsidizing what we are subsidizing. I only can talk about the 

effects, most of which are adverse. What I really do find amazing 

is the argument simultaneously from the proponents of wind and 

solar power that, A, they are now competitive in a cost sense with 

fossil fuel generation; and, B, we should continue the subsidies. 

You really can’t make both of those arguments simultaneously. If 

they are competitive, they don’t need the subsidies, and if they 

need the subsidies, they are not competitive. 

Mr. MCKINLEY. OK. Well, I am not opposed to wind and solar. 

I think it is unique. I think it’s something that makes it truly part 

of all of the above. I am willing to support that. My concern is that 

we keep subsidizing an industry that I think has matured to a 

level that perhaps it is unnecessary to subsidize it, especially if it 

gives us and under the extent, degree, it is an unreliable grid that 

we develop by pursuing this policy. 

157 

And so Dr. Murphy, I would like to get back to a question you 

said or you put in your paper and that was about how wind can 

actually get into the market into the PJM when they go to market 

on getting power at a virtually negative rate and still can make 

money on that because of the subsidy. Could you explain that on 

an elementary level, how you can actually bid in negatively or almost at cost and still make money with it? 

Dr. MURPHY. Sure, yes. So I should mention that there are cases 

where that might actually be sensible, like if a nuclear plant 

doesn’t want to completely shut down. So it is not that this is only 

possibly due to this one factor, but I think if you look at the data, 

the frequency with which these negative wholesale prices, so yes, 

they are legitimately negative prices where producers of electricity 

are paying people to take their product from them. 

And so I think a main reason that we have seen a prevalence of 

this increase is the production tax credits. So you are an operator, 

if you own one of these things, for every megawatt hour that you 

sell your tax bill goes down $23. And so, as long as the marginal 

costs of production aren’t that high, you would be willing to even 

sell at a negative price, because all things equal to you individually 

you make money doing that because it reduces your tax bill. 

Mr. MCKINLEY. OK, and just in the closing let me just make sure 

I understand, Dr. Murphy, your statement you make in your written testimony. And you may have made it in verbal, I might have 

missed that but there was talk about the Federal support for the 

wind and solar now is in the, particularly solar, let’s just focus on 

solar, is somewhere, I believe you listed it. It was $231 a megawatt 

and coal is at 57 cents. Am I reading your statement correctly? 

Dr. MURPHY. Yes. Well, what that was, yes, that was from the 

written testimony and that was for looking at fiscal year 2013. EIA 

had looked at the total Federal support, so that included direct 

grants not just tax preferences and then we adjusted it for a per 

megawatt hour basis. 

Mr. MCKINLEY. OK. So given the difference between $231 and 57 

cents, how can anyone in good conscience say that we are trying 

to not pick winners and losers here in Washington? 

Dr. MURPHY. Well, right, I agree with you. And I also think like 

some of the other comments made reflect that, that talking about 

how historically there hasn’t been much support for wind and solar 

and, right, and that is why we haven’t seen any real generation 

from wind until very recently. So I think that underscores the point 

that the expansion of wind thus far is driven by the tax code and 

other mandates. 

Mr. MCKINLEY. I know I am over time, but just would you agree 

that that would provide, if we were to become more reliant on wind 

and solar that we would have an unreliable grid? 

Dr. MURPHY. I think so, just obvious common sense that wind is 

intermittent. So, even in areas where it does make economic sense, 

you wouldn’t want to have your whole grid just dependent on that, 

because sometimes the wind is not blowing. 

Mr. OLSON. The gentleman’s time has expired. The Chair calls 

upon the gentleman from Iowa, Mr. Loebsack, for 5 minutes. 

Mr. LOEBSACK. Thank you, Mr. Chair. This has been pretty fascinating. I used to teach at a small college and not economics, politVerDate Mar 15 2010 10:21 Sep 25, 2017 Jkt 037690 PO 00000 Frm 00161 Fmt 6633 Sfmt 6633 I:\115THCONGRESS\115X22ENERGYTAX\115X22ENERGYTAXPENDING WAYNE
158 

ical science, but we had a lot of theoretical discussions. There has 

been a lot of theoretical discussions today. There have been a lot 

of, I think, false choices presented to us. I am one as a strong supporter, for example, of wind and solar, but I completely agree that 

we are never going to get to the point where we can depend completely on wind and solar. We simply probably will never have 

enough storage capacity for one thing to do that without relying 

upon some other forms of energy. So I think we have a situation 

here where we have false choices often get presented to us and I 

think that is unfortunate. 

And I kind of want to bring this back to the real world of Iowa 

and my home State, where some of you may know that our electricity generation—there is about 40 percent now from wind energy, and that is supported on a bipartisan basis in the State of 

Iowa. We have a Republican Governor who is for this, we have a 

Republican senator, Chuck Grassley, who is essentially the father 

of the production tax credit. And I am a Democrat, the only Democrat in the Federal delegation who pushes really hard for this. 

There is nothing partisan about it. It is about making sure that we 

create great jobs in Iowa. It is about making sure that we do the 

best we can to have as clean energy sources as we possibly can. 

You know, we have seen the production tax credit, the benefit 

that it has provided in terms of jobs, in terms of our rural communities as well where these turbines get sited, the leases that are 

important there for those farmers in a situation where, you know, 

we have low corn prices, people are depending on other sources of 

income often and this is one of them. So in the State of Iowa this 

has been, I think, a boon in many ways. It has been very beneficial 

not only for the environmental effects but for the economic effects 

as well. 

And we know what is going to happen to the production tax credit over a 5-year period. I would like to ask Mr. Clemmer, if we had 

not had the PTC in the past it is difficult to know, but maybe you 

might have some idea of what that might have done in terms of 

the jobs that would have been lost. I realize that we would have 

had other jobs in other parts of the energy industry because we 

would have electricity coming from other parts of the industry, the 

energy industry. But do you have any idea what that might have 

meant in terms of jobs if we had not had the PTC in the past? 

Mr. CLEMMER. Yes. Well, generally speaking, I think I can answer that. 

Mr. LOEBSACK. Right. 

Mr. CLEMMER. You know, one point to make is that as you said 

Senator Grassley is the father of the PTC passed in 1992, it really 

did not have much of an effect actually until the early 2000s. And 

in part it was the combination of the technology improving, it was 

also due to some of the State renewable standards that got put in 

place and Iowa was one of the early States that had one of those. 

And both of those policy mechanisms, which in a lot of the States 

these were places that didn’t have fossil fuel resources in their 

State and the economic benefits to them were even greater by fostering those industries, but as I said in my testimony, the effect 

was by stimulating development when they were in a nascent early 

phase and then the effects of driving down the cost to make them 

159 

more cost effective is what has started to lead to the growth recently and all the jobs that have followed along with it. 

And I think if we wouldn’t have had—one of the things I said in 

my testimony and my oral comments was the domestic sourcing of 

wind turbines has gone from about 20 percent in 2007 to about 50 

to 85 percent depending on what part of the technology you are 

talking about. And that has been a tremendous success story that 

would not have happened without the PTC. 

Mr. LOEBSACK. Right. I have two blade manufacturers in my congressional district, one in Newton and one in Fort Madison. I have 

a turbine, the structural tower manufacturers in my district as well 

in Newton, Iowa, and they have been great jobs. They are jobs that 

you know I hope aren’t going to go away. You know, the PTC is 

going to go away at this point. We will see what happens down the 

line. 

But then on solar as well, I have a lot of hog farmers in my district who are putting solar panels on top of those hog confinement 

facilities. I don’t have the number off the top of my head, but if it 

weren’t for that investment tax credit that wouldn’t be happening 

because we have a matching tax credit in the State of Iowa as well. 

If we didn’t have the Federal tax credit we wouldn’t have the tax 

credit in Iowa. And we can talk all we want theoretically about the 

distortion of the market and all the rest, but I can tell you there 

are tangible, positive effects in my State from both the PTC and 

the ITC, and I am personally glad that we got those extensions on 

those. 

Thank you, Mr. Chair, and I yield back. Thanks to the panel. 

Mr. OLSON. The gentleman yields back. The Chair calls upon the 

gentleman who flew combat missions in F–16 Falcons built in Fort 

Worth, Texas, Mr. Kinzinger from Illinois, for 5 minutes. 

Mr. KINZINGER. It wasn’t an F–16, but it was still out of Texas. 

Well, thank you, Mr. Chairman, and I want to thank you for holding this hearing. Obviously we all recognize we have an opportunity for once in a lifetime, maybe in my lifetime, tax reform, and 

especially for energy we have to keep in mind that changes can either be a boost or a hindrance and so this is a very important hearing to have. 

Mr. Hartman, often the argument is that new technologies need 

support to scale up and become viable commercially and it often 

comes from the tax code. How do we determine when a technology 

has become viable and it no longer needs preferential treatment, in 

your mind? 

Mr. HARTMAN. Well, first off that sort of gets into the infant industry argument. I think that that argument has small shreds of 

validity, but on the whole I disagree with it as an argument to support a technology in later stage either pre-commercial or early commercial development. I don’t find it convincing. However, in this 

context of saying if we are going to make tax credits more targeted 

to scale these resources up, typically what we see is that the per 

unit cost of production is very high at low production levels. And 

then at a certain point economies, as you ratchet up production you 

hit economies of scale. 

And there are, you know, economic analyses that can be done on 

various technologies that suggest where economies of scale points 

160 

are for a given technology, and thus if we are committed to providing tax credits for infant industries it is better to have an objective criteria like that to help phase those out. 

Mr. KINZINGER. OK, so yes, then it is not based just on the politics in the moment, I guess, in terms of when and where. And how 

have subsidies for renewables negatively impacted other sources 

like nuclear, for example? 

Mr. HARTMAN. That question is for me? 

Mr. KINZINGER. Yes. 

Mr. HARTMAN. I think that is very region specific, even subregion 

specific. So, for example, in Illinois, part of what we see is Illinois 

is a very heavy nuclear State, there is also a lot of wind development, and some of those negative pricing events are contributing 

factors on the whole. Now I think that sometimes the question of 

whether a price is negative or it is zero or slightly positive is a little bit blown out of proportion. 

I think overall when you look at it we are subsidizing a technology that when it sets price regardless of where it is market 

prices are below where the competitive levels would be. So, for a 

technology like nuclear, because there are a lot of transmission constraints at times where these nuclear plants are located, the cost 

of wind sets the marginal cost, which means its price effect is more 

pronounced in an area like Illinois than, say, in an area where you 

don’t have a high level of wind production or transmission constraints. 

But overall I would stress that the economics of nuclear, especially from independent power producers, is overwhelmingly driven 

by inexpensive natural gas. 

Mr. KINZINGER. And let me ask you too on a bit of a different 

issue. You discuss how a lack of information and misaligned incentives can cause consumers to underinvest in energy efficiency. 

Could you elaborate on why that is and some potential solutions to 

encourage continued investment in energy efficiency? 

Mr. HARTMAN. Sure, absolutely. So, from just informational 

asymmetry perspective, one thing I would point out is that a lot of 

times in a whole variety of studies, whether this is something like 

an inefficient furnace consideration or it is, you know, retrofitting 

homes with more energy-efficient appliances or insulation, usually 

your everyday consumer doesn’t fully understand the net benefits 

calculation going back. And so there is definitely an information 

shortage that can lead to suboptimal investment behavior. 

Most of the economic literature that looks at that suggests that 

there is an underinvestment associated with it. My concern with 

providing tax credits for it is that a lot of those tax credits go to 

support behavior that would have otherwise occurred in which 

there is no actual additional behavioral improvement, or in some 

cases the degree of information deficiency is very, you know, 

person- or household-specific, and using a blunt instrument like a 

tax credit doesn’t really correct for that deficiency well. 

Mr. KINZINGER. OK. With 40 seconds left I will yield back. Thank 

you. 

Mr. OLSON. The gentleman yields back and the Chair wants to 

take the time to correct his previous comments. My colleague wanted to fly F–16 Falcons built in Fort Worth, Texas. 

161 

[Laughter.] 

Mr. OLSON. The Chair now calls upon a Texas neighbor, Mr. 

Green, for 5 minutes. 

Mr. GREEN. Thank you, Mr. Chairman and Ranking Member, for 

holding the hearing, and thank our witnesses for being here. If you 

can’t tell my accent, I am also from Texas. 

Since the turn of the 20th century, the United States Government has recognized the importance of energy-related industries in 

our economy and our national security. It is under this rubric that 

both conservative and liberal administrations and Congress has offered energy-related industries preferential treatment. As our 

needs have transitioned, so have fields of power generation and 

fuel production. At one time, to start up oil, gas, chemical industries required the assistance of the Federal Government and I am 

proud to say that Texas has benefited. 

Now we have new industries that harness the wind, the sun, rivers, oceans, and biomass that will help power the next generation. 

By the way, Texas produces more wind power than any other State 

in the country. The truth is, the majority of the investment, tax 

credits, and directed research has benefited the United States economy and national security. The U.S. economy is the largest and 

most productive in human history. The free market principles upon 

which it is founded have created vast sums of wealth that have 

never been seen before. 

However, there are gaps in the system. Basic elementary research and development is not covered by the free market. Initial 

stages of development are risky and oftentimes not subject to immediate commercializations. Private wealth and investment are not 

incentivized to take risks on these new industries that haven’t been 

vetted or proved out in some capacity. That is the Federal role, the 

Government’s basic job. The United States Government has funded 

new industries that have revolutionized our country—hydraulic 

fracking, alcoholic fuels, and nuclear power. These chemical fuel 

and power sectors and many, many more have benefited from the 

tax policy and basic funding and directed research of the U.S. Government. 

Rather than pointing fingers let’s look forward and focus on 

where our interests lie and where our money is best spent. There 

are some cases where incumbent technologies where we can make 

a big difference like enhanced oil recovery and carbon sequestration 

and others that may be new, innovative industries like energy storage that would benefit with a little help. The future of U.S. energy 

will mix traditional and new power generation and fuel production 

and let’s embrace that reality and keep the ball moving forward. 

I have—thank goodness, my time didn’t get taken up. 

Ms. Dinan, in current and previous testimony the Congressional 

Budget Office stated that the basic research and development conducted by the Department of Energy is difficult to quantify. Why 

are the benefits so hard to calculate? 

Dr. DINAN. Well, in general, the reason why kind of the economic 

rationale for funding such basic research is that it creates what is 

called spillover benefits and those benefits are very dispersed. So 

that they could, they are not captured by an individual firm in the 

form of profits, so you might create some basic knowledge that is 

162 

used by various, by a multiple, many different industries and they 

could be, those benefits could occur over time. 

So it is hard to follow the threads from the initial research to 

capture all of the benefits that flowed from it. So there is a study 

that people rely on that is fairly old that indicates that the benefits 

from basic research have more than paid for themselves, but as I 

said it is very difficult to measure them just by definition of what 

those benefits are. 

Mr. GREEN. Well, if the Federal Government has difficulty in 

finding the benefits in basic research, it would seem it would be 

even more so for the private sector because the Federal Government has so many more resources and I guess it, is the private sector inclined to take risk associated with unknown results? 

Dr. DINAN. In general, I think the incentives for the private sector to undertake such research gets greater as the technology gets 

closer to the marketplace because they are more likely to be able 

to capture that. So that is why we have said in the past that the 

rationale for government funding of research is much greater when 

it is very early in the technology process or at the very basic level 

precisely because firms are less likely to undertake that on their 

own, but it can create benefits for society as a whole. 

Mr. GREEN. Well, I would probably estimate that we wouldn’t 

have developed hydraulic fracking, although there is a lot of folks 

who did that without some of the tax incentives that the industry 

would have been able to use. I am not a big one on ethanol because 

I am from Texas, but we only believe in drinking and eating our 

corn. 

[Laughter.] 

Mr. GREEN. But my colleague from Iowa is not here, but they 

also helped in the creation of ethanol and the research for that. I 

appreciate your response. My last 13 seconds for the panel, this is 

for everyone on the panel: Why would we have decided that tax 

policy is the best means for advancing policy initiatives? Do you 

want to just go down the—— 

Dr. MURPHY. Yes, if I understand, I would say it is in that I 

think that tax policy—if the Government needs to spend funds, 

then, yes, they have to have taxes to get them, but that they 

should try to do so without by distorting what would otherwise 

happen in a market outcome as little as possible. 

Mr. HARTMAN. Correct. And I think we have just seen a lot because it is an easier mechanism to implement reform. 

Mr. ALDY. Congressman, I would say that you have an array of 

instruments at your disposal—tax instruments, spending, regulation—and you have to be thoughtful and review and analyze what 

is the most cost effective way of delivering on your social goals 

using each of these instruments and accounting for the potential 

interactions between these instruments. 

And you may find that tax policy in some cases may be the most 

effective way to deliver on our social goals, but in others it may be 

better through authorizing new activities through the Government 

through spending or through regulatory actions. 

Mr. GREEN. Thank you, Mr. Chairman, for the time. 

163 

Mr. OLSON. The time has expired. The Chair calls upon the gentleman from the Commonwealth of Virginia, Mr. Griffith, for 5 

minutes. 

Mr. GRIFFITH. Thank you very much, Mr. Chairman. I appreciate 

it greatly. Let me say that yesterday the President signed the executive orders related to energy. From my district which has lost 

thousands of jobs in the war on coal, his declaration that the war 

on coal was over and that saved thousands of jobs that would be 

direct and indirect, but he said the war on coal is over and I am 

glad to hear that. Unfortunately, in the past many people on the 

other side of the aisle wanted to say there was no war on coal. 

They would always cite the price of natural gas, which is true has 

been a market problem for selling coal, but more important, regulations, et cetera, have been a real problem for us. 

And I noted in a political argument on their site yesterday related to the President’s executive orders that Brian Deese, former 

Obama energy advisor, noted that stock prices for coal-related companies are down, underperforming the market by several percentage points, which he sees as a sign that the U.S. economy’s transition to cleaner energy sources is firmly enough underway that this 

administration cannot fundamentally change that dynamic. And 

that, he argued, is partly because of the Obama team’s efforts not 

only on the regulatory side, but also with respect to research and 

commercialization, tax incentives, and otherwise. I think it is pretty clear there was a war on coal when your energy advisor can 

make those kind of comments after the fact. 

Now what we want to try to do is come up with a tax policy that 

makes sense, free market sense, let the market determine where 

we should go. I believe in all of the above. I think there have been 

some great things with wind and solar but we have to move forward. Now one of the interesting comments that came up earlier— 

and I understand there was a dust-up when I was out meeting 

with constituents a little bit earlier, a dust-up over some of your 

comments, Dr. Zycher, in regard to backup energy being necessary 

in the case of renewables. 

And I wondered if you wanted to, A, explain what kind of 

backups are necessary in relationship to renewals, would that also 

apply to natural gas in certain times of the year in crisis situations? And I understand that the study you were relying on, its accuracy was impugned. If you would like to respond that I will give 

you this opportunity. 

Dr. ZYCHER. Well, I mean, there are two different questions 

there. One, what are the backup requirements for wind and solar 

power? You know, I wrote a book on this issue, or on the economics 

of renewables, about 5 years ago. And my estimate of the cost of 

backup power given the capacity factor, usage, and the cycling on 

it was about $370 per megawatt, and it was really quite striking. 

With respect to the pollution effects of renewables combined with 

the need for their backup power that Mr. Clemmer and I seem to 

disagree on, he is referring to a bunch of studies that in effect are 

looking at systems in which the market share renewables is really 

rather low. It is when renewables approach ten percent or higher 

in terms of the market share that you start to get this very, very 

164 

serious problem with cycling of the backup units up and down and 

the increased pollution that results from it. 

There is simply no question in the Bentek study of Colorado and 

Texas done about 5 or so years ago and other studies that, once renewable market shares reach about 10 percent, depending on local 

conditions, the cycling problem results in an increase in the emissions of pollutants, conventional pollutants, and greenhouse gases 

rather than a reduction, which is not what the clean-energy proponents would have you believe. 

Mr. GRIFFITH. All right, I appreciate that. I also thought it was 

of some interest because—just something I read about a number of 

years ago that you mentioned, that the Mojave solar project had 

not produced as much power. I would like for you to touch on that. 

But also, if you have any knowledge—at the time they were putting 

that in, there was a real environmental concern that they were 

going to destroy the ecosystem under the crust of the desert. And 

if you have any information on that, I would appreciate that, as 

well. 

Dr. ZYCHER. Well, there are no more deserts, there are only fragile deserts. I don’t know what fragile means, but any newspaper article, anything that talks about the desert, deserts are always described as fragile. The Ivanpah plant was supposed to produce 

roughly a million megawatt hours a year starting with its operation about 2 years ago. It has only produced about 650,000 

megawatts a year. A spokesman attributed that—and I am not kidding—to some light conditions that were lower than years of studies had suggested to them. That is what they claim, which is a little like the argument from Gosplan on Soviet agriculture. Seventy 

years of bad harvest were created by 70 years of bad weather. That 

was essentially their argument. 

There actually is, you could argue that there is a statistical distribution of sunlight conditions at any given site and they just happened to get unlucky that the first couple of years they had more 

clouds than is normally the case. But if you wait enough years, everything will revert to the mean and so they will produce more 

power. Another theory, which is the one I think is much more likely to be true, is that they overestimated sunlight conditions at the 

site in order to get the Section 1705 DOE loan guarantee of 1.6 billion, et cetera, et cetera. I don’t think that plant is ever going to 

operate as advertised. 

And with respect to your last question, what has happened to the 

ground beneath the heliostats, I don’t know the answer to that. 

That I have not seen. 

Mr. GRIFFITH. All right, and I appreciate that. I yield back, Mr. 

Chairman. 

Mr. OLSON. The gentleman yields back. The Chair calls upon the 

gentleman from my parents’ home State of Vermont, Mr. Welch, for 

5 minutes. 

Mr. WELCH. Thank you very much, Mr. Chairman. I thank all of 

the witnesses. It is a timely hearing given the decision by President Trump to roll back the Clean Power Plan. The question of tax 

incentives is all in the eye of the beholder depending on where you 

are from if your industry is given an advantage or not, but bottom 

165 

line, they seem to be a tool that Congress uses pretty frequently 

for better or for worse. 

I think it is no question that tax incentives affect behavior, 

whether the outcome is good or bad is always a debate. But my understanding is we have had significant tax incentives for oil and 

gas production for about a hundred years and it is a very profitable 

industry. I do believe, and this is a policy question. There is some 

debate on it in this committee that we do have to move to a much 

lower carbon footprint in our economy, and I also happen to believe 

that the more we double down on that effort we can actually create 

some jobs. 

Dr. Zycher, I will ask you. I probably disagree with most of what 

you say, but I want to ask your opinion as to whether or not there 

are external expenses associated with carbon fuels that are not 

priced into the cost of a gallon of gas. 

Dr. ZYCHER. If you believe that EPA regulations, as promulgated 

in coordination with the States, have reduced emissions or have 

achieved national ambient air quality standards in particular for 

the six criteria pollutants that protect the public health with an 

adequate margin of safety, then in that case emissions of those pollutants have been reduced to a level that is efficient in which the 

marginal cost of reducing them—— 

Mr. WELCH. All right, yes. But—— 

Dr. ZYCHER [continuing]. Equals the marginal benefit of doing so. 

If you don’t believe that, fine, then the EPA is violating the terms 

of the Clean Air Act. 

Mr. WELCH. Yes. I don’t want to spend too much of my time on 

this, but I was in Delhi and you couldn’t breathe there, and Beijing 

and you couldn’t breathe there, and there is enormous health consequences. I mean, do you dispute that? 

Dr. ZYCHER. Do I dispute that there are serious pollution problems overseas? Of course not. 

Mr. WELCH. Right. And some of those pollution problems are related to the effects of significant carbon emissions. 

Dr. ZYCHER. Sure. Those pollution problems in China and India 

and, indeed, in Europe are created by policies that do not satisfy 

U.S. standards. 

Mr. WELCH. Let me go on, because I only have 2 minutes, but 

thank you very much. I am working with Mr. McKinley who is 

from a coal State, but he and I have an efficiency bill that actually 

with Mr. Barton we had success getting out of the House several 

terms ago. But it would provide a rebate for homeowners who demonstrate a 20 percent energy savings, and 40 percent energy savings would get a $5,000 rebate. That is taxpayer money that is 

going to make a difference for folks. 

Mr. Aldy, do you have any view on that, an approach like that? 

Mr. ALDY. Well, I think one important question to ask about how 

using taxpayer monies for something like this is, What is going to 

be the incremental impact of that subsidy? And if we think we really are changing people’s behavior in a fundamental way, we are 

getting investment in new energy technologies, that is fantastic. I 

will note there are a number of States that have programs as well. 

And I think this is why as I noted in my testimony and earlier, 

reviewing the effectiveness of these policies is really important and 

166 

it is that transparency on the efficacy of the policy that is really 

lacking on the tax provisions in contrast to how we address—— 

Mr. WELCH. And I agree with that. I mean any of us who supported use of the tax code to achieve a result have to be willing to 

actually calculate what the results are and it can be very expensive, oftentimes much more so than direct investment. And the 

other issue that is a debate here is regulation because you can 

overdo it as a regulator and get it wrong. 

So I, as a person who thinks that regulation in the right circumstances and properly done is an effective tool to get a policy 

outcome, am willing to review those regulations to see if it is working. I mean, is regulation a tool that should be used to achieve a 

policy outcome in your view, Mr. Clemmer? 

Mr. CLEMMER. Yes, absolutely. I mean that is, you know, as Dr. 

Zycher is talking about with EPA, some of the regulations that are 

in place to reduce SO2 emissions, mercury, that is—— 

Mr. WELCH. Didn’t it really work with SO2? There was not a big 

cost to the taxpayer, it was regulation that worked? 

Mr. CLEMMER. It worked at a much lower cost than what industry was saying for sure because of—— 

Mr. WELCH. Or mileage standards where we are not micromanaging. It is a challenge obviously, big engineering challenge for the 

car makers. But if it is a level playing field where the goal is out 

there and then they are given the freedom to figure out how best 

to achieve it, that is not costing the taxpayer money but it is 

achieving a policy of trying to lower gas emissions by increasing 

mileage. 

Mr. Hartman, do you want to comment on that? Then I will yield 

back, thank you. 

Mr. HARTMAN. Sure, so you raised a variety of energy-efficiency 

policies there. And I think most studies on energy-efficiency policies are very specific to the set of circumstances and that particular 

policy and what technologies we are looking at. Mr. Aldy referred 

to some State programs, and I think State programs have done a 

much more of a drill-down approach to it and I think have revealed 

that in some cases there are positive net benefits. But in some 

cases, especially in cases where it gets tied into a mixture of social 

policy that strays from the original objective function, you tend to 

see cost well above benefits. I think it is very policy and situation 

specific. 

Mr. WELCH. All right, thank you. Thank you very much. 

Mr. OLSON. The gentleman’s time has expired. The Chair calls 

upon the gentleman from Ohio, Mr. Johnson, for 5 minutes. 

Mr. JOHNSON. Thank you, Mr. Chairman. 

Mr. Hartman, this doesn’t directly relate to tax policy, but in 

your testimony you say that to truly level the competitive playing 

field and to enhance market performance wholesale electricity market reforms and market enhancing reforms at the FERC level must 

take place. Can you please elaborate on what those reforms might 

be? 

Mr. HARTMAN. Sure. So I think we can begin with some pending 

rulemakings that are currently on hold while FERC does not have 

a quorum at this point. Generally, you want price formation of 

wholesale electricity markets to fully reflect market fundamentals. 

167 

Now because there is a whole variety of very nuanced market failures in electricity systems largely stemming from the need to balance supply and demand instantaneously amongst some other factors, there is a need for the visible hand in terms of the design and 

the rules of these markets to facilitate the invisible hand of markets to go to work. And so there is a lot of nuanced rules that we 

need to address. Just to bring up a couple that have been more in 

the spotlight, I would say the price formation initiative at FERC 

is a very good example of a well-intended focus to make sure that 

in this case all short-run marginal costs are incorporated into the 

pricing structure within the regional transmission operation systems. 

Mr. JOHNSON. OK. Well, in your opinion, what should happen 

first, taking a look at wholesale market reforms or addressing some 

of the other issues that impact the energy markets outside of 

FERC jurisdiction like leveling energy-tax preferences and regulatory reform? 

Mr. HARTMAN. I think we could, at the risk of biting too much 

off at the same time, I think we can simultaneously address quite 

a few. In some cases we see regulatory reform barriers in licensing, 

whether that is hydro or some of the advanced, you know, modular 

nuclear reactor designs as well, you know that falls under a very 

different jurisdiction and set of actors than we see at FERC. So I 

think it is possible to provide a nudge in all those directions simultaneously. 

Mr. JOHNSON. Do you have an opinion on which of these are 

most pressing in terms of market distortions and why? 

Mr. HARTMAN. I think that is a bit challenging to answer overall. 

The things I would actually stress first and foremost are that we 

see public policy support competitive market reforms, ones that 

focus on enhancing market access. So in some cases a lot of these 

electricity systems were designed around large, central thermal 

plant generation and what we are seeing with a lot of unconventional technologies becoming more economical is that we don’t have 

a system that fully provides access on a nondiscriminatory basis to 

all resources in some of these markets. 

And so I think that is a good area to approach while making sure 

we don’t cross the road into preferential treatment for these resources and instead make sure we focus on enhancing competitive 

market outcomes. 

Mr. JOHNSON. OK, all right. 

Dr. Zycher, understanding the various factors influencing energy 

markets and predicting how market will respond to tax treatments 

is very complex and difficult process, so how much confidence 

should we have in the ability of the tax code to produce a desired 

outcome? 

Dr. ZYCHER. Well, certainly in directionally if you subsidize 

something you are going to get more of it and the question then 

becomes how much more and is it worth the cost, and that is something that Congress has to decide. The purpose of the tax code, and 

I think others have made this point, is to raise revenues while creating, while distorting economic activity as little as possible. If 

Congress wants to subsidize activity X it really ought to do it on 

168 

the spending side of the budget not the tax side, at least in principle. 

The narrow answer to your question is it is very difficult to estimate in advance how much a given tax provision will affect the 

level of a given economic activity. We can get testimony about it, 

we can experiment, we can see what experience provides, but Congress really has to operate in some degree in the dark when it estimates how much a tax provision will affect the activity that it is 

trying to encourage. 

Mr. JOHNSON. OK. Dr. Murphy, where are the greatest inefficiencies in our energy markets? Is there anything that we have not 

talked about here this morning that you would like to highlight? 

Dr. MURPHY. Well, I think that we have discussed in general all 

of these aspects, but in particular, yes, I would just say that I 

would caution policymakers regarding things like the social cost of 

carbon that even stipulating the physical and science and chemistry and so on, it is not an obvious exercise to go from that to this 

is the dollar figure that we should then implement in the policy. 

So just to motivate it, you asked a hundred physicists how hot 

is the surface of the sun they are all going to give you an answer 

that is pretty close. You ask a hundred economists what is the social cost of carbon, the answer is going to be all over the place. 

Mr. JOHNSON. Well, in terms of the temperature of the sun, as 

long as you are close it is not going to matter that much, right? 

Dr. MURPHY. Right, right. 

Mr. JOHNSON. OK, all right. Thanks a lot. Mr. Chairman, I yield 

back. 

Mr. OLSON. The gentleman’s time has expired. The Chair calls 

upon the acting ranking member of the subcommittee, Mr. Sarbanes, for 5 minutes. 

Mr. SARBANES. Thank you, Mr. Chairman. I want to thank the 

panel. Mr. Aldy, I want to thank you for your testimony today. In 

your view, have fossil fuel tax subsidies undergone the kind of rigorous scrutiny here in Congress that you think makes sense when 

you think about the taxpayers’ investment on our energy policy or 

could we do better on that? 

Mr. ALDY. I think we could go a lot better on that. I think the 

fact that they are permanent makes it very difficult to motivate 

that kind of analysis to get people who have the knowledge and the 

analytic tools to bring to bear to assess what impacts they have. 

When we look at what has been done in terms of academic research, we find that those subsidies are for the most part transferring taxpayer monies to these oil and gas companies and to some 

extent coal companies with very little impact on their production. 

Mr. SARBANES. Well, I agree with you. And I have a theory about 

it, so let me talk for a moment about why I think Congress has not 

done the kind of heavy lifting on scrutinizing these subsidies that 

I think it should do. Last election cycle the oil and gas industry 

alone pumped over a hundred million dollars into Washington, and 

that wasn’t to build a refinery down the street. That went into 

spending on campaign contributions and lobbying here in DC, and 

it was done, I think, primarily to protect their special interests. 

Now I know we don’t have any lobbyists here. Everyone here is 

an intern, I think, in the audience. But this is a problem. And Dr. 

169 

Zycher, you talked about the, quote, ideological and budget maximization incentives of the bureaucracy. I confess I am not exactly 

sure what you were talking about, but it was elegant phrasing so 

I wanted to borrow it a little bit and talk about the ideological and 

profit maximization incentives of the oil and gas industry. 

The industry has a huge incentive to pour money into campaign 

contributions and lobbying and put an army of people up here on 

Capitol Hill, but it is a very smart investment. I don’t blame the 

industry for doing this. There is a 2014 study out there that estimates that for every $1 that the fossil fuel industry invested in 

campaign contributions and lobbying, it got $59 back when you 

look at the subsidies that they benefit from here in Washington. 

That is a 5800 percent return, so it would be crazy for the industry 

not to invest those kinds of dollars up here in Washington. 

But the fossil fuel industry has not just bought its way into a 

permanent subsidy from the American people, they have bought a 

whole new discipline over the last few decades of fake science practiced by politicians who deny climate change. The studies show 97 

percent of climate scientists agree that climate change is a real 

threat to the planet; that fossil fuel pollution is a root cause. 

Eighty percent of Americans want Congress to do something about 

this. 

But we saw what the Trump administration did yesterday and 

we have seen an inability here in Washington to address the issue 

of climate change and today we are talking about continuing these 

permanent subsidies to the fossil fuel industry using American taxpayer money. Mr. Aldy, do you think it makes sense for all the current oil and gas industry subsidies that we have currently in the 

tax code to be made permanent? 

Mr. ALDY. No. 

Mr. SARBANES. No. We talk about energy independence, but we 

need to start talking about how Congress can free itself of dependence on oil industry campaign contributions that have distorted our 

energy policy for decades. We keep talking about distortion. That 

word has been used a lot today in relationship to the tax code and 

whether it distorts or doesn’t distort, how we make policy in this 

country, the judgment and decisions we make. But the huge sums 

of money that pour into our campaign system from special interest 

have probably more of a distorting impact on making good public 

policy than just about anything else. 

Now that is our issue. That is our problem here. We have to fix 

that. We need to build a whole new way of funding campaigns in 

this country that can free us of the need to turn to special interest. 

We have got to do it. But if we do that I have absolute confidence 

that we will have better public policy not just with respect to energy, but with respect to just about everything else. So this is task 

we have to face. And if we can do it I think we can have smart, 

thoughtful energy policy for this country that puts the interests of 

the American people first. And with that I would yield back. 

Mr. OLSON. The gentleman’s time has expired. The Chair saved 

the best for last. I recognize Mr. Walberg for 5 minutes, from 

Michigan. 

Mr. WALBERG. I certainly appreciate the chairman’s expose ́ of the 

best for last, but I think, frankly, I am the most junior member. 

170 

It is good to be here, though. And we will go back on to the energy 

issue. Mr. Zycher, one issue that has been continuously brought to 

my attention within the tax policy and tax reform debate in this 

area of energy is the importance of a deductibility of interest expense. Could you please provide some insights on why this is so important to regulated electric and gas companies? 

Dr. ZYCHER. Yes. The issue of expensing of capital investments, 

and therefore to be consistent the elimination of the deductibility 

of interest expense on the financing for those capital investments, 

makes a lot of sense everywhere except the regulated utility sector, 

primarily because regulated ratemaking as accrued generalization 

uses each year’s accounting costs to determine rates that generate 

a fair and reasonable return. 

And so, if a given utility invests in a capital asset, a new generator—pick whatever capital asset you want—and expenses it, then 

rates in that year will be driven down under what the green eyeshade accounting types call a normalization process, and then the 

subsequent year it will be driven back up. So, because of the nature of regulated ratemaking, the substitution of expensing in place 

of the deductibility of interest would create a lot of instability in 

regulated rates for consumers. 

And I think that if Congress in its efforts to adopt a tax reform 

decides to allow the expensing of capital investments and therefore 

the elimination of the deduction of interest expense, I think that 

there needs to be some sort of provision made for the unique circumstances affecting regulated utilities and the ratemaking process. 

Mr. WALBERG. OK. Mr. Murphy, what components, I guess continuing on from that what components of the tax code work best 

for electric and gas companies and their customers, which is important? 

Dr. MURPHY. Well, sure. So yes, just to follow on, I think I am 

coming from a slightly different angle. My position on this matter, 

so yes, economists they are concerned that right now the income 

tax, corporate income tax, by allowing the deductibility of interest 

payments of a company raises money by issuing bonds then they 

can write that expense off, but not if they issue stock. 

And so my point is simply, though, if you got rid of that deductibility but kept it as an income tax, then that means the companies 

that have a lower net income are getting taxed at a higher rate if 

they happen to have, be capital-intensive. So yes, it is things like 

utilities that are very capital-intensive what seems to be an arcane 

manner of tax policy could have a huge impact. 

And as Dr. Zycher was saying, it might get passed on more to 

consumers because of the way that their prices are set, their ratemaking, and it will show their costs. So I would just caution that 

if there is going to be tax reform but it is still going to be an income tax to make sure a company is being taxed on its genuine income. 

Mr. WALBERG. OK. Mr. Zycher, if utilities are unable to deduct 

interest costs for infrastructure projects they will ultimately pass 

these costs along to consumers, they indicate, resulting in higher 

costs for American families. Do you believe that this rise in electricity prices will have a disproportionate impact on lower income 

171 

customers and small businesses? And finally, will this rising cost 

hurt the global competitiveness of energy-intensive industries like 

American steel and manufacturing? 

Dr. ZYCHER. Well, with respect to lower income individuals and 

families that depends on the, what an economist would call the income elasticity of demand for electricity and whether or not electricity demands rise less, equal to, or more than proportionate with 

income and that is not clear. But certainly in the narrow context 

of those in lower income classes it would be a burden. That is certainly true. 

In terms of driving up power prices that would affect competitiveness in international goods markets adversely, that is certainly 

true as well. I think the major problem is what I mentioned before, 

the creation of instability in regulated ratemaking over time because of a substitution of expensing in place of the deductibility of 

interest over time. And I think Congress needs to be very careful 

about that. 

Mr. WALBERG. OK, thank you. I yield back. 

Mr. OLSON. The gentleman’s time has expired. The Chair wants 

to announce that the first round of questions is over, it is time for 

Round 2. I am just kidding. Seeing that there are no further members wishing to ask questions of the first panel, I would like to 

thank all of our witnesses again for being here today. Before we 

conclude—— 

Mr. SARBANES. Mr. Chairman, just ask unanimous consent to introduce these documents into the record: a statement from the 

American Institute of Architects; comments from Doug Koplow, 

president of Earth Track, Inc.; written testimony from U.S. Wind, 

Inc.; a statement from Lake Erie Energy Development Corporation; 

and a statement by the Biomass Thermal Energy Council. 

Mr. OLSON. Without objection, so ordered. 

In addition to those statements I would like to introduce a statement for the record from the American Public Power Association; 

and Matthew Godlewski, the president of the Natural Gas Vehicles 

for America. And we got the one from the Architects and Earth 

Track, correct, and Biomass? We are all covered. Without objection, 

so ordered. 

[The information appears at the conclusion of the hearing.] 

Mr. OLSON. And pursuant to committee rules, I remind Members 

that they have 10 business days to submit additional questions for 

the record, and ask the witnesses to submit their response within 

10 business days upon receipt of the questions. Without objection, 

the subcommittee is adjourned. 

[Whereupon, at 12:58 p.m., the subcommittee was adjourned.] 

[Material submitted for inclusion in the record follows:] 

172 

173 

174 

175 

176 

177 

178 

179 

180 

181 

182 

183 

184 

185 

186 

187 

188 

189 

190 

191 

192 

193 

194 

195 

196 

197 

198 

199 

200 

201 

202 

203 

204 

205 

206 

207 

208 

209 

210 

Æ