August 5, 2007

Motivating U.S. energy growth with "carrots" and "sticks"

Before breaking for summer the U.S. 110th Congress made strides on defining energy policies through passage of the 2007 Farm Bill (July 27th) and Energy Bills (August 4th). Analysis of these measures shows how the House seeks to achieve its goals by luring development with the "carrots" of incentives while threatening corporations with the "sticks" of taxes and regulatory standards.

In comparison to deliberations on the 2005 Energy Policy Act (EPACT) - passed prior to Bush's alarm-sounding "addicted to oil" State of the Union message and the oil price hikes of 2006 - both sides of the aisle seem to be tripping over themselves to prove to their constituencies that they "get" voter concern about the impact of U.S. oil dependency on the war in Iraq, the steep increases in the price of gasoline, carbon emissions from fossil fuels, and the overall need for more self-reliance for both electric and fuel energy production.

As a result, the Farm Bill and Energy Bill includes provisions that strongly support renewable energy development in general and biofuels development in particular.

So what are in these bills? While various news outlets carry detailed comparisons of the House and Senate versions of each, suffice it to say that the main issues break down between those usually held by pro-business Republicans vs. pro-environmentalist Democrats.

"Carrots" are incentives that enable private enterprise to reduce the risk of investment in new research, development, & deployment (RD&D). Reliance is placed on American business acumen, the power of profit-motive, and the social benefit of good jobs to spur innovation and positive action. They tend to favor a cap and trade system used in Europe to reward progress implementing carbon emission reduction and energy efficient technologies.

The carrots the House Energy Bill contains -
• New tax credits for consumers to buy plug-in electric hybrids and fuel-cell vehicles as well as low-interest loans and grants for consumers to buy energy efficient appliances and install solar panels and geothermal pumps at their homes.
• Incentives to build biomass factories and for research into cellulosic ethanol and biodiesel.
• Bonds to be used by cities and counties for energy conservation.
• Tax credits for installing E-85 pumps.
• Tax breaks, subsidies for research into better batteries for plug-in hybrid cars and up to $4,000 tax credit for purchasing such cars.
• Funds for an assessment of areas for underground carbon dioxide storage and calls for developing large-scale storage demonstration projects.

The 2007 Farm Bill (H.R. 2419) includes some other carrots -
• Funding to invest in rural communities nationwide, including economic development programs and access to broadband telecommunication services.
• New investments in popular conservation programs, including the Conservation Reserve Program, Wetlands Reserve Program, Environmental Quality Incentive Program, Farm and Ranchland Protection Program
• New investments in renewable energy research, development and production in rural America. Rebalancing loan rates and target prices among commodities, achieving greater regional equity.
• Additional funding aimed at protecting and sustaining our nation’s forest resources.

How would these carrots be paid for, besides growth in tax revenues from development of new industries? The House voted to repeal $16 billion in tax breaks given to the oil and gas industry, shifting the money into programs to boost biofuels, renewable energy and efficiency programs.

"Sticks" are regulations and punitive taxes that would increase government oversight of the process of energy technology deployment. Sticks would retard those technological development that could possibly threaten the environment, institute mandates on renewable energy purchases, set high standards on vehicle mileage and emissions reduction, and tax companies that fail to implement emissions improvements.

Some sticks create business opportunities. State Renewable Portfolio Standards (RPS) are an example. These mechanisms require utilities to purchase a certain percentage of their electricity from renewable sources. This tends to create market opportunities that encourage investment in chiefly solar and wind energy systems. California and Florida utilities are embracing these standards, in part because of other carrots and sticks. The Global Warming Act and similar California legislation that puts a cap on the use of coal to produce electricity threaten utility access to these mainstay sources of generation. However, the renewable energy sources can result in electricity that is more costly and more seasonal than current modes of generation, consequently they result in higher costs which are usually passed on to the consumer.

Another factor involved with RPS is that access to these wind and solar energy are regional. For this reason, Southern utilities are bristling at the attempt of Congress to pass a national RPS . They don't have much access to wind and solar energy. Biomass energy could rectify the imbalance because the Southeast is the wood basket of America and wood waste is actually a good source of bioenergy, but biofuel conversion technologies have yet to be employed commercial-scale and are at an early adopter stage of marketing.

The sticks the House Energy Bill contains include:
• Requirements that electric utilities produce 15 percent of electricity from renewable energy sources.
• New efficiency standards for appliances, lighting and building

The Farm Bill also contains -
• Strengthening payment limits for farm subsidies to ensure that people making more than $1 million a year (adjusted gross income) can’t collect conservation and farm program payments.
• Provisions that close loopholes that allow people to avoid payment limits by receiving subsidies through multiple business units.

One stick sought by the Democrats that didn't get passed was a big increase in federal fuel economy standards for all cars and trucks. The auto companies, like GM, have argued that this would cripple their industries because the American public still demands gas guzzling SUVs and pick-up trucks, the most profitable vehicles they make. Nevertheless, Speaker Pelosi is expected to push to include a Senate provision to raise fuel economy to 35 miles per gallon for cars and trucks by 2020 during deliberations.

What do the experts think about these Bills?
Bob Dinneen, President of the Renewable Fuels Association said this about the Energy Bill - “This bill could be to next generation cellulosic ethanol production what the 2005 energy bill was to grain-based ethanol. To achieve the ambitious goals the American people are calling for, it will require the production of ethanol from all available feedstocks, including corn, corn stover, switchgrass, wood chips and other cellulosic materials. This bill strikes the right chord by requiring that 21 billion of the 36 billion gallon requirement be met by cellulosic ethanol production."

Marchant Wentworth, a legislative representative for the Union of Concerned Scientists says "The Energy Bill saves consumers money, creates jobs and makes a down payment on reducing the threat of global warming."

Even though it satisfies the interests of most farmers, the Farm Bill looks like it might face a Bush veto. In one section Democrats added another "stick". They said they were closing a loophole and cracking down on foreign tax-dodgers, while Republicans called it a massive tax hike that would affect manufacturers that provide millions of jobs in their districts.

"This is an unprecedented move to use a farm bill as a vehicle to increase taxes," said Rep. Adam Putnam of Florida, the No. 3 Republican. "We could have put the House imprint on the farm bill, and now it is veto bait, and that is a tragedy."

Agriculture Secretary Mike Johanns said Democrats had narrowed support for farm programs by including the tax measure in the bill. "If there was ever a time when our farm programs needed friends, it is now," he said.

Both bills will now go to the Senate to be merged with their versions.

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