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Beacon Hill Analysis Shows Nevada RPS Hikes Electricity Prices

September 3, 2014 by Leave a Comment

The state of Nevada—like many others—has implemented a “Renewable Portfolio Standard,” or RPS. According to the state mandate—which was first implemented in 1997 but has since been periodically revised—the state utility, NV Energy, must produce at least 25 percent of its total retail electricity with eligible renewable sources by 2025, and 6 percent of the total must be satisfied with solar energy in particular. Beyond the arbitrariness of these political goals—isn’t it a coincidence that the target is 25 percent by the year 2025?—is the fact that these RPS mandates necessarily raise electricity prices. We can review empirical studies to see just how big the price hikes may be, costing households some $70 more per year and industrial businesses many thousands of dollars annually.

Whenever thinking about an RPS, we must realize that it necessarily makes electricity more expensive than it otherwise would be. Remember, an RPS forces utilities to provide electricity with methods that they would not choose voluntarily. If it were really efficient to produce such a large fraction of electricity with renewable sources, then the government wouldn’t have to force the power companies to do so. Precisely because an RPS and other such mandates makes companies act against their immediate financial interests, these regulations end up causing electricity prices even at the retail level to be higher than they otherwise would be. That means empirical estimates are merely trying to quantify what we know the qualitative result must be.

To get a sense of the quantitative impacts, we can turn to report from last year published by the Nevada Policy Research Institute, and written by scholars from the Beacon Hill Institute located at Suffolk University, has estimated the quantitative impact of Nevada’s electricity mandates. The result is higher electricity prices for both consumers and businesses.

The Beacon Hill analysis uses inputs from the EIA in order to estimate the impact of Nevada’s renewable mandate. Ironically, the price hikes are muted because Nevada is fortunate to have access to plentiful supplies of geothermal energy. (Thus, the RPS will wreak less havoc than in a state without such natural abundance.) Then the Beacon Hill team used its “STAMP” computer model to assess the impact on the Nevada economy as if it had suffered from a retail sales tax of comparable magnitude, because in many respects a hike in energy prices operates like a tax hike. (Notice that the loss to consumers from higher energy prices does not benefit energy producers dollar for dollar, because the higher prices are resulting from being forced to use less efficient energy sources.)

Specifically, the Beacon Hill analysis estimates that:

• The current RPS law will raise the cost of electricity by $174 million for the state’s

electricity consumers in 2025, within a range of $45 million and $310 million.

• Nevada’s electricity prices will rise by 6 percent by 2025, due to the current RPS

law, within a range of 1.6 percent and 10.8 percent.

…

• reduce real disposable income by $233 million, within a range of $72 million and $373 million;

• decrease investment by $29 million, within a range of $9 million and $47 million; and

• increase the average household electricity bill by $70 per year; commercial businesses by an expected $400 per year; and industrial businesses by an expected $26,220 per year.

One can quibble with the specific modeling choices, but (to repeat) the Beacon Hill analysis relied on plausible numerical inputs from the academic literature and government estimates. There is no doubt that Nevada’s RPS raises electricity prices for consumers and businesses alike—at this point we’re just arguing about how much.

IER Senior Economist Bob Murphy authored this post. 

 

Filed Under: Products and Power, Renewable Fuel Standard, Threats Tagged With: , , ,

How Much Water Does Hydraulic Fracturing Use?

August 28, 2014 by Leave a Comment

Environmental groups have historically and continuously looked for ways to attack affordable, reliable sources of energy like natural gas and oil. Much of their recent attack has focused on hydraulic fracturing because the term “fracking” makes it sound like it is a bad thing. But now some groups are calling attention to the “hydraulic” part of hydraulic fracturing by claiming that hydraulic fracturing uses too much water, even though water has been used in the process for decades.

One example is the Wall Street investor activist group Ceres. (For more on Ceres, see this post about how they are promoting doubling electricity rates for many Americans).  Ceres recently released a report which argues that hydraulic and horizontal drilling technologies are having a “significant impact on water availability, particularly in already water stressed regions of the country.” That sounds concerning, just as it is intended to by the anti-affordable energy group, but according to a recent study by the Western Energy Alliance, water used for oil and natural gas activities constitutes less than 1 percent of the total water used in Colorado, New Mexico, and Wyoming. That certainly isn’t a “significant impact.”

The Big Picture of Water Usage

Here’s a chart from EPA on U.S. freshwater withdrawals to put water use in context:  

Natural gas and oil development is included in the “Industrial” category. The numbers above are from all states, not just the western states with energy production that the Western Energy Alliance looked at. They found that the agriculture industry was by far the largest user of water in each of the Western states included in the study, and used at least half the water in all the states included in the study. If Ceres and other groups are concerned about natural gas and oil development using 1 percent of water in these states, why are they not shouting about agriculture using 50 percent of the water? It appears this may be one more example of environmental groups trying to demonize the production of affordable, reliable energy.

The chart from Western Energy Alliance’s data shows the water use of agriculture versus natural gas and oil activities:

State % of Water Used for Agriculture % of Water Used for all Industrial Activities including Oil and Gas
Colorado 56.1% 0.8%
New Mexico 73% 0.3%
Wyoming 88.9%* 2.2%*

 

 

 

*Wyoming tracks their water usage by river basin. The numbers above reflects the average percentage of all the river basins.

While natural gas and oil activities use water, it’s also helpful to look at other large industrial uses of water for comparison. For example, the Western Energy Alliance report listed the largest individual industrial users of water in Colorado which included Coors Brewing Company, Colorado Steel Company, and golf courses, all of which use more water than a typical hydraulic fracturing operation, and further shows the lack of context used by groups criticizing water use from oil and gas.

Water Usage and Job Creation

Not only does hydraulic fracturing use a small amount of all the water consumed, but it also creates more high paying jobs per gallon than other sources of energy and agriculture. Using data from the U.S. Bureau of Labor statistics, the U.S. Census, federal agencies, and industry reports, Energy In Depth compared the number of jobs that are created per 5,000,000 gallons of water used: 

They found that water usage for hydraulic fracturing in deep shale, creates nearly five jobs, while solar power only creates four, golf courses create two, nuclear power half a job, and agriculture hardly creates any jobs with that amount of water usage. The point is not that natural gas and oil production is “better” than other parts of the economy, but that natural gas and oil production create real jobs with the water it uses. Water used for hydraulic fracturing is not wasted, but it is being used to put people to work while simultaneously lowering the cost of energy, which serves the as the key to the engine of economic growth.

Conclusion

It is important to look at water use in context. On its face, the average of 5,000,000 gallons per drilling operation sounds like a lot, but the as the chart above shows, natural gas and oil production accounts for less than 1 percent of total water usage in many states.

Hydraulic fracturing and horizontal drilling are technologies that have radically improved the prospect for home-grown natural gas and oil production. For forty years, U.S. Presidents have talked about how energy independence is just around the corner. The only thing that has actually made energy independence an achievable reality is hydraulic fracturing combined with horizontal drilling. But because this technology is providing affordable, reliable energy, anti-energy groups are trying to stop it. These attacks are not about water, they are about limiting access to energy.

The Earth itself does not lack for water. About 71 percent of the surface of the Earth is covered by water. The biggest factor limiting our ability to get water to where it is needed is energy and bad government policies. If green groups did not oppose building more water infrastructure and storage in California, and if we had enough affordable energy, we could store and desalinate enough water so that the California drought would not be a problem.  The real limiting factor is not water—it’s affordable energy.

IER Policy Associate John Glennon authored this post.

Filed Under: News, Products and Power Tagged With: , , ,

Conservatives Shouldn’t Trust Stelzer on Carbon Tax

August 25, 2014 by Leave a Comment

Irwin Stelzer has a PhD in economics from Cornell and decades of experience in academia, the financial world, and public policy. He is a frequent columnist in right-leaning outlets and was the editor of the 2004 The Neocon Reader. As such, readers may have taken Stelzer very seriously when he recently argued in The Weekly Standard that conservatives should support a carbon tax because it would (he claims) be good for economic growth. Yet as I’ll show, Stelzer’s article shows that he is unfamiliar with the technical literature in this area, and moreover, displays a shocking naïveté about how government grows.

Stelzer Cares About Economy – Not Environment

Knowing that many conservative readers are deeply suspicious of Al Gore and anything smacking of “green” concerns, Stelzer completely dismisses considerations of global climate change. Indeed he writes:

Conservatives know that whatever effect, if any, the climate-warming theoreticians believe a carbon tax might have on the incidence of floods (or is it droughts?) has nothing to do with the advance of the conservative economic agenda that carbon taxes can produce. We can remain skeptical about the so-called settled science of climate change, allow a few chortles from the greens, and get on with stimulative tax and economic reform.

Thus Stelzer’s wise-alecky commentary shows that he is not warning conservatives, “Hey, we actually need to take this IPCC stuff seriously. Humans shouldn’t keep emitting so much carbon dioxide.”

No, on the contrary, Stelzer is making his case for a carbon tax entirely dependent on its (alleged) ability to reduce harmful taxes and regulations. I’ll spend the rest of this article showing how ignorant of the literature, and naïve politically, his case really is.

Standard Literature Says A Revenue-Neutral Carbon Tax Will HURT Economy

As with many others who claim that a carbon tax will be a “win-win,” Stelzer simply asserts matter-of-factly that a tax-swap will boost economic growth:

Conflate two separate issues and you get one policy error. That is what too many opponents of carbon taxes are doing, getting caught up in the argument about climate change, which really has nothing to do with the case for a carbon tax. That case is that such a tax can make growth-inducing tax reform easier to achieve, and reduce the need for an expansion of the regulatory state, while protecting the competitiveness of our industries.

There is broad agreement that our tax structure is slowing economic growth and job creation.…Our payroll taxes, layered over with new taxes concealed in Obamacare, discourage work and risk-taking, and discriminate against modest earners. Our corporations sit on billions overseas rather than pay a huge fee for repatriating the cash.

A carbon tax would provide funds to make an attack on these nonsensical features of our tax code far easier. At minimum such a tax can be revenue-neutral, with the proceeds offsetting reductions in other taxes; at maximum, it might be what Wall Street calls revenue-accretive, generating new revenues by stimulating growth and job creation.

As the above makes clear, Stelzer simply takes it for granted that levying a carbon tax and then using the revenues dollar-for-dollar to reduce payroll, corporate, or other distortionary taxes would be good for economic growth. Yet he is simply wrong; that’s not what the standard results in the economics literature say.

Stelzer’s mistake is understandable. Intuitively, it first it sounds reasonable to suppose that if the government should impose a carbon tax to correct for climate change “externalities,” then that is a much more efficient way to raise revenues than to tax obviously productive things like work and saving. In the popular catchphrase of the pro-carbon-tax crowd: “Tax bads, not goods.”

Yet this analysis leaves out something important, which economists who publish in this area have labeled the “tax interaction effect.” Specifically, by enacting a carbon tax in the presence of pre-existing taxes on labor and capital, the distortions caused by those pre-existing taxes are amplified. In other words, adding in the carbon tax makes the payroll, personal income, and corporate taxes more harmful to the economy than they were originally. This is the “tax interaction effect”: The name comes from the fact that the new carbon tax interacts with the pre-existing taxes, making them more harmful.

Now it’s true, if some or even all of the revenues from the new carbon tax are used to reduce the marginal rates of the payroll tax or corporate tax, then that will help the economy compared to the new, awful position it’s in. Yet that’s not the same thing as saying the economy will be better off, compared to the original position when there was no carbon tax.

This is a subtle point, and it takes a minute to think it through if you’ve never heard it before. In this EconLib article I walk through the logic, and point to the published literature establishing the result and estimating its size—it’s huge. Also, for those who prefer to watch a live presentation, at IER’s conference last summer Dr. Ross McKitrick explained the published literature and why people get things backwards when they simply assume that a “revenue-neutral carbon tax swap” would boost economic growth. (In this post I highlight McKitrick’s key points and post the 17-minute video.)

Using Stelzer’s Own Authorities Against Him

Perhaps Dr. Stelzer doesn’t trust my analysis or McKitrick’s (even though the latter has written a graduate-level textbook on the economic analysis of environmental policy). Well then, let’s find a source whom Stelzer does trust. In his Weekly Standard article, when Stelzer is discussing whether a carbon tax would be regressive, he relies on commentary from Resources for the Future (RFF) and says matter-of-factly that RFF is “the think tank all sides agree is doing the most careful and non-partisan research on environmental issues.”

OK, so if Stelzer thinks RFF can be trusted on such issues, let me quote from a 2003 RFF study on the fiscal considerations surrounding a carbon tax. The author, Ian Perry, first explains that a “double dividend” would mean that a carbon tax hypothetically could kill two birds with one stone: it would help the environment (by penalizing harmful carbon dioxide emissions), but it would also boost conventional economic growth by using its revenues to reduce other, harmful taxes. So this “double dividend” is exactly what Stelzer is using to get conservatives to embrace a carbon tax. Yet the RFF author Perry then goes on to explain that economists publishing in this field eventually realized that the “double dividend” can be knocked out by the tax interaction effect:

A second wave of papers revealed another linkage with the labor market that undermines the double-dividend….A carbon tax increases the price of electricity, gasoline, and other energy goods; in turn, this drives up the prices of products in general, since they require energy inputs in production. The general increase in the price level reduces real household wages, which should slightly reduce employment given econometric evidence that lower real household wages lead to lower labor force participation and work effort.

This leads to an efficiency loss…And labor tax revenues fall…; to maintain revenues, labor taxes must be increased slightly, resulting in an efficiency cost…The combined loss from these two effects…is referred to as the tax-interaction effect.…

Comparing [equations] (3) and (4), the tax-interaction effect exceeds the revenue-recycling effect for all levels of emissions reduction; that is, the net effect of the carbon tax is to increase rather than decrease the efficiency costs of preexisting labor taxes, and there is no double dividend. [Bold added.]

I don’t want to oversell my case: There are peer-reviewed papers in which the author builds a model of the economy in which the introduction of a carbon tax can boost conventional economic growth. Even so, these are somewhat contrived models that make assumptions that deviate from what economists would use in other settings; the default in the literature is still to conclude that a carbon tax—even with 100% revenue recycling—would stifle conventional economic growth.

To repeat, the standard result in the literature—as even the RFF author reports, and Stelzer tells us that RFF is a trusted, non-biased authority on these matters—is that even 100% revenue-recycling will hurt conventional economic growth. There would still be a prima facie case for a carbon tax on environmental grounds, but you would be hurting the economy in order to reduce (alleged) climate change. If you go Stelzer’s rhetorical route and throw out the climate change issue altogether, then the case for a carbon tax collapses. That’s what the standard literature shows, and it’s disturbing that Stelzer apparently doesn’t even realize this, despite the confidence with which he lectures the Weekly Standard’s readers.

Stelzer Ignores Real-World Examples of Carbon Taxes

Besides Stelzer’s apparent unfamiliarity with the theory of carbon taxes, he also ignores the practice. Specifically, Stelzer apparently believes that if the U.S. implemented a carbon tax at the federal level, then environmentalists would grudgingly go along with a repeal of all of the other “green” interventions in the economy. In Stelzer’s words:

The president says he is proposing his new, complicated, agency-growing regulations to reduce emissions only because Congress has denied him a carbon tax. The administration’s hench-economist Paul Krugman helpfully chimed in with support: if we can’t have what Krugman joins the president in believing is the first-best solution of a carbon tax, well then, let’s live with the second-best solution, a regulation-heavy restructuring of the energy sector. The president’s flaccid support for a carbon tax and Krugman’s gleeful acceptance of a second-best solution have to make one wonder whether advocates of more centrally directed regulation actually prefer second- to first-best, more efficient solutions. After all, the health care sector has already been “transformed,” “core” standards have education en route to transformation from local to Washington control, and government control of the energy sector would make it three-out-of-three successes for Obama’s plan to “fundamentally transform … the United States of America” from a market-based to a government-directed, European style economy.

Here is an opportunity to give the president what he says he wants, and at the same time strike a blow for less regulation and smaller government. Impose carbon taxes, but in legislation that repeals the mare’s nest of admittedly second-best regulations and gives our coal industry a better chance of surviving.

The above argument from Stelzer is shocking in its glibness: He comes pretty close to arguing, “Let’s go along with a carbon tax just to prove what a bunch of liars these guys are.”

As Stelzer himself notes, many of the people clamoring for a carbon tax are not doing so because they are sleepless at 3am, worrying about atmospheric CO2 concentrations. No, many of the most powerful people pushing a carbon tax (and other “green” policies) do so because they have a disposition of favoring central planning over market outcomes. (That’s why, for example, so many of the people who warn about the imminent threats from CO2 emissions also oppose nuclear power, even though it is emission-free.)

Stelzer is right when he considers Krugman’s hypocrisy on these matters; Krugman only pays lip service to the “market solution” of a carbon tax, and has no problem with the EPA acting directly to shut down coal-fired power plants since Krugman thinks it’s obvious that this is the “optimal” outcome.

Yet Krugman’s hypocrisy on this point is hardly a reason to call his bluff, as Stelzer recommends. If the U.S. government were to implement a carbon tax, and if this allowed coal-fired plants to survive, Krugman then would claim that the carbon tax wasn’t high enough, or that it needed to be supplemented by other top-down interventions. He wouldn’t shrug his shoulders and say, “Aww shucks, you wily conservatives got me, I guess coal-fired power plants are good for America after all.”

When you step back and look at the situation, it’s very odd that Stelzer is actually using the progressive Left’s inconsistency on carbon tax rhetoric as a reason for giving them what they demand. On the contrary, when you realize the people you are bargaining with are being dishonest about their true objectives, if anything that’s a reason to walk away from the bargaining table.

We don’t need to speculate on these matters; we can look at actual history. Australia really did have a carbon tax in place (though its voters threw out the Prime Minister who installed their carbon tax and voted in a new PM who promptly repealed it). But while its carbon tax was in place, the Australian government increased its other “green” measures, as Dr. Alex Robson explained in his hard-hitting study. There was no shrinkage of the now “unnecessary regulations” in Australia, after they got their carbon tax in place.

Look at the unbelievable rhetoric that the environmentalist Left has used in denouncing carbon emissions, calling coal “dirty energy” and referring to “polluters.” Does Stelzer really think progressive pundits will suddenly write op-eds endorsing the Keystone Pipeline if a revenue-neutral carbon tax should be installed?

At IER’s carbon tax conference, Ken Green explained his own personal odyssey in this dimension. He had originally given tentative support to a carbon tax, because he thought a properly designed program—involving tax cuts and elimination of top-down regulations—could improve upon the status quo. Yet Green soon realized that he was just being used; it was only conservatives and libertarians who made such concessions. The typical environmentalist progressive never announced any intention of shrinking government elsewhere, once a carbon tax had been introduced.

Finally, let me quote Marlo Lewis to illustrate the danger and folly in Stelzer’s strategy of having conservatives support a carbon tax to win concessions from the Left:

Let’s get real. When was the last time you heard the Sierra Club, NRDC, Bill McKibben, or Gina McCarthy say that Massachusetts v. EPA, EPA’s greenhouse gas regulations, the Renewable Fuel Standard, new-car fuel economy standards, DOE energy efficiency standards, the incandescent light bulb ban, stimulus subsidies for Solyndra, and the proliferation of state-level renewable energy quota were all just a strategy to put conservatives over a barrel so we’d finally ask for a carbon tax to make those regulations, mandates, and subsidies go away?

Conclusion

Irwin Stelzer is a smart guy with excellent training and business experience. Yet his Weekly Standard article in support of a carbon tax is remarkably deficient in both theory and practice. He completely missed a large portion of the technical literature, which shows a default presumption that even a revenue-neutral carbon tax would hurt conventional economic growth. Furthermore, Stelzer is naïve when he argues that progressive pundits and policymakers would go along with phasing out other “green” policies in exchange for a carbon tax. Their rhetoric suggests otherwise, and in the real world, we simply don’t see such quid pro quo deals being made in the countries that have introduced carbon taxes.

IER Senior Economist Robert Murphy authored this post.

Filed Under: News, Products and Power Tagged With: , ,

Does Senator Hagan Oppose Affordable Energy?

August 21, 2014 by Leave a Comment
WASHINGTON — The American Energy Alliance today released the following statement asking Sen. Kay Hagan to put politics aside as public hearings on proposed hydraulic fracturing rules are set to begin in North Carolina.

“With North Carolina’s moratorium on hydraulic fracturing set to be lifted next year, Kay Hagan should embrace America’s energy revolution that will create good paying jobs, protect access to affordable energy, and provide added revenue to strengthen local communities,” said AEA President Thomas Pyle.

“For over 60 years, hydraulic fracturing has been used to unlock our energy resources. But for too long, the powerful national environmental lobby has strong-armed public leadership into siding with more red tape, which has led to fewer jobs, higher energy costs, and reduced opportunity. Sen. Hagan should stop playing politics, stand up to the special interests, and fully commit to supporting American innovation and ingenuity,” he added.

Hydraulic Fracturing Helps Local Communities
Duke University Research Finds Hydraulic Fracturing Helps Local Government Coffers; Revenues Exceed Costs: “The researchers found that the net impact of recent oil and gas development has generally been positive for local public finances.” (Richard Newell & Daniel Raimi, “Local Government Financial Impact of Recent Oil and Gas Development,” Duke University Energy Initiative, Accessed 8/18/2014)

Hagan Opposed North Carolina’s Efforts to Advance Affordable Energy

Hagan Opposed State Legislation That Would Lift The Moratorium On North Carolina’s Hydraulic Fracturing For Shale Gas In 2015: “In her speech, Hagan blasted the Republican legislature for rolling back environmental regulations.” (John Frank & Renee Schoof, “US Sen. Kay Hagan and her challenger House Speaker Thom Tillis at odds over climate change,” Raleigh News & Observer, 5/31/2014)

Hagan Is Trying to Have It Both Ways On Energy
Hagan Is a Skilled Politician Who Knows Her Audience: “In a speech to an environmental group in Raleigh last week, Hagan expressed support for the EPA’s role [in regulating power plants].” (John Frank & Renee Schoof, “US Sen. Kay Hagan and her challenger House Speaker Thom Tillis at odds over climate change,” Raleigh News & Observer, 5/31/2014)
But Days Earlier, With A Wink & A Nod To Environmentalists: “Hagan expressed concern about the timeline for implementing the rules, asking in a letter to the EPA that the public comment period be doubled to 120 days. She declined to sign a stronger-worded letter backed by 45 senators asking for the same extension.” (John Frank & Renee Schoof, “US Sen. Kay Hagan and her challenger House Speaker Thom Tillis at odds over climate change,” Raleigh News & Observer, 5/31/2014)
Fearing Blowback From Environmentalists, Hagan Has Been Reluctant to Support Sensible Energy Policies for North Carolina: “Hagan took a more careful approach to describe where she stands on energy issues, straddling a line that may frustrate environmentalists.” (John Frank, “Hagan blasts Tillis on environment,” Raleigh News & Observer, 5/27/2014)

Hagan Also Flip-Flopped On Her Support For A Carbon Tax

FLIP: The Hill: “Hagan Campaign Says She Opposes Carbon Tax.” (Zack Coleman, “Hagan Campaign Says She Opposes Carbon Tax,” The Hill, 9/6/13)
FLOP: Sen. Kay Hagan Urged Harry Reid To Make A Carbon Tax A Top Priority. On July 16, 2010, Sen. Kay Hagan, along with 11 other senators, sent a letter to the Majority Leader calling for a “price on greenhouse gas emissions.” (Letter to Senate Majority Leader Harry Reid, 7/16/14)

###

Filed Under: Press Releases Tagged With: , ,

BRADLEY: The Moral Imperative against Divestment

August 20, 2014 by Leave a Comment

Institute for Energy Research Founder and CEO Robert Bradley published the following op-ed last month in the Findlay Courier on the University of Dayton’s decision to divest from fossil fuels:

Citing “the negative consequences of climate change,” the board of Trustees of the University of Dayton (UD) recently voted to divest its oil, natural gas, and coal stocks. By ridding its $670 million investment pool of fossil fuels, UD hopes to protect “the world’s most vulnerable people” and continue its commitment to “human rights.”

Such investment politicization might please some or many associated with the private Catholic school, but it fails on the merits. The human condition has been vastly improved by fossil fuels, and more than one billion individuals today desperately need electrification at a scale and at a cost that only fossil fuels can provide.

In an email message to alumni, UD President Daniel Curran’s claimed “moral responsibility” for the divestment. But consumers (short of government coercion) chose fossil fuels because they are more affordable, reliable, and convenient compared to nuclear power, wind power, and (on-grid) solar power.

Oil, gas, and coal deserve respect, even profound gratitude. The market share of renewable energy—wood, dung, falling water, and later whale oil—was 100 percent for most of mankind’s existence. Such energy poverty changed when the chemical properties of carbon-based energy fueled the technical and engineering advances of modern life. This dense-for-dilute energy equation has not changed.

Fossil fuels are a feedstock for medicines that have saved countless lives and led to the development of fertilizers that have greatly increased crop yields to feed the hungry. They also have made heating and cooling, transportation, refrigeration, cooking, and myriad other staples of our lives affordable and dependable.

But this reality is being overlooked at those colleges, universities, non-profit organizations, and local governments where pressure groups have made decision-makers feel guilty about owning fossil fuel stocks. This leads to the assumption that divestment is good (it is not) and might make a difference (it will not).

Consider the facts. U.S.-side carbon dioxide reductions are increasingly being swamped by non-U.S. CO2 emissions, led by coal plants in India and China serving non-electrified towns and villages. And the U.S. Environmental Protection Agency credits natural gas—a fossil fuel—with reducing U.S. greenhouse-gas emissions. An April EPA study shows that U.S. carbon emissions declined 3.8 percent between 2011 and 2012 thanks to natural gas replacing coal to generate electricity.

Fossil-fuel stocks also have provided a good if not superior rate of return in UD’s and other university’s investment portfolios. Such investments have been judged as among the best investments for anyone wanting a solid, risk-adjusted return. One analysis found that a 2.1 share in oil and natural gas companies in 2010–2011 by colleges and universities generated 5.7 percent of all endowment gains.

Retirees, including school teachers and firefighters, have experienced similar results. Of the top five state pension funds operating in 17 states, Sonecon found that oil and gas company shares have outperformed all other stock investments by a seven-to-one ratio.

Many college and university administrators are aware of these financial benefits. Tufts’ President Tony Monaco decided to “refrain from divestment…primarily because of the significant anticipated negative impact on Tufts’ endowment.” Similarly, Harvard University President Drew Faust rejected divestment because the endowment is a “resource,” she wrote, “not an instrument to impel social or political change.”

When asked at a town hall meeting whether he would divest, University of Colorado President Bruce Benson said simply, “I’m not going to do that.” His reasoning is explained in a reprinted editorial in Boulder’s Daily Camera which calls divestment a “feel-good policy that would accomplish little,” because “modern society utterly depends on” fossil fuels.

“One of the great mistakes is to judge policies and programs by their intentions rather than their results,” economist Milton Friedman was fond of stating. In fact, as energy philosopher Alex Epstein put it, fossil fuels have made a unsafe planet safe, not a safe planet unsafe.

UD officials should not only rate oil, gas, and coal investments on their business merits. They should welcome the wider benefits of modern energy. Such would be in keeping with the Association of Catholic Colleges and Universities’ stated mission “to advance the common good.”

—–

Robert L. Bradley Jr., is CEO of the Institute for Energy Research, and the author of seven books on energy history and public policy. He blogs at www.masterresource.org.

Filed Under: News, Products and Power Tagged With: , , , ,

ICYMI: Big Wind Doesn’t Need Welfare

August 19, 2014 by Leave a Comment
“Congress has a decision to make: Will they stand with American families or with Big Wind’s high-powered lobbyists?” -AEA President Thomas Pyle
WASHINGTON – The American Energy Alliance has long argued that the wind industry should no longer receive the taxpayer-funded wind Production Tax Credit (PTC).  In a recent interview with the Casper Star-Tribune, Power Company of Wyoming CEO Bill Miller stated that the 3,000-megawatt Chokecherry and Sierra Madre wind facility in Wyoming does not require the wind PTC:
“Because of the size and the quality of the resource we have for the project, this project can be done without the production tax credit.
“Quite frankly, though, it would be very beneficial to the project and the market if it were available, but it is not necessary for it to be viable. There are probably not a lot of projects today that could say it doesn’t matter. It does matter, but it is not absolutely required.”
Click here to read the full story in the Casper Star-Tribune.

“This reinforces what we have known all along—the wind industry is no longer an infant and should not be treated like one,” said AEA President Thomas Pyle.

“For over two decades, Americans have been pouring their tax dollars into propping up an industry that has been around for over a century. Extending this handout will cost American families billions of dollars. Congress has a decision to make: Will they stand with American families or with Big Wind’s high-powered lobbyists?” He added.

Filed Under: Blog, Press Releases Tagged With: , ,

Markets, Not Govt., Will Improve Energy Security

August 18, 2014 by Leave a Comment

Senator Edward J. Markey provided the Institute for Energy Research (IER) with questions for the record after the hearing he held on “U.S. Security Implications of International Energy and Climate Policies and Issues” on July 22, 2014. Below are IER’s responses to those questions:

I have responded to each of the questions from Senator Markey below. I would like to make it clear at the outset that I am in favor of all energy technologies. However, I believe that the energy marketplace should determine the market penetration of each technology, not government policies that distort the economics of the technologies and end up costing the American public more than necessary to pay for the power that they need.

Further, I would note that some of the policies that Senator Markey seems to advocate in his questions below would reduce U.S. energy production, increase oil imports and our trade deficit, and have the effect of reducing U.S. energy security. Senator Markey should understand the implications of ending the tax deductions mentioned below, which is essentially a tax increase on the oil and gas industry resulting in a reduction in domestic energy production, which would result in an increase of oil from overseas suppliers. That said, in regard to tax policy, I believe that all industries should be treated the same, irrespective of the product that the industry produces.

There are those who complain about the earnings of the oil and gas companies without understanding the nature of the business, which is the most capital-intensive in the world. The oil and natural gas industry must make large investments in new technology, new production, and environmental and product quality improvements to meet future U.S. energy needs. These investments are not only in the oil and gas sector but in alternate forms of energy (e.g. biofuels). For example, an Ernst & Young study shows the five major oil companies had $765 billion of new investment between 1992 and 2006, compared to net income of $662 billion during the same period. The 57 largest U.S. oil and natural gas companieshad new investments of $1.25 trillion over the same period, compared to net income of $900 billion and cash flows of $1.77 trillion. In another Ernst and Young report, the 50 largest oil and gas companies spent over $106 billion in exploration and development costs in 2011, an increase of 38 percent over those capital investments in 2010. Without these investments, the U.S. oil and gas industry would not have been able to make the strides in increased oil and gas production that they have made and continue to make in this country.[i] Earnings allow companies to reinvest in facilities, infrastructure and new technologies, and when those investments are in the United States, it means many more jobs, directly and indirectly. It also means more revenues for federal, state and local governments.

Question: Ukraine’s reliance on Russian natural gas to meet half of its domestic needs has left it vulnerable to predatory Russian practices in terms of energy supply manipulation. Yet Ukraine has vast untapped domestic natural gas supplies and it is also the second least energy efficient country in the world. I have introduced legislation—S. 2433—that aims to double U.S. government-wide energy assistance to Ukraine to help them increase efficiency, develop their own resources, and get off Russian gas. Do you support this legislation? Please provide any thoughts or technical feedback about this legislation.

Response: For years, the United States experienced declining natural gas production and was constructing terminals for liquefied natural gas (LNG) imports to ensure that the United States had an adequate supply of natural gas in the future. The reason the United States now produces the most natural gas in the world and no longer needs to rely on LNG imports is not because of government programs, but because of technological improvements in the market place, private property rights, and prudent regulations by state regulators. Policymakers should promote these proven avenues that have led to natural gas energy independence and growing market power for the United States. If Senator Markey believes that Ukraine is vulnerable to hostile governments because it has not fully tapped its domestic gas supplies, Senator Markey should agree that the United States government should not commit a similar mistake by hampering the development of American oil and gas supplies, as the Obama Administration is currently doing.

If it is the case that Ukrainian government is hampering the development of its own domestic gas resources, then Ukrainian people would be served by eliminating such obstacles. However, the U.S. government does not need to assist Ukrainian government in implementing a policy that makes Ukrainians wealthier and more strategically secure. Furthermore, S. 2433 contains provisions for the U.S. government to provide “loan, lease, and bond guarantees” to financial institutions to facilitate the goals of the proposed legislation.[ii] Such guarantees place U.S. taxpayers on the hook in the event of a default. There is no economic rationale for U.S. taxpayers to effectively subsidize Ukrainians to do what it is in their own best interest.

Question: You made your critical views on the Cape Wind offshore wind project, and government support for it, very clear during the hearing. What are your views on the $8.3 billion loan guarantee, most of which has been finalized, to construct nuclear reactors?

Response: The Energy Information Administration (EIA) estimates the levelized cost of new generating technologies as part of its Annual Energy Outlook. The average cost of offshore wind in the agency’s 2014 outlook is 20.4 cents per kilowatt hour while the levelized cost for advanced nuclear is 9.6 cents per kilowatt hour, or less than half the cost of offshore wind.[iii] Given that EIA also expects advanced nuclear to have a 90 percent capacity factor while offshore wind has only a 37 percent capacity factor on average, the amount of generation from nuclear power compared to wind power would be 2.4 times more for the same amount of generating capacity. Further, wind is an intermittent technology and cannot be relied on continuously to supply power when Americans need it most. It generates power only when the wind blows which is more prevalent at night when we need it the least. Because Cape Wind will drive up the cost of energy for Americans based on its contract specifications, I do not support it.

Compared to offshore wind, which is an intermittent, inefficient and expensive technology, nuclear power is reliable, efficient and more affordable as the numbers from EIA above demonstrate.

That said, I believe it is a bad idea for taxpayers to support either technology (or any technology for that matter).  The federal government has demonstrated time and time again with companies like Solyndra that it is ill-suited to pick winners in the marketplace.  The reason that the government supports specific technologies is the belief that consumers will not willingly pay for those technologies.  When elected officials impose their choice of technologies on consumers and taxpayers, other technologies that could have made it in the marketplace on their own are locked out–and the consumers who would have preferred those technologies–suffer.

Question: Thanks to an oil company court challenge to a 1995 law, oil companies are able to drill on many leases in the Gulf of Mexico without paying any royalties to the American taxpayers. Currently, oil companies are paying zero royalties to taxpayers for one quarter of all offshore oil production in the United States. Incentivizing companies to renegotiate these leases in order to pay a fair return to the public could save taxpayers $15.5 billion over 10 years according to the Department of the Interior. The Government Accountability Office has estimated that taxpayers could lose up to $53 billion over the life of these faulty leases. Would you support legislation to correct this problem, which the Congressional Research Service has found is within Congress’s legal authority and would not abrogate contracts between oil companies and the federal government?

Response: I am grateful for the opportunity to set the record straight on the deepwater royalty relief program. Oil is being produced in the deep water federal Gulf of Mexico, where production just increased during fiscal year 2013 for the first time since the moratorium on drilling was imposed by the Obama Administration in 2010, because of the royalty relief program. The program originally provided royalty relief for operators to develop fields in water depths greater than 200 meters (656 feet). The suspension of Federal royalty payments for new leases was limited to a certain level of production based on water depth. The original terms and conditions expired in November 2000, and since that time, a revised incentive plan was adopted that is no longer based on volumes determined by water-depth intervals. Instead, the Department of Interior assigns a lease-specific volume of royalty suspension based on how the determined suspension amount may affect the economics of various development scenarios with the most economically risky projects receiving the most relief, while others may receive no relief. For example, a deep-water field might not receive any relief if it is adjacent to an existing gathering system. On the other hand, a similar field may receive a great deal of relief if it is located far beyond the current pipeline infrastructure.[iv]

If the royalty relief program did not exist, the technology would not have been developed to produce oil and natural gas in the deep water Gulf of Mexico and domestic oil production would be much lower—clearly reducing America’s energy security and making the United States more dependent on foreign imports. This is consistent with the points made by the Honorable Hazel O’Leary, Secretary of Energy during the Clinton Administration.

In a letter on page H11872 of the Congressional Record in support of the legislation at the time,[v] the Secretary said, “Comparing this loss (foregone royalties) with the gain from the bonus bids on a net present value basis, the Federal government would be ahead by $200 million. It is important to note that affected OCS projects would still pay a substantial upfront bonus and then be required to pay a royalty when and if production exceeds their royalty-free period. A royalty-free period, such as that proposed in S. 395, would help enable marginally viable OCS projects to be developed, thus providing additional energy, jobs and other important benefits to the nation.”

On the matter of national security, she went on to add, “The ability to lower costs of domestic production in the central and western Gulf of Mexico by providing appropriate fiscal incentives will lead to an expansion of domestic energy resources, enhance national energy security, and reduce the deficit.”

Clearly, President Clinton and his Administration studied this matter and saw it as a significant national security benefit to the United States, and a benefit, not a loss, to the U.S. Treasury. Besides providing the American public with more oil and gas production and greater energy security, thousands of jobs exist today because of the royalty relief program.

Question: Last-In, First-Out (LIFO) accounting allows oil companies to value their inventories at deeply discounted prices. Repealing this subsidy for the largest oil and gas companies would generate at least $14.1 billion over 10 years, according to the Joint Committee on Taxation (JCT). Is there any other industry that benefits from this tax subsidy as much as the oil and gas sector? If so, which sector(s) and how much do they benefit from this subsidy? Would you support ending this accounting methodology for all taxpayers?

Response: All U.S. taxpayers may use the LIFO (Last-In-First-Out) method of accounting for inventories. Repealing this provision for just the oil and gas industry would be particularly detrimental to refiners, who maintain large inventories of both crude and refined products. I believe that all industries should be treated the same under the U.S. tax law and that one industry should not be singled out for differential treatment. This accounting methodology should either be allowed for all taxpayers or repealed for all taxpayers.

Question: Foreign tax credits allow all companies that do business abroad to reduce from their U.S. tax bill by any income taxes paid to other governments. However, these rules were not intended to allow oil companies to claim deductions for what amount to royalty payments to foreign governments. Such payments are not income taxes but fees for the privilege of producing valuable natural resources abroad. Yet, as a result of loosely drafted rules, oil companies are frequently deducting these payments from their U.S. tax liability. Eliminating this tax treatment for the largest oil companies would generate at least $6.5 billion over 10 years, according to the JCT. Would you support ending this tax subsidy for the largest oil companies? Is there any other industry that benefits from this tax subsidy as much as the oil and gas sector? If so, which sector(s) and how much do they benefit from this provision.

Response: The above issue relates to dual capacity rules and according to the Joint Committee on Taxation, U.S. oil and gas companies are already limited in their ability to claim these credits.[vi] Further, the purported issue that you describe, i.e. that companies claim royalty payments as a foreign tax credit, is prevented by the current rules for this provision. Oil and gas companies are under constant audit by the Internal Revenue Service. As a part of these audits, teams of examiners focus heavily on this very issue. If an IRS agent feels that there is an issue related to mischaracterization of a tax payment, he or she need not “prove” the case, but merely needs to raise the question. The taxpayer is then required, under the law, to prove that the payment was, in fact, a payment of tax and not a royalty, and to provide that proof in court, if necessary. The burden of proof rests heavily on the taxpayer in this instance. Modifications to this provision will make U.S. companies less competitive and place a greater share of oil and gas reserves into the hands of non-U.S. companies, employing non-U.S. workers; many of which are foreign-government-controlled.

Question: The section 199 domestic manufacturing deduction was enacted in 2004 and re-categorized the oil industry as a manufacturing industry, thus making it eligible for this deduction. Repealing this provision for the largest oil companies would save $10.4 billion over the next 10 years, according to the JCT. Would you support ending this tax subsidy for the largest oil companies?

Response:The purpose of the domestic manufacturing tax deduction is to incentivize companies to continue to do business in America. The United States now has the highest tax rate in the world among developed countries, and due to these high tax rates, companies have been making investments overseas.[vii] The domestic manufacturing tax deduction allows all industries and businesses (not just oil companies) to deduct a certain percentage of their profits. For the oil and gas industry, the tax deduction is 6 percent; for all other industries (software developers, video game developers, the motion picture industry, among others), it is a 9 percent deduction.[viii] Removing these tax deductions will result in oil companies taking capital abroad to make their investments, reducing U.S. oil production and tax revenues and increasing imports of foreign oil. Given that oil and gas production-related employment on non-federal lands in the United States is one of the few bright spots in the worst economic recovery since the Great Depression, such a result would undermine job creation.

Question: The expensing of intangible drilling costs allows intangible drilling costs, such as wages, repairs, and supplies related to and necessary for drilling and preparing wells for the production of oil and gas, to be deducted in the year they occurred. Non-energy companies must depreciate these costs over time. The JCT estimates that repealing this subsidy will generate $13.2 billion over 10 years. Are any other companies besides oil and gas production companies eligible for this claiming this tax provision? Would you support ending this tax subsidy?

Response: This incentive exists to encourage small companies (less than 20 employees) to produce oil from marginal wells that are old or small and do not produce much oil individually. According to the Independent Petroleum Association of America, independent producers drill 95 percent of the oil and natural gas wells in America, producing 54 percent of U.S. liquids – 54 percent oil and 81 percent condensates. They reinvest 150 percent of their American cash flow back into new American production.[ix]

Independent oil producers are allowed to count certain costs associated with the drilling and development of these wells as business expenses. This ability to expense these costs is analogous to the research and development (R&D) deduction available to all taxpayers engaged in R&D activities. The law allows the small producers to expense the full value of these costs, known as intangible drilling costs, every year to encourage them to explore for new oil. The major companies get a portion of this deduction—they can expense a third of intangible drilling costs, but they must spread the deductions across a five-year period.[x]

Again, I believe that all industries should be treated the same under the tax law and that one industry should not be singled out for differential treatment because the terminology used is different.

Question: Certain oil companies amortize the costs of exploratory work in two years, while other companies must amortize those same costs over seven years. Increasing geological and geophysical amortization periods for oil and gas companies to seven years would harmonize this policy across industries and operators. The JCT estimates that making this change would save taxpayers as much as $1.1 billion over 10 years.Would you support this change in tax policy to eliminate a subsidy?

Response: Independent producers and smaller integrated companies are currently allowed to amortize geological and geophysical (G&G) costs over a 2-year period, whereas major integrated producers may only amortize over 7 years.[xi] According to the Joint Committee on Taxation, G&G costs are costs incurred for the purpose of obtaining and accumulating data that will serve as acquisition and retention of mineral properties[xii], which are akin to research and development expenses that most companies can expense in one year.

“Research and development, or R&D, are the lifeblood of technological advancement, and they factor heavily in most corporate enterprises’ planning and growth. Recognizing the importance of technology and business growth in the international marketplace, the U.S. Congress created tax breaks for companies that engage in R&D. As an incentive to engage in research and development, the IRS permits businesses to deduct all R&D expenses in a single year instead of amortizing as a capital expense.”[xiii]

Again, I believe that all industries should be treated the same under the tax law and that one industry should not be singled out for differential treatment because the terminology used is different.

Question: Oil and gas properties qualify for “percentage depletion,” a tax deduction of 15 percent of gross revenues from the well, even if the deductions exceed the well’s value over time. The JCT estimates that repealing this provision for the large oil companies would generate $11.9 billion over 10 years. Do you support the repeal of this tax subsidy? Are any other companies besides oil and gas production companies eligible for claiming this tax subsidy?

Response: I am grateful for the opportunity to set the record straight on the percentage depletion tax deduction that the small independent oil producers are allowed to deduct on their taxes. As the oil and gas in a well is depleted, the small independent producers are allowed a percentage depletion allowance to be deducted from their taxes. While the percentage depletion allowance sounds complicated, it is similar to the treatment given other businesses for depreciation of an asset. The tax code essentially treats the value of a well as it does the value of a newly constructed factory, allowing a percentage of the value to be depreciated each year. This allowance was first instituted in 1926 to compensate for the decreasing value of the resource, and was eliminated for major oil companies in 1975.[xiv] This allowance applies only to the first 1,000 barrels of production during the period, so it is of little significance to large independent producers. It saves the independent oil and gas producers about $1 billion in taxes per year.[xv] It is true that repealing this provision would extract more tax revenue from these energy producers since that is what tax hikes do, but it would make sense from neither an economic nor accounting perspective. When oil is removed from a well and sold, the remaining value of the well does go down. The percentage depletion deduction addresses this reality of oil and gas production.

Question: Under the tax rules governing tertiary injectants, oil companies deduct expenses relating to the cost of tertiary injectants during the taxable year, instead of depreciating these costs over a typical cost recovery schedule. Ending this subsidy for large oil companies would generate $32 million over 10 years, according to the JCT. Do you support the repeal of this tax subsidy? Are any other companies besides oil and gas production companies eligible for this claiming this tax subsidy?

Response: According to the Joint Committee on Taxation, oil and gas companies can deduct tertiary injectant expenses during the taxable year[xvi], similar to a business expense of other companies. This provision was provided to the oil and gas industry to increase domestic oil production, providing greater energy security for the nation. And, it is continuing to be effective. For example, domestic oil production from enhanced oil recovery is expected to increase in EIA’s Annual Energy Outlook projections by over 160 percent between 2012 and 2040[xvii], which shows that this tax provision is fulfilling its intended purpose of increasing domestic oil production, thereby increasing energy security.

Question: Taxpayers can shelter active income through passive losses or credits associated with the production of oil and gas, a condition that does not apply to other sources of passive income or credit. Repealing the exception for passive loss limitations for oil and gas properties for oil companies with revenues above $50 million per year would generate $9 million over 10 years, according to the JCT. Would you support this change to harmonize tax treatment so as not to favor oil and gas investments over other types of energy investments?

Response: Although this is not a specifically energy-related topic, in the spirit of promoting economic efficiency and avoiding the government picking winners and losers, IER supports broad-based tax reform that would eliminate all tax credits and deductions for all firms, so long as marginal tax rates were reduced across-the-board to maintain revenue neutrality. This reform would flatten the tax code and consistently apply the same rules to everybody, removing the temptation for government officials to dole out privileges to favored groups by partially shielding them from the full burden of the code. IER would fully support Senator Markey if he chooses to promote such broad-based tax reform. However, if Senator Markey believes it is good policy to discriminate against a particular industry merely because they produce hydrocarbons, then Senator Markey’s proposal will not provide efficient tax reform but instead will simply be a tax hike on one of the few sectors of our economy that has been consistently producing jobs since the recession began.

[i] Ernst and Young, US E&P Benchmark Study, June 2012, http://www.ey.com/Publication/vwLUAssets/US_E_and_P_benchmark_study_-_June_2012/$FILE/US_EP_benchmark_study_2012.pdf

[ii] https://beta.congress.gov/bill/113th-congress/senate-bill/2433.

[iii] Energy Information Administration, Levelized Cost and Levelized Avoided Cost of New Generation Resources in the Annual Energy Outlook 2014, April 17, 2014, http://www.eia.gov/forecasts/aeo/electricity_generation.cfm

[iv] Encyclopedia of Earth, Deep Water Royalty Relief Act, July 17, 2011, http://www.eoearth.org/view/article/160979/

[v] Congressional Record, November 8, 1995, http://www.gpo.gov/fdsys/pkg/CREC-1995-11-08/pdf/CREC-1995-11-08.pdf

[vi] Joint Committee on Taxation, Description of Present Law and Select Proposals Relating to the Oil and Gas Industry, May 12, 2011, https://www.jct.gov/publications.html?func=startdown&id=3787

[vii] US News, World’s Highest Corporate Tax Rate Hurts U.S. Economically, April 2, 2012, http://www.usnews.com/opinion/economic-intelligence/2012/04/02/worlds-highest-corporate-tax-rate-hurts-us-economically

[viii] Scientific American, End Oil Subsidies? The $4 Billion Dollar Question, February 21, 2012, http://blogs.scientificamerican.com/plugged-in/2012/02/21/guest-post-end-oil-subsidies-the-4-billion-question/

[ix] Independent Petroleum Association of America, http://oilindependents.org/about/

[x] Trib.com, Obama tax changes could hit small oil and gas operators in Wyoming, March 30, 2012, http://trib.com/news/state-and-regional/obama-tax-changes-could-hit-small-oil-and-gas-operators/article_6b18a423-f5ec-5301-b920-05491a9d40ab.html

[xi] Joint Committee on Taxation, Description of Present Law and Select Proposals Relating to the Oil and Gas Industry, May 12, 2011, https://www.jct.gov/publications.html?func=startdown&id=3787

[xii] Joint Committee on Taxation, Description of Present Law and Select Proposals Relating to the Oil and Gas Industry, May 12, 2011, https://www.jct.gov/publications.html?func=startdown&id=3787

[xiii] Small Business, Tax Breaks for R&D, http://smallbusiness.chron.com/tax-breaks-rd-36815.html

[xiv] Star Tribune, Obama tax changes could hit small oil and gas operators in Wyoming, March 30, 2012, http://trib.com/news/state-and-regional/obama-tax-changes-could-hit-small-oil-and-gas-operators/article_6b18a423-f5ec-5301-b920-05491a9d40ab.html

[xv]Scientific American, End Oil Subsidies? The $4 Billion Dollar Question, February 21, 2012, http://blogs.scientificamerican.com/plugged-in/2012/02/21/guest-post-end-oil-subsidies-the-4-billion-question/

[xvi] Joint Committee on Taxation, Description of Present Law and Select Proposals Relating to the Oil and Gas Industry, May 12, 2011, https://www.jct.gov/publications.html?func=startdown&id=3787

[xvii] Energy Information Administration, Annual Energy Outlook 2014, http://www.eia.gov/forecasts/aeo/pdf/tbla14.pdf

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EPA Chopper

August 15, 2014 by Leave a Comment

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EPA’s Expanded Definition of Cellulosic Biofuels: A+ Grades for C- Performance

August 8, 2014 by Leave a Comment

Last month, the Environmental Protection Agency (EPA) issued a final rule expanding the types of fuels that can qualify as cellulosic biofuel under the Renewable Fuel Standards (RFS).[i]   For the EPA this is perfect timing, as it still has yet to finalize the RFS standards for 2014, but is proposing to significantly increase the cellulosic target.  It’s current proposal would require the blending of 17 million gallons of cellulosic biofuel – up 11 million gallons from the 2013 target – [ii] despite the fact that a mere 422,740 gallons of cellulosic biofuel were produced in 2013, and only 72,754 gallons have cellulosic biofuel have been produced through the first six months of 2014.

EPA’s estimates of cellulosic biofuel production have overestimated production by millions of gallons every year. EPA is therefore trying to increase what is defined as “cellulosic biofuel.”

Expanding what qualifies as a cellulosic biofuel increases the volume of cellulosic production, and will help fuel producers meet the overly ambitious 2014 targets.  After all, the RFS mandates the blending of 16 billion gallons of cellulosic biofuel into transportation fuel by 2022, and with just over 800,000 gallons of cellulosic biofuel produced last year[iii]—only 0.0008 percent of the original 2013 target of 1 billion gallons and 0.13 percent of the EPA’s 2013 adjusted target of 6 million gallons—it should come as no surprise that EPA is trying to ramp up cellulosic production.

What is Cellulosic Biofuel?

As defined by the Clean Air Act, cellulosic biofuel is “a renewable fuel derived from any cellulose, hemicellulose, or lignin that is derived from renewable biomass and that has lifecycle greenhouse gas emissions…that are at least 60 percent less than the baseline lifecycle greenhouse gas emissions”.[iv]  However, many plants do not solely contain cellulose, hemicellulose, or lignin, but also include varying amounts of other components that can also be converted into renewable fuel.[v]  For this reason, it may be appropriate to allow de minimis exceptions – such that an entire fuel can be considered cellulosic, so long as a very small portion is derived from a non-cellulosic source.

In light of this, existing RFS regulations specify that “it is appropriate for producers to base RIN assignment on the predominant component and, therefore, to assume that the biogenic portion of their fuel is entirely of cellulosic origin”(emphasis added).[vi]   In other words, the existing RFS regulations suggest that although a fuel may not be entirely made out of a cellulosic source, it can be assigned a total cellulosic RIN value if it is “predominantly” made from feedstock containing cellulose.  Comments on a minimum threshold to be considered “predominant” ranged from 70 percent to 99.9 percent, with some interpretations suggesting that the existing regulations allowed only for minimal exceptions to fuels that were 95 percent to 99 percent cellulosic in origin.[vii]

Rather than minimal exceptions, EPA’s new regulation drastically alters what it defines as cellulosic ethanol, and is now allowing fuel that is 75 percent cellulosic to count as 100 percent cellulosic. Setting such a low threshold means that EPA can now classify other fuels as entirely cellulosic, such as compressed natural gas and liquefied natural gas that is produced using biogas from landfills.[viii]

EPA has gone even one step further in this vein, and will now categorize electricity generated from biogas that is used in the transportation sector to power electric vehicles as cellulosic.[ix]

Fudging What is Cellulosic Biofuel—Even Electricity Can Now Be Called “Biofuel”

EPA’s expanded definition of cellulosic biofuel production quite clearly fudges the Clean Air Act’s definition of a cellulosic biofuel.  Now, any biofuel with a 75 percent cellulosic content is considered to be 100 percent cellulosic, which means that rather substantial portions of fuels that are not “derived from any cellulose, hemicellulose, or lignin” will be considered as such.  Furthermore, including up to 25 percent non-cellulosic fuel in cellulosic production volumes artificially inflates the reported amount of actual cellulosic biofuel produced, which could lead to continually inflated RFS cellulosic targets in the future.[x]

Suspicion also arises over the EPA’s rather low and ambiguous threshold target when political intentions are considered.  Setting such a low threshold allows for a substantial increase in the types of fuel that can be counted as entirely cellulosic, and is an easy way to bring in new constituencies to support the RFS.  With renewable electricity generators now able to obtain valuable cellulosic RINs from transportation fuels produced using biogas, incentives now exist for utilities to support electric vehicle (EV) production and infrastructural improvement, a pleasing development for the EV sector always hungry for subsidies. [xi]

Defining electricity as cellulosic biofuel is quite clearly wrong unless the biogas electricity generator is only connected to an electric vehicle and not connected to the electric grid. Otherwise the electricity that actually reaches the electric vehicle will actually come from numerous sources, such as coal and natural gas instead of the biogas.

Conclusion

As the RFS continues to be less of a success story and EPA is repeatedly forced to lower the original proposed standards, it should come as no surprise that EPA seeks to gain supporters before the final rule on the 2014 RFS standards. Moreover, allowing the EPA to arbitrarily redefine what it means for a fuel to be cellulosic opens the door for further corruption and fraud, as we have already witnessed in RIN trading.

The expanded pathways rule alters the definition of a cellulosic biofuel by allowing fuel containing only 75 percent cellulose, hemicellulose, or lignin to be counted as 100 percent cellulosic biofuel—it’s like assigning an A+ grade to a piece of C-student writing.  Although the rule will undoubtedly increase the reported volume of cellulosic biofuel production, it allows EPA to continue to get away with setting unrealistic and inflated cellulosic targets.  Using this regulation to create new support for the RFS is a dangerous consequence of the political maneuvering that has taken place in order to keep the RFS alive.

This post was authored by IER Summer Associate Sarah Pearce.

[i] Environmental Protection Agency, EPA Issues Final Rule for Renewable Fuel Standards (RFS) Pathways II and Modifications to the RFS Program, Ultra Low Sulfur Diesel Requirements, and E15 Misfueling Mitigation Requirements, July 2, 2014, http://www.epa.gov/otaq/fuels/renewablefuels/documents/420f14045.pdf.

[ii] Environmental Protection Agency, Federal Register, Vol. 78, No. 230, November 29, 2013, http://www.gpo.gov/fdsys/pkg/FR-2013-11-29/pdf/2013-28155.pdf.

[iii] Environmental Protection Agency, EPA Issues Direct Final Rule of 2013 Cellulosic Standard, April 2014, http://www.epa.gov/otaq/fuels/renewablefuels/documents/420f14018.pdf.

[iv] Clean Air Act of 2007, 42 U.S.C. § 7545, Regulation of Fuels

[v] Environmental Protection Agency, 40 C.F.R. Part 80, Regulation of Fuels and Fuel Additives: RFS Pathways II, and Technical Amendments to the RFS Standards and E15 Misfueling Mitigation Requirements, July 2, 2014, http://www.epa.gov/otaq/fuels/renewablefuels/documents/rfs-path-II-fr-07-02-14.pdf.

[vi] ibid

[vii] ibid

[viii] ibid

[ix] ibid

[x] Comments of the American Fuel & Petrochemical Manufacturers and the American Petroleum Institute, Regulation of Fuels and Fuel Additives: RFS Pathways II and Technical Amendments to the RFS 2 Standards, Docket ID No. EPA-HQ-OAR-2012-040,  July 15, 2013.

[xi] Peterka, Amanda, In new twist, RFS could boost electric vehicles, Greenwire, July 8, 2014, http://www.eenews.net/stories/1060002483.

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Climate Hero

August 8, 2014 by Leave a Comment

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